-----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, TySi8aSQL02vnY9Uoir+MitFn4qX/RwNS1oOxOFgb/UvZtifxSecHs8YOEEW8Bta yBYgP+UE3Q1Cf4/lTljN+Q== 0000912057-00-012448.txt : 20000321 0000912057-00-012448.hdr.sgml : 20000321 ACCESSION NUMBER: 0000912057-00-012448 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACTV INC /DE/ CENTRAL INDEX KEY: 0000854152 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 942907258 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10377 FILM NUMBER: 573841 BUSINESS ADDRESS: STREET 1: 1270 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10020 BUSINESS PHONE: 2122622571 MAIL ADDRESS: STREET 1: 12270 AVE OF THE AMERICAS #2401 STREET 2: 12270 AVE OF THE AMERICAS #2401 CITY: NEW YORK STATE: NY ZIP: 10020 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 ACTV, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2907258 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 1270 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10020 (Address of principal executive offices) (Zip Code)
(212) 217-1600 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, PAR VALUE $0.10 PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 16, 2000, the aggregate market value of the voting stock held by non-affiliates of the registrant (based on The Nasdaq Stock Market closing price of $30.06 on March 16, 2000) was $1,202,428,391. As of March 16, 2000, there were 47,147,838 shares of the registrant's common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This annual report on Form 10-K contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demand and acceptance, changes in technology, economic conditions, the impact of competition and pricing, government regulation, and other risks defined in this document and in statements filed from time to time with the Securities and Exchange Commission. All such forward-looking statements are expressly qualified by these cautionary statements and any other cautionary statements which may accompany the forward looking statements. ACTV, Inc. disclaims any obligations to update any forward-looking statements to reflect events or circumstances after the date hereof. INTRODUCTORY NOTE The term "Company" used herein refers to ACTV, Inc. and its subsidiaries ACTV Entertainment, Inc. and HyperTV Networks, Inc. PART I ITEM 1. BUSINESS OVERVIEW We are a digital media company that has developed proprietary technologies, called Individualized Television and HyperTV. Individualized Television enables television programmers and advertisers to create individualized programming for digital television. HyperTV enhances standard television content with information and interactivity delivered through the Internet. We believe that Individualized Television is the only technology that enables viewers to instantly and seamlessly customize their viewing experiences. HyperTV is one of the first technologies to provide synchronized delivery of television programming and Internet content. INDUSTRY BACKGROUND INDIVIDUALIZED TELEVISION Although television programming is produced for national, regional and local audiences, it has not been commercially exploited as an individualized services medium. According to Paul Kagan Associates, Inc., Carmel, CA, over 97% of U.S. households have televisions and approximately 69% of those households subscribe to cable television services. We do not believe that there is currently any television service, widely available to consumers, providing individualized programming. Historically, two factors have limited development of individualized programming: (1) the shortage of channel capacity in a typical cable system and (2) the lack of digital technology available to provide such individualized services. However, advances in digital transmission and set-top box technology have begun to eliminate these barriers to providing individualized programming. The development of compression technology and the digital transmission of television signals allows for the transmission of a greater number of channels with better audio and video quality. The resulting expansion of channel capacity allows a cable or Direct Broadcast Satellite ("DBS") broadcaster to offer a wider variety of programming choices, including individualized programming. Traditional analog cable systems typically offer a limited number of programming channels. Current digital compression technology, however, allows the conversion of each analog channel into as many as twelve digital channels of programming. Many major U.S. cable operators are therefore converting significant portions of their systems from analog to digital. 2 The technology necessary to provide individualized services will become increasingly available as cable subscribers have increased access to digital set-top boxes. Kagan estimates that nearly 5.1 million U.S. cable subscribers had digital set-top boxes at year-end 1999, projecting the number to grow to approximately 28 million in 2003, and 47 million in 2008. We believe that sales of digital set-top boxes will increase rapidly as prices decrease. Forrester Research, Inc. estimates that prices for digital set-top boxes will decline from $400 to $200 by 2001 as chip vendors reduce the cost of the decoders and tuners that are the main components of the set-top boxes. DBS is a digital television transmission system. We believe that in the future our Individualized Television service may expand to DBS platforms. Kagan has estimated that DBS had approximately 11 million subscriber households at the end of 1999, and projects an increase in this number to approximately 15 million in 2003, and 18 million in 2008. Advertising represents a critical application of Individualized Television programming. According to Veronis Suhler & Associates, advertisers spent approximately $48.5 billion on television advertising in the United States in 1998. Although traditional television broadcasting, cable and DBS systems do not provide an integrated means for viewers to respond to programs and advertisements, the Direct Marketing Association, Inc. ("DMA") estimates that approximately $105.8 billion of goods and services were purchased through direct response television programming and advertising in 1999. The DMA predicts that this amount will grow to approximately $159.8 billion in 2004. (Reprinted from Economic Impact: US Direct & Interactive Marketing Today 1999 with permission from the Direct Marketing Association, Inc.) Many advertisers are using television advertisements to generate requests for product information, which in turn serve as sales leads for their products and services. Today, most direct response television purchases and requests for information require a telephone call, causing advertisers to incur a significant cost per transaction. We believe that television viewers, advertisers and merchants will respond favorably to a simple, immediate, inexpensive and automated method enabling them to participate in television commerce. We believe that sports programming also represents a compelling application of Individualized Television. Participatory and spectator sports are among the leading pastimes in the United States, as evidenced by the popularity of sports media and the amount of money consumers spend on sports events, products and related services. Further, according to industry sources, sports television programming in the United States consistently draws large audiences, with sports broadcasts comprising five of the top ten most widely viewed broadcasts since 1960. According to Kagan, in 1998, broadcast network sports television programming attracted $3.7 billion in advertising. In addition, the Sporting Goods Manufacturers Association estimates that sales (wholesale value) in the United States of sports equipment, athletic footwear and sports apparel reached $45.6 billion in 1998. HYPERTV The Internet has grown rapidly over the past several years and is now a medium used by millions of people for entertainment, education, e-commerce and multimedia content. Jupiter Communications projects that by 2001, more than 50 million U.S. households will have Internet connectivity, and by 2002, the on-line population will rival that of U.S. consumers of cable television and newspapers at 62 million. In addition, The National Center for Education Statistics estimates that over 80% of public schools have access to the Internet. We believe such rapid growth is attributable mainly to the increasing number of personal computers, technological innovations providing easier, faster and cheaper access to the Internet and the proliferation of content and services available on the Internet. Growing use of the Internet and the World Wide Web has created opportunities for television content providers and their advertising customers to reach and interact with millions of Internet users. The increasing popularity of the Internet and the established popularity of television have led a growing number of home computer users to simultaneously access Internet content while they watch 3 television. Over half of all PCs in US households, or 22.6 million, are in the same room as a television and of those, nearly all, or 21.8 million, use the television and PC simultaneously at least some of the time, according to Media Metrix. Due to its interactive nature, the Internet is an emerging medium that competes with traditional television because of its ability to provide customized, targeted programming and advertising to consumers and to generate cost-effective results for certain advertisers. According to Jupiter Communications, approximately 45% of Internet users maintain that they watch less television because of time spent on-line. To combat this migration and gain on-line market share, broadcasters and cable programmers have begun and are expected to continue promoting companion on-line programming during shows and using commercial airtime to drive viewers to far more lucrative on-line programming. We believe we are well positioned to take advantage of this shift in consumer media consumption and that the convergence of television and Internet content promises significant opportunities for enhanced entertainment programming. We believe that the opportunities for television programmers to generate additional advertising revenues are increasing due to the growing recognition by advertisers of the potential advantages of Internet-based advertising over advertising in traditional media. Unlike radio, television and print, the Internet is highly interactive, creating enhanced opportunities for advertisers to focus their marketing efforts on specific user groups to directly distribute targeted information to consumers on an individualized basis and to receive timely feedback from customers and potential customers. Forrester Research estimates that the amount of Web advertising worldwide will grow from $3.3 billion in 1999 to over $33.1 billion by the year 2003. Additionally, as merchants take advantage of the Internet to deliver a guided selling experience on-line, integrating intelligent product recommendations, real-time customer service and simplified buying procedures, more consumers are expected to engage in e-commerce. International Data Corporation estimates that the number of consumers making purchases on the Web will grow from 30.8 million in 1998 to 182.6 million in 2003 and that the total value of consumer goods and services purchased over the Web will increase from $14.9 billion to $177.7 billion over the same five-year period. The combination of growth in on-line advertising and e-commerce enhances the Internet's value as a commerce medium. OUR BUSINESS STRATEGY INDIVIDUALIZED TELEVISION One of our business objectives is to make Individualized Television a leading application for digital television by achieving widespread use of Individualized Television programming in all programming genres and advertising. Our strategies for accomplishing this objective include: - PROMOTE NATIONAL AWARENESS OF INDIVIDUALIZED TELEVISION THROUGH OUR LIBERTY MEDIA AND IN DEMAND JOINT VENTURES. LMC IATV Events LLC, our joint venture with Liberty Media, plans to license and produce individualized national or international marquee pay-per-view events, including sports, musical, theatrical and news events. Through LMC IATV's venture with iN DEMAND, we expect to showcase Individualized Television to a national audience leveraging iN DEMAND's marketing and distribution capabilities. - DEVELOP TARGETED ADVERTISING SERVICES THROUGH DIGITAL ADCO, INC. We believe that advertisers are looking for more efficient ways to reach their targeted audiences. We have created a company with Motorola Broadband Communications Sector, formerly General Instrument Corporation, to develop applications that will enable the digital television industry to provide this efficiency to advertisers. The company, called Digital ADCO, Inc., will provide the means for television distributors to insert advertisements into a digital programming stream without noticeable interruption and deliver to their viewers targeted commercial messages based on demographic or geographic information or on the viewers' purchase behavior. Both we and Motorola Broadband 4 have licensed certain of our intellectual property to the company, and have contributed management personnel and technical knowledge to launch the business. In addition, Motorola Broadband has made a $5 million capital commitment to the company. - FOCUS INITIALLY ON SPORTS PROGRAMMING DELIVERED THROUGH PAY-PER-VIEW EVENTS AND REGIONAL NETWORKS. We believe that the features available through Individualized Television for sports telecasts, such as a different view of the action, highlight packages, statistics or instant replays will lead viewers to associate Individualized Television with a distinctive experience and result in rapid consumer acceptance of our service, products and technology. In addition, focusing on sports programming is more cost-efficient than a more diverse programming line-up, enabling us to attain profitability with a relatively smaller subscriber base. - GAIN BROAD DISTRIBUTION OF INDIVIDUALIZED TELEVISION. We intend to gain broad distribution of Individualized Television through digital distribution systems, including cable, DBS and eventually broadcast television, by concentrating our efforts on the following activities: - TARGETING CABLE OPERATORS WITH SIGNIFICANT DIGITAL SYSTEMS. Initially, we plan to distribute our programming through cable systems that currently offer, or have indicated they will soon be offering, digital set-top boxes to their subscribers. - DEVELOPING SOFTWARE COMPATIBLE WITH DBS SET-TOP BOXES. To increase the potential market for Individual Television subscribers, we intend to expand the compatibility of our Individualized Television software to the greatest number of digital set-top boxes, including those deployed in DBS. - EXPAND INDIVIDUALIZED TELEVISION PROGRAMMING INTO OTHER TYPES OF TELEVISION PROGRAMMING AND INTERNATIONAL MARKETS. Once we have developed programming for marquee events, advertising and regional sports, we intend to expand into other types of individualized programming, such as music, game shows, news and children's programming and into international markets. We may license content from producers of such programming or enter into ventures with such entities when opportunities arise, either telecasting individualized versions of this new programming on our existing network or creating networks tailored to such new programming. Additionally, we may license our technology to programmers to allow them to create individualized versions of their content. HYPERTV One of our business objectives is to be a leading provider of software, hosting and creative services for enhancing television programming with information and interactivity available through the Internet. Our strategies for accomplishing this objective include: - DEVELOP EARLY AWARENESS AND ADOPTION OF HYPERTV PRODUCTS AND SERVICES. By aggressively rolling out our HyperTV products and services, we intend to establish a leading position in the existing market of U.S. households that simultaneously use a television set and computer located in the same room. We believe that our ability to address the existing convergent market provides us with a unique opportunity to develop awareness and adoption of HyperTV products and services, in contrast to some of our competitors that are focused solely on the future market for television/Internet convergence programming that can be received on a single device. We expect to leverage the HyperTV brand, installed user base and content we develop in the current market to the future single-device market. - OFFER TELEVISION CONTENT PROVIDERS A TURNKEY SOLUTION FOR TELEVISION/INTERNET CONVERGENCE. We offer networks and other TV content providers a turnkey solution for television/ Internet convergence. We supply TV programmers with the elements needed to enhance their television programming with simultaneously delivered Web content, including user software, Web content creation 5 software, and data capture, analysis and reporting. We also supply Web content creation creative and program hosting services, but expect in the future to license third parties much of the business of providing these services. - FORM RELATIONSHIPS WITH, OR ACQUIRE, CONTENT OR SOFTWARE PROVIDERS TO CREATE HYPERTV-ENHANCED TELECASTS. We intend to make equity investments in, or enter into joint ventures and license agreements with, content and software providers to create and offer HyperTV programming that enhances standard telecasts. Through such alliances and acquisitions, we expect to broaden the experience of the viewer and generate new revenue streams for us and our partners, co-venturers and licensors. - EXPAND OUR HYPERTV.COM WEBSITE. We intend to expand the HYPERTV.COM website to serve as an Internet portal that will provide a guide and connections to all available HyperTV programming and a central source for downloading HyperTV software. - ESTABLISH A DATA WAREHOUSE. We intend to establish a data warehouse to compile, aggregate and analyze user information. We will make such data available to our programming partners and advertisers as a fee-based service. We expect this enhanced data to be of significant value to HyperTV licensees and programming partners in gaining feedback on their television viewing audience. This information will also provide us with a unique measure of the market for enhanced television programming and may help us to attract new licensees and programming partners. - EXPAND HYPERTV INTO OTHER FORMS OF MEDIA. We intend to use our HyperTV products and services to enhance other video delivery systems, including video streamed over the Internet for broadband applications and video delivered from DVDs or CD-ROMs. In addition, we will seek to form relationships with radio stations and other providers of streamed audio on the Internet to enhance their content using HyperTV. With increases in digital broadband capacity and the deployment of the next generation of digital set-top boxes, we expect that the market for the integration of television programming and Internet content delivered to viewers through a single device will begin to grow significantly. Our long-term objective is to be a leader in this market by providing powerful programming tools for television networks, advertisers, cable networks and DBS through the integration of Individualized Television with HyperTV products and services. INDIVIDUALIZED TELEVISION OVERVIEW Individualized Television is a patented process for creating interactive and instantly customized television content and advertising in response to viewer remote control entries or to stored demographic information. Individualized Television remembers a viewer's inputs throughout a program and can later deliver tailored content to the viewer based on those inputs. We create individualized programming by simultaneously sending the viewer multiple television signals, related in time and content, and switching among those signals without a visually perceptible delay. With Individualized Television, the viewer experiences the video, audio and graphics of a single fluid programming stream, while the programming on the other signals remains transparent. In addition, Individualized Television offers advertisers the opportunity to convey more effectively their messages. Advertisers can use Individualized Television to target viewers based on demographic information stored in digital set-top boxes or on viewers' inputs in response to basic questions about themselves or the products advertised. We expect Individualized Television to generate revenues from subscriber fees, advertising sales and sales of software and services related to targeted advertising. 6 We believe that Individualized Television is a core breakthrough for television programming and advertising. For example - the viewer of a national or international pay-per-view sporting event or a regional sports telecast can select from features such as a different view of the action, highlight packages, statistics or instant replays; - a car commercial can ask viewers to identify the models that most interest them and, based upon their answers, provide individualized information about the identified models; - neighbors watching the same television program can see entirely different advertisements based upon demographic information stored in their respective set-top boxes; and - a child viewing a program can engage a favorite television character in what seems to be a one-on-one dialogue. TECHNOLOGY We create individualized programming by allowing the viewer to select from a number of frame-synchronized video, graphics and/or audio signals delivered simultaneously to their digital set-top box. The viewer sees and hears only one of the signals at a given moment while the others remain transparent. Each viewer interacts with the programming individually by making selections using the standard cable remote control that comes with a digital set-top box. An unlimited number of viewers can make selections simultaneously. In response to the viewer's keyed inputs, the individualized programming seamlessly switches from one signal to another, providing each viewer with programming appropriate to the input. The individualized programming signal is not interrupted when a viewer switches between programming elements because, unlike channel switches on the television, the switch occurs with frame accuracy and no perceptible delay. Our Individualized Television software in the digital set-top box maintains a "memory" of the viewer's choices and can automatically switch from one digital video, audio and graphics stream to another based on the viewer's earlier input. At appropriate points during an Individualized Television program, the set-top box will make these automatic switches, recall information, create graphics and/or implement other pre-programmed instructions. The viewer's individually selected preferences, inputs, or information maintained in the set-top box's memory determine the particular program seen by each viewer. CONTENT We intend to develop applications of Individualized Television for both national and regional markets. For national distribution of Individualized Television, we formed a joint venture with Liberty Media, called LMC IATV Events, LLC, to license and produce individualized marquee pay-per-view events, including sports, musical, theatrical and news events for national or international distribution. We have granted LMC IATV Events an exclusive license to produce and distribute these pay-per-view events incorporating our individualized programming enhancements. In exchange for granting this license, we received a one-third equity interest in the net profits of the joint venture and have no obligation to make capital contributions. Subsequently LMC IATV Events entered into a joint venture with iN DEMAND, LLC (formerly known as Viewer's Choice, LLC), to create a cable and satellite pay-per-view programming venture. Through this venture, with iN DEMAND's marketing and distribution capabilities, we expect to showcase Individualized Television to a national audience. iN DEMAND, the nation's leading pay-per-view network, serves over 1,700 affiliated systems with approximately 27 million addressable households and 112 million channel subscribers nationwide. Its five stockholders include AT&T/TCI Communications, Inc., Time Warner Entertainment-Advance/Newhouse Partnership, Comcast Programming Ventures, Inc., MediaOne of Delaware, Inc. and Cox Communications Holdings, Inc. 7 Viewer's Choice was renamed iN DEMAND on January 1, 2000. The joint venture is founded on a long-term agreement between the parties, which plan to produce and distribute a minimum of four marquee events each year, beginning in early 2000, depending on the licensing of suitable initial events. The events will be available for viewers to purchase and watch, as long as they have digital cable boxes or satellite receivers that support our Individualized Television technology. The pay-per-view events could include U.S. professional team championships and all-star competitions, international sporting events and large-scale rock concerts. Advertisers can use Individualized Television in several ways to reach a targeted audience. During an individualized program, we can ask viewers to respond to basic questions about themselves or to choose among alternative product models. Based on these responses or choices, we can send the most appropriate advertisement to each viewer. For instance, an Individualized Television enhanced car commercial could "ask" viewers to identify specific models that most interest them and based on their answers, the car commercial would "respond" with detailed information about that specific model. Viewers who make no selection will receive an advertisement selected by the advertiser. Viewers' responses are stored in their digital set-top boxes' memory. Based on this information, the advertiser can subsequently provide appropriate follow-up content such as premium offers, additional information or more targeted commercial messages. Alternatively, relying on demographic information about the digital television household stored in the set-top box, the advertiser can deliver to each household, among a set of alternative advertisements, the commercial that best targets its customers. In this case, what viewers see is determined not by their selections or responses but by demographic information. In November 1999, we formed a company with Motorola Broadband to develop applications for the delivery of addressable advertising to cable subscribers regardless of whether or not they are subscribers receiving Individualized Television service. The applications developed through this company, called Digital ADCO, Inc., will permit advertisers to deliver targeted messages to individual viewers based on demographic information stored in their digital set-top boxes. The Digital ADCO system will allow different advertisements to go to different households watching the same television show. Under the terms of our agreement with Motorola Broadband, we have licensed five of our patents to Digital ADCO in exchange for 51% of the common stock of Digital ADCO, and Motorola Broadband has licensed six of its patents plus made a $5 million capital commitment for 49% of Digital ADCO's common stock. Any capital contribution after Motorola Broadband has fulfilled its initial $5 million commitment will be made pro rata based on ownership interests. We anticipate that Digital ADCO will generate revenues from three major sources: software license fees, fees for inserting digital codes into commercials to identify their target audiences, and advertisement handling fees. We have entered into a master license agreement, expiring in June 2003, that sets forth the framework for negotiating with each of FOX Sports Net's 19 owned or affiliated regional sports networks to provide content for a planned individualized sports programming service. FOX Sports Net, which reaches more than 72 million homes nationwide, features professional basketball, hockey and baseball games, as well as college sports events. To date, we have entered into licensing agreements with the following five regional sports networks FOX Sports Net Southwest, FOX Sports Net West, FOX Sports Net Northwest, Sunshine Network and FOX Sports Net Bay Area. Although we chose to focus our initial commercialization efforts on marquee events, advertising and regional sports, we believe that our Individualized Television system will have universal applications. It is our objective to expand our Individualized Television to include many other genres of television programming. We believe that Individualized Television can become a standard for interactive digital television programming distributed through cable systems, DBS, and digital broadcast television. 8 PRODUCTION We expect to bear the incremental content, transmission, delivery and master control costs incurred in connection with the production and distribution of individualized programming for pay-per-view events and regional networks. Currently, we have a state-of-the-art master control facility in Irving, Texas. Our master control receives multiple video/audio feeds via fiber lines from the programmers that produce the standard telecasts to which we add individualized elements. We intend to construct or lease similar facilities for creating and distributing individualized programming for each of our future regional sports networks. DISTRIBUTION We are initially targeting Individualized Television, which is software-based, for distribution through digital cable systems. To offer Individualized Television, a cable operator needs only to have our software downloaded to the set-top boxes of its digital subscribers. All the cable subscriber needs to receive our service is a digital set-top box with our software download. We have agreements with the leading manufacturers of digital set-top terminals--Motorola Broadband, Scientific-Atlanta and Pioneer--to achieve compatibility of our software with their equipment. Motorola Broadband and Scientific-Atlanta shipped 98.3% of the digital set-top boxes delivered in 1998 and are projected to ship 95.9% of the digital set-top boxes in 2000, according to Kagan. All of Motorola Broadband's digital terminals are compatible with our software. By the time Scientific-Atlanta's digital set-top boxes are deployed in the United States in any significant quantity, we expect that our software will be compatible with these terminals as well. For our pay-per-view event business, iNDemand will provide distribution of Individualized Television programming, through an exclusive United States distribution agreement. iN DEMAND is the nation's leading pay-per-view network, serving over 1,700 affiliated systems with approximately 27 million addressable households. Its five stockholders include AT&T / TCI Communications, Inc., Time Warner Entertainment-Advance/Newhouse Partnership, Comcast Programming Ventures, Inc., MediaOne of Delaware, Inc., and Cox Communications Holdings, Inc. The initial distribution of our regional sports programming will be provided by cable operators that are currently upgrading their service from analog to digital transmission and deploying digital set-top boxes. The service may be carried part-time or full-time and may be carried as a single service or in any tier or package of services. As of this date, neither the final pricing nor launch dates have been agreed upon. To support Individualized Television, we do not require any communication capability from the set-top box back to the cable operator's system, also known as a "back channel." There is no additional memory or hardware necessary to upgrade a digital set-top terminal for delivering the individualized programming to subscribers. HYPERTV OVERVIEW HyperTV is a patented process that enhances a television program or advertisement with related and synchronized content delivered through the Internet. We believe that HyperTV has potential applications for virtually all forms of television programming and advertising. For instance: - a music video network can send its viewers song lyrics, band member biographies or trivia through the Internet in sync with its television content; - a network, televising a movie, can sell banner advertisements on the Internet and generate revenues from the sale of movie-related merchandise; and 9 - a HyperTV-enhanced automobile advertisement can deliver detailed information from the manufacturer's website or link to local dealer websites where viewers can schedule test drives. Initially, HyperTV will serve the growing number of TV viewers who simultaneously use the Internet to complement and enhance their TV viewing experiences. As digital set-top box technology becomes more sophisticated and powerful and as more cable operators offer high speed Internet access, we anticipate that subscribers will be able to experience both video and Internet content delivered simultaneously to their televisions. We believe that our proprietary HyperTV technology uniquely positions us to capitalize on this anticipated convergence of television and Internet content. TECHNOLOGY Like Individualized Television, HyperTV is a software-based system. We offer free HyperTV software through direct or indirect downloads from our HYPERTV.COM website. HyperTV works either by embedding a stream of Web page addresses into the video or audio signal or by transmitting the addresses directly over the Internet to the user's computer. The Web content is synchronized to what is being shown on a particular television channel. Because HyperTV is software-based and platform independent, it can operate on any of today's most popular computer operating systems, including, Windows, Macintosh or UNIX. HyperTV supports both analog and digital television systems, so programmers and users do not have to upgrade their existing systems to use HyperTV enhanced television content. ENTERTAINMENT We believe that the most significant portion of HyperTV's future revenues will come from the entertainment market, where we believe the sources of revenue will be software licensing, data management services, on-line advertising sales, e-commerce applications, event sponsorship, and program hosting and content creation fees. We expect in the future to license third parties to perform much of the program hosting and content creation service business for HyperTV. We have recently entered into an agreement with The Box Music Network ("The Box"), which reaches more than 40 million households worldwide, to create programming that will integrate HyperTV with their 24-hour-a-day interactive music television programming. The network uniquely tailors programming for each of its 200 markets. Viewers within each market have the option to call in or go on-line to request a video for that market from a menu of up to 200 selections. HyperTV will enable The Box to extend brand identity by synchronizing the delivery of relevant Web material, Web-based advertising, messages, e-commerce and chat to broaden the viewer experience and generate new revenue streams. We will share the incremental on-line revenues and expenses equally with The Box. We commenced distribution of The Box's enhanced programming in December 1999. We have also worked with other TV networks and programmers to produce and distribute HyperTV presentations, including - SHOWTIME Online, Inc. for its STARGATE science fiction program - New Line Television, Inc. for pay-per-view exhibitions of AUSTIN POWERS, THE SPY WHO SHAGGED ME - TBS Superstation for its CYBERBOND: 15 DAYS OF 007 movie festival - Turner Network Television for the Screen Actors Guild Awards program and the exhibition of a filmed concert tribute to Bob Marley 10 DATA MANAGEMENT In order to receive HyperTV events, viewers must register for the free download of the HyperTV plug-in. This registration requires viewers to provide their names, addresses, birthdates, e-mail addresses and other demographic and personal interests information. As our servers deliver HyperTV content through the Internet, we can capture and store information about the users' interactions with such content in a relational database. This captured information can include the user's viewing time, click-stream, survey and advertisement responses, chat participation and e-commerce activities. Analysis of the resulting database allows programmers, advertisers and other businesses to understand and profile their viewer base and to build a one-to-one relationship with each end-user, subject to the user's consent. We market HyperTV to television networks and other television content and advertising producers as a turnkey system consisting of user software, Web content creation software and creative services, database management and analysis and program hosting. For program hosting, we intend to create multiple Internet access facilities, called points of presence or POPs, each consisting of large-scale computer servers and related equipment, whose architecture and software are optimized to deliver HyperTV to mass audiences. We have built our first POP, which is located at the Northeast data center of Exodus Communications, Inc. As the demand for HyperTV program hosting increases, we plan to scale up our delivery capacity either by building additional POPs or, more likely, by contracting for the requisite network capacity and technical services from third party vendors. We also plan to create a Web portal site at WWW.HYPERTV.COM which will, among other things, provide a guide and connections to all available HyperTV programming and a central source for downloading HyperTV software and software tools. EDUCATION In mid-1997, we launched the first application of HyperTV, called eSchool-Registered Trademark-, designed for the education market. eSchool uses HyperTV technology to integrate educational video with relevant Internet content and chat functionality. In addition, eSchool gives educators tools to assess a student's performance and record the results of the assessment. Using eSchool software, students can receive traditional video lessons through frames in their Web browsers or from a television in the classroom. Simultaneously, eSchool provides separate frames in the Web browser that display websites with supporting information, a dialogue with a teacher or other students during a live lesson and a "playlist" of websites received to permit navigation from one to another. eSchool content creation software allows an instructor to easily select and order the addresses of the websites and related questions to be included in the playlist. The website addresses and questions can be assigned times and sent automatically to students during a pre-recorded program or in a live lesson. The instructor can have any website address or question sent to the students at any time. EQUIPMENT SUPPLIERS We do not intend to manufacture set-top converters, terminals, video servers or other devices in connection with Individualized Television or HyperTV. In addition, we do not intend to manufacture any computer or networking equipment needed to build our planned HyperTV POPs. This equipment will be supplied to us or to third parties pursuant to agreements with third party equipment suppliers. In 1996, we signed a non-exclusive, royalty-free manufacturing agreement with Motorola Broadband for Motorola Broadband's MPEG-2 digital set-top terminals. Working with us and with Motorola Broadband, Sarnoff Corporation effected the integration of individualized programming into these terminals. We and Motorola Broadband also agreed to jointly market our Individualized Television application, which operates with Motorola Broadband's digital systems and consumer set-top terminals. 11 We have also entered into a non-exclusive, royalty free joint marketing and development agreement with Scientific-Atlanta to integrate our Individualized Television programming software with Scientific-Atlanta's advanced digital set-top boxes, including the Explorer 2000. In addition, we and Pioneer agreed to integrate our Individualized Television programming software into Pioneer's digital set-top box software applications to enable reception of Individual Television through digital set-top boxes that operate using systems developed by Pioneer. We may grant licenses similar to those granted to Motorola Broadband, Scientific-Atlanta and Pioneer to other manufacturers that are selected by the future distributors of Individualized Programming. PATENTS AND OTHER INTELLECTUAL PROPERTY We have sought to protect the proprietary features of our individualized programming technologies and HyperTV technologies through patents, copyrights, confidentiality agreements and trade secrets both in the United States and overseas. As of the present time, the United States Patent and Trademark Office has issued 19 patents to us that are currently in force. We also have additional patents pending. The patents expire at various dates from 2003 to 2016. Corresponding patents for some of the above U.S. patents have been granted or are pending in Canada, Japan, Australia and the European Patent Office. We believe such patents will strengthen our competitive position in these countries. There can be no assurance that our patents are enforceable, or, if challenged, that we can successfully defend them, particularly in view of the high cost of patent litigation, nor can there be any assurance that we will derive any competitive advantages from them. To the extent that patents are not issued for any other products developed by us, we would be subject to more competition. The issuance of patents may be insufficient to prevent competitors from essentially duplicating our products by designing around the patented aspects. In addition, we cannot assure you that our products will not infringe on patents owned by others, licenses to which may not be available to us, nor that competitors will not develop functionally similar products outside the protection of any patents we have or may obtain. The inventors named on all of our issued patents have assigned to us all right, title and interest in and to the above U.S. patents and any corresponding foreign patents or applications based thereon. We require that each of our full time employees, consultants and advisors execute a confidentiality and assignment of proprietary rights agreement upon the commencement of employment or a consulting relationship. These arrangements generally provide that all inventions, ideas and improvements made or conceived by the individual arising out of the employment or consulting relationship are our exclusive property. These agreements generally also require all such information be kept confidential and not disclosed to third parties, except with our consent or in specified circumstances. We cannot assure, however, that these agreements will provide effective protection for our proprietary information in the event of unauthorized use or disclosure of such information. WOLZIEN PROCESS In April 1999, we acquired a patent from Thomas R. Wolzien for on-line media applications, which we call the Wolzien Process, that expands the functionality of HyperTV. While HyperTV enables content producers and advertisers to "push" synchronized Internet content to television viewers, the Wolzien Process provides the means, based on prompts from television or radio programming, for users to "pull" relevant content from the Internet to augment that programming or to communicate directly with an on-line provider. We intend to develop the Wolzien Process both on a stand-alone basis and in conjunction with the HyperTV Process. Other applications for the Wolzien Process include real time radio broadcasting, both analog and digital, and recorded video programming on VCR's, CD-ROM or DVD players. 12 The terms of the patent acquisition agreements provide that the Wolzien patent and the HyperTV patents will be jointly licensed and all revenue from such joint licenses will be shared equally between our subsidiary, Media Online Services, and us. However, Media Online Services has granted us a worldwide royalty-free license to use the Wolzien patent in our Individualized Television and eSchool products and services. As consideration for the Wolzien patent, Thomas R. Wolzien received, among other considerations, an option exercisable at any time for $49,900 to acquire a 49% interest in Media Online Services. RESEARCH AND DEVELOPMENT We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our Individualized Television and HyperTV technologies and strengthening our technological expertise. During the years ended December 31, 1996, 1997, 1998, 1999, we expended approximately $1.2 million, $551,328, $820,475, and $1,392,937, respectively, on outside research and development. We intend to continue to devote substantial resources to research and development for the next several years. As of December 31, 1999, approximately 16 employees, or 28% of our work force, were primarily engaged in research and development activities. COMPETITION The markets for digital television applications and television/Internet convergence programming is extremely competitive, and we expect competition to intensify in the future. The markets for digital television applications and television/Internet convergence programming are new and quickly evolving and are characterized by untested consumer demand and a lack of industry standards. These markets are therefore subject to significant changes in the products and services offered by existing market participants and the emergence of new market participants. As a result, it is difficult to determine what companies and technologies are competing with us or may compete with us in the future in one or more of our businesses. We believe our competitors in the television/Internet convergence programming and services markets include RespondTV, Liberate Technologies, Mixed Signals, More.com, NTN, OpenTV, Inc., Spiderdance, Inc., Starwave's Enhanced TV, Wink Communications, Inc. and Worldgate Communications, Inc. We also face competition from other traditional broadcast and cable television networks. Many of these competitors are currently offering (or may soon offer) services that will compete with some or all of our current and proposed HyperTV products and services. In addition, we compete with companies such as Apple, Microsoft Corporation's WebTV, Motorola Broadband, RealNetworks, Inc., Source Media, Inc. and Veon that provide applications which enable video content to be "streamed" over the Internet. Many of these applications could be extended and compete with some or all of our existing or proposed HyperTV applications. We do not believe that there are currently any competitors offering products comparable to Individualized Television. But there are a number of companies, including NDS Group plc, who are offering products and services that are similar to different portions of our Individualized Television service. Furthermore, we expect to face competition in the future from traditional television and cable broadcasters such as ABC, CBS, CNN, FOX and NBC. Some of these broadcasters have in the past and may in future develop and broadcast their own television/Internet convergence programming or programming that is similar to Individualized Television. GOVERNMENT REGULATION We believe that neither our present or future implementation of Individualized Television is subject to any direct substantial government regulation. However, the broadcast industry in general, and cable 13 television, DBS and wireless communication in particular, are subject to substantial government regulation. TELEVISION Pursuant to federal legislation enacted in 1992, which we call the 1992 Cable Act, the Federal Communications Commission substantially re-regulated the cable television industry in various areas including rate regulation, competitive access to programming, "must carry" and retransmission consent for broadcast stations. These rules, among other things, restrict the extent to which a cable system may profit from, or recover costs associated with, adding new program channels, impose certain carriage requirements with respect to television broadcast stations, limit exclusivity provisions in programming contracts and require prior notice for channel additions, deletions and changes. The United States Congress and the FCC also have under consideration, and may in the future adopt, new laws, regulations and policies regarding a wide variety of matters which could, directly or indirectly, materially adversely affect our operations. INTERNET Increased regulation of the Internet might slow the growth in use of the Internet, which could decrease demand for our services, increase our cost of doing business or otherwise have a material adverse effect on our business, financial condition and results of operations. Congress has recently passed legislation regulating certain aspects regarding the use of the Internet, including children's protection, copyright infringement, user privacy, taxation, access charges and liability for third-party activities. In addition, federal, state and local governmental organizations as well as foreign governments are considering other legislative and regulatory proposals that would regulate the Internet. Areas of potential regulation include libel, pricing, quality of products and services, intellectual property ownership and personal privacy. We collect and store significant personal information from users of our Individualized Television and HyperTV applications and plan to use such information to develop our businesses, particularly with respect to targeted advertising, or otherwise generate revenues. Storage and use of such information is subject to state and federal regulation. Storage and use of such information may also subject us to privacy claims relating to our use and dissemination of personal information. We do not know how courts will interpret laws governing the Internet or the extent to which they will apply existing laws regulating issues such as property ownership, libel and personal privacy to the Internet. Therefore, we are not certain how new laws governing the Internet or other existing laws will affect our business. We are unable to predict the outcome of future federal legislation or regulatory proposals or the impact of any current or future laws or regulations on our operations. There can be no assurance that we will be able to comply with any future laws or regulations that may be imposed on our operations. EMPLOYEES At December 31, 1999, we employed 87 full-time employees. We are not subject to any collective bargaining agreements. We believe that our relationships with our employees are generally satisfactory. ITEM 2. PROPERTY--OFFICES AND FACILITIES We maintain our principal and executive offices at Rockefeller Center, 1270 Avenue of the Americas, New York, New York, where we lease approximately 10,600 square feet. Our lease for 2,600 square feet and for 8,000 square feet of this space extends through February 2000 and January 2001 respectively. We also lease office and technical space in four other facilities, one each in New York, New York, Dallas, Texas, Houston, Texas and Los Angeles, California. None of these leases extends beyond December 31, 1999. We lease approximately 12,000 square feet at 233 Park Avenue South, New York, New York, where most of our HyperTV operations are located, and we have committed to lease 20,000 square feet next door at 225 Park Avenue South. This lease commitment extends through 2015. Our lease at 233 Park Avenue South terminates at such time as we occupy the space at 225 Park Avenue South. We expect to be able to move into 225 Park Avenue South early in 2001. We have also 14 committed to lease approximately 8,000 square feet of office space in Branchburg, New Jersey for ACTV's and Digital ADCO's technical and research facilities. That lease commitment extends into 2005. ITEM 3. LEGAL PROCEEDINGS There are no pending material legal proceedings to which ACTV is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 20, 1999 we held an Annual Meeting of Stockholders for which we solicited votes by proxy. The following is a brief description of the matters voted upon at the meeting and a statement of the number of votes cast for and against, and the number of abstentions as to each matter. 1. Election of directors:
FOR WITHHELD ---------- -------- William Samuels............................................. 26,926,845 44,863 William Frank............................................... 26,915,170 56,538
2. To approve the adoption of the ACTV's 1999 Stock Option Plan.
FOR AGAINST ABSTAIN - ---------- -------- -------- 25,325,428.. 994,092 652,188
3. To ratify the appointment of Deloitte & Touche, LLP as independent auditors
FOR AGAINST ABSTAIN - ---------- -------- -------- 26,922,888.. 21,658 27,162
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ACTV's common stock is traded on The Nasdaq Stock Market under the symbols "IATV". The following table sets forth the high and low bid prices for Common Stock as reported by Nasdaq.
COMMON STOCK ------------------- 1999 QUARTER HIGH LOW - ------------ -------- -------- First....................................................... 11.44 3.81 Second...................................................... 25.25 9.25 Third....................................................... 16.44 8.88 Fourth...................................................... 51.75 13.25
1998 QUARTER HIGH LOW - ------------ -------- -------- First....................................................... 2.13 1.50 Second...................................................... 2.50 1.38 Third....................................................... 2.97 1.50 Fourth...................................................... 4.50 1.56
On March 16, 2000, there were approximately 374 holders of record of ACTV's 47,147,838 outstanding shares of common stock. 15 On March 16, 2000, the high and low bid prices of the common stock as reported by Nasdaq were $28.06 and $31.38, respectively. ACTV has not paid cash dividends since its organization. We plan to use earnings, if any, to fund growth and do not anticipate the declaration or the payment of cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Statement of Operations Data: Revenues........................... $ 1,312 $ 1,476 $ 1,651 $ 1,406 $ 2,118 ---------- ---------- ---------- ---------- ---------- Costs and expenses: Cost of sales.................... 334 647 472 219 174 Operating expenses............... 1,261 1,956 1,361 2,005 3,241 Selling and administrative....... 4,998 6,333 6,880 9,862 17,037 Depreciation and amortization.... 687 420 328 1,106 1,577 Amortization of goodwill......... 426 426 426 426 426 Loss on investment............... -- 274 -- -- -- Stock appreciation rights........ 567 184 (347) 2,000 1,950 ---------- ---------- ---------- ---------- ---------- Total costs and expenses....... 8,237 10,240 9,120 15,618 24,405 ---------- ---------- ---------- ---------- ---------- Loss from operations............... (6,961) (8,764) (7,469) (14,212) (22,287) Interest (expense) income--net..... 40 159 116 (748) (595) Minority interest--subsidiary preferred stock dividend and accretion........................ -- 1,695 3,006 5,429 -- ---------- ---------- ---------- ---------- ---------- Minority interest--subsidiary...... -- -- -- -- (588) Net (loss) before extraordinary item............................. (6,921) (10,300) (10,359) (20,389) (22,883) ---------- ---------- ---------- ---------- ---------- Net (loss)......................... (6,827) (10,300) (10,359) (20,389) (22,883) Preferred stock dividends and accretion........................ -- -- -- 479 494 ---------- ---------- ---------- ---------- ---------- Net (loss) applicable to common stockholders..................... $ (6,827) $ (10,300) $ (10,359) $ (20,868) $ (23,378) ========== ========== ========== ========== ========== Loss per common share before extraordinary item............... $ (0.68) $ (0.88) $ (0.80) $ (0.98) $ (0.61) ========== ========== ========== ========== ========== Basic and diluted (loss) per common share............................ $ (0.67) $ (0.88) $ (0.80) $ (0.98) $ (0.61) ========== ========== ========== ========== ========== Weighted average number of common shares outstanding............... 10,162,128 11,739,768 12,883,848 21,399,041 38,219,009 Balance Sheet Data: Cash and cash equivalents.......... $ 3,532 $ 6,521 $ 554 $ 5,189 $ 8,816 Working capital (deficiency)....... 2,397 5,094 (1,082) 3,419 9,857 Total assets....................... 8,551 11,693 7,902 13,606 28,152 Long-term debt (including current portion)......................... -- -- -- 4,315 4,803 Preferred stock of a subsidiary(1).................... -- 1,675 3,006 5,429 -- Total stockholders' equity (deficiency)..................... 6,894 9,201 (1,613) 4,763 19,640
- ------------------------ (1) In 1998, we converted the preferred stock into equity. See Note 5 to our consolidated financial statements for the year ended December 31, 1999. 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE AND INCORPORATED BY REFERENCE. THE RESULTS DISCUSSED BELOW ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED IN ANY FUTURE PERIODS. TO THE EXTENT THAT THE INFORMATION PRESENTED IN THIS DISCUSSION ADDRESSES FINANCIAL PROJECTIONS, INFORMATION OR EXPECTATIONS ABOUT OUR PRODUCTS OR MARKETS OR OTHERWISE MAKES STATEMENTS ABOUT FUTURE EVENTS, SUCH STATEMENTS ARE FORWARD-LOOKING AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE STATEMENTS MADE. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR FURTHER INFORMATION ABOUT FORWARD-LOOKING STATEMENTS. OVERVIEW Since our inception, the primary focus of our operating activities has been to develop proprietary technologies that enable programmers and advertisers to create individualized programming and programming enhancements--first for television and later for the emerging area of television/Internet convergence. We call our technologies for the television and television/Internet convergence markets Individualized Television and HyperTV, respectively. RESULTS OF OPERATIONS Since we have engaged principally in the research and development of Individualized Television and HyperTV, our historical results of operations are not indicative of, and should not be relied upon as an indicator of, our future performance. COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 REVENUES. Revenues increased 51% to $2.1 million for the year ended December 31, 1999, from $1.4 million for the year ended December 31, 1998, due to an increase in HyperTV sales. Substantially all of our revenues in 1998 and the majority of our revenues in 1999 were derived from sales of HyperTV software, services and related computer hardware. TOTAL COSTS AND EXPENSES. Total costs and expenses increased 56% to $24.3 million for the year ended December 31, 1999, from $15.6 million for the year ended December 31, 1998. Cost of sales decreased 20% to $174,032 for the year ended December 31, 1999, from $218,574 for the year ended December 31, 1998, and cost of sales as a percentage of revenues decreased to 8% for the year ended December 31, 1999 from 16% for the year ended December 31, 1998. The decrease as a percentage of revenues was the result of an increase in service-driven revenues in the recent year having proportionately less associated direct costs. Total costs and expenses, excluding cost of sales, increased 57% to $24.2 million for the year ended December 31, 1999, from $15.4 million for the year ended December 31, 1998. The increase in operating expenses during 1999 of $1.2 million or 62% is due principally to the expansion of the Company's HyperTV business, including the introduction of HyperTV to the entertainment market in 1999. We also incurred a $3.1 million charge related to an incentive compensation provision that is based on changes in the market value of our common stock during the twelve-month period ended March 31, 1999. We are accruing the total value of the award in four equal quarterly amounts, beginning March 31, 1999, since it is payable in quarterly installments that are contingent on continued employment by us of the executive receiving this compensation. We have paid approximately 55%, of the award in the form of our unregistered common stock. Selling and administrative expense increased 73% to $17.0 million for the year ended December 31, 1999, from $9.9 million for the year ended 17 December 31, 1998, due chiefly to non-cash employee compensation, paid in the form of stock and to greater expenses related to HyperTV. We continue to innovate in the areas of software development and intellectual properties. Accordingly, our Depreciation and amortization expense increased approximately $.5 million or 43%. The SAR expense for both years ended December 31, 1998 and 1999 was $2.0 million. In September 1999, we exchanged all of our outstanding SARs for stock options with the same exercise prices and vesting dates. To account for this exchange, we simultaneously incurred non-cash compensation expense of $1.3 million as a component of selling and administrative expense and non-cash income of $2.6 million from the elimination of our liability related to SARs. Additionally, we incurred a $381,000 non-cash charge to deferred expenses for those SARs that have not vested. INTEREST (EXPENSE) INCOME--NET. Interest expense increased 12% to $1,044,227 for the year ended December 31, 1999, from $932,247 for the year ended December 31, 1998. Interest expense is related to the $5.0 million notes issued in January 1998 by one of our subsidiaries. We chose to pay the interest due on the notes on June 30, 1998 and December 31, 1998 in kind rather than in cash. Interest income increased 144% to $448,757 for the year ended December 31, 1999, from $184,285 for the year ended December 31, 1998. The increase was due to higher average cash balances in 1999. MINORITY INTEREST--SUBSIDIARY PREFERRED STOCK DIVIDEND AND ACCRETION. For the year ended December 31, 1999, we had no accrual for or payments of subsidiary preferred stock dividends, compared to accruals of $200,305 for the year ended December 31, 1998, related to preferred stock issued by a subsidiary of ours, which was accounted for as a minority interest. The subsidiary preferred stock was retired in November 1998 in exchange for a combination of our new Series B preferred stock, which was subsequently redeemed in full in May 1999, common stock and warrants. In addition, we paid all preferred dividends during the year ended December 31, 1998 in the form of our common stock. PREFERRED STOCK DIVIDEND AND ACCRETION. For the year ended December 31, 1999, we paid $494,431 in preferred stock dividends, related to our Series B preferred stock, compared to no such preferred dividend payments during the comparable 1998 period. The Series B preferred stock was issued in November 1998 and was redeemed in full in May 1999. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased 12% to $23.4 million, or $0.61 per basic and diluted share, for the year ended December 31, 1999, from $20.9 million, or $0.98 per basic per basic and diluted share, for the year ended December 31, 1998. COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 REVENUES. Revenues decreased 15% to $1.4 million for the year ended December 31, 1998, from $1.7 million for the year ended December 31, 1997. The decrease was the result of our product shift toward on-line learning software and services in 1998 and away from video programming and related equipment. All of our revenues during 1998 were derived from the on-line learning market, compared to 20% in 1997. TOTAL COSTS AND EXPENSES. Total costs and expenses increased 71% to $15.6 million for the year ended December 31, 1998, from $9.1 million for the year ended December 31, 1997. Cost of sales decreased 54% to $218,574 for the year ended December 31, 1998, from $471,956 for the year ended December 31, 1997, and cost of sales as a percentage of revenues decreased to 16% in 1998 from 29% in 1997. The decrease as a percentage of revenues was due to a shift in revenue mix from video programming and related equipment, which represented the majority of revenues in 1997, to eSchool which has higher gross margins. Total costs and expenses, excluding costs of sales, increased 78% to 18 $15.4 million for the year ended December 31, 1998, from $8.6 million for the year ended December 31, 1997. The increase was attributable to a number of factors, including a large change in stock appreciation rights due to a higher common stock price at December 31, 1998, a rise in both operating expenses and selling and administrative expense principally from increased activity of our Texas-based regional network operation and to higher depreciation and amortization expense. Depreciation and amortization expense increased 103% to $1.5 million from $754,053 for 1997. This increase was due principally to depreciation for the full year in 1998 of television production equipment installed in our Texas subsidiary's facility, compared to several months during 1997, and to greater amortization of software development costs in the more recent year. INTEREST (EXPENSE) INCOME--NET. We incurred interest expense of $932,247 for the year ended December 31, 1998, compared to no interest expense for the year ended December 31, 1997. Interest expense is related to the $5.0 million notes issued in January 1998 by one of our subsidiaries. Interest income increased 58% to $184,285 for the year ended December 31, 1998, from $116,870 for the year ended December 31, 1997. The increase resulted from higher available average cash balances in the more recent year. MINORITY INTEREST--SUBSIDIARY PREFERRED STOCK DIVIDEND AND ACCRETION. For the years ended December 31, 1998 and 1997, we recorded $5.6 million and $3.0 million, respectively, for dividends and accretion on subsidiary convertible preferred stock issuances, which were accounted for as a minority interest. All dividend payments were made in our common stock. The increase during 1998 is the result principally of our redemption in full of the subsidiary convertible preferred stock. NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common stockholders increased 101% to $20.9 million, or $0.98 per basic and diluted share, for the year ended December 31, 1998, from $10.3 million, or $0.80 per basic and diluted share, for the year ended December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have not generated revenues sufficient to fund our operations, and we have incurred operating losses. Through December 31, 1999, we had an accumulated deficit of approximately $95.3 million. Our cash position on December 31, 1999 was $8.8 million, compared to $5.2 million on December 31, 1998. NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES During the year ended December 31, 1999 and 1998, we used $12.7 million and $10.0 million, respectively, in cash for our operations. Despite the increase in net loss in the more recent period, a higher percentage of this loss was the result of non-cash charges. During the year ended December 31, 1998, we used $10.0 million in cash for our operations, compared with $6.6 million for the year ended December 31, 1997. The increase was due to both a higher operating deficit as well as a net use of cash related to asset and liability changes. During the years ended December 31, 1997 and 1996, we used $6.6 million and $7.6 million, respectively, in cash for our operations. The decrease was due to lower operating expenses and higher gross margins, which more than offset higher selling and administrative expenses. NET CASH USED IN INVESTING ACTIVITIES AND CAPITAL EXPENDITURES With respect to investing activities, during the year ended December 31, 1999, we used cash of $10.9 million. These activities were related to the acquisition of patents and investments in patents pending, computer hardware and software development. With respect to investing activities during the year ended December 31, 1998, we used cash of $1.9 million for patents, property and equipment, and systems and software development. With respect to investing activities during the year ended 19 December 31, 1997, we used cash of $2.8 million, related principally to the purchase of equipment for a television master control facility in Dallas, Texas and for the systems development related to the incorporation of Individualized Television into the Motorola Broadband cable set-top box and to eSchool. NET CASH PROVIDED BY FINANCING ACTIVITIES We met our cash needs in the year ended December 31, 1999 from sales of our common stock to private investors, totaling approximately $18.9 million, and from the exercise of stock options and warrants, totaling approximately $12.0 million. We met our cash needs in the year ended December 31, 1998 from sales of our common stock totaling approximately $10.8 million to private investors, including $5.0 million invested by Liberty Media. Liberty Media also received an option to invest an additional $5.0 million for the same price per share. We met our cash needs in the year ended December 31, 1997 from the proceeds of a series of private placements during 1997 of our common stock totaling $1.5 million, convertible preferred stock totaling $2.0 million, and from the remainder of funds received from the sale in 1996 of exchangeable preferred stock issued by a wholly-owned subsidiary totaling $9.1 million. With respect to other financing activities, for the year ended December 31, 1999, we redeemed all of our outstanding Series B preferred stock by paying a total of approximately $5.8 million, which represents a 10% premium above the stock's face value plus accrued dividends. Because the Series B preferred stock was convertible into our common stock at $2.00 per share beginning in November 1999, we effectively redeemed the preferred stock by buying it at an equivalent of $2.20 per common stock share, a price significantly less than the market price of a share of our common stock at the time of the redemption. The redemption avoided the possible future issuance of more than 2.8 million shares of our common stock. In November 1999, we formed a company with Motorola Broadband Communications Sector, formerly General Instrument Corporation, to develop applications for the delivery of addressable television advertising. Under the terms of our agreement with Motorola Broadband, the Company licensed five of our patents to Digital ADCO in exchange for 51% of the common stock of Digital ADCO. Motorola Broadband has licensed six of its patents and made a $5.0 million capital commitment for 49% of Digital ADCO's common stock. Any capital contribution after Motorola Broadband has fulfilled its initial $5.0 million commitment will be made pro rata based on ownership interests. In November, the first $2.0 million of $5.0 million was contributed to the company by General Instruments with $3.0 million to follow in the next twelve months. In February 2000, we completed a follow-on offering of 4.0 million common shares as well as 0.6 million common shares to cover the over-allotments of our underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc., Lehman Brothers, and Salomon Smith Barney. The total common shares of 4.6 million were priced to the public at $30 per share or $138 million. Underwriting discounts and commissions of $1.80 per share or $8.28 million were deducted resulting in net proceeds of $28.70 per share or $129.7 million. We intend to use the net proceeds from our sale of shares in the offering to repay approximately $5.9 million of outstanding indebtedness, and for general corporate purposes, including working capital requirements, potential minority investments in strategic alliances and potential acquisition. YEAR 2000 COMPLIANCE The year 2000 issue is the result of computer software that was written with only two digits rather than four digits to represent the year in a date field. Computer hardware and software applications that are date-sensitive may interpret a date represented as "00" to be the year 1900 rather than the year 2000. The result could be system failure or miscalculations causing the disruption of operations. 20 We believe that our internal systems, relating to both computer hardware and software, will function properly with respect to dates in the year 2000 and beyond. In addition, we believe that our proprietary software either sold directly to third parties or incorporated in products sold to third parties is year 2000 compliant. Having performed an assessment of the potential year 2000 problem, we do not expect to incur significant costs related to year 2000 issues. However, there is general uncertainty regarding the year 2000 problem and its effect on the overall business environment. We cannot determine at this time whether the year 2000 problem will have a material impact on our operations or financial condition as the result of significant disruptions to the U.S. economy or business infrastructure. IMPACT OF INFLATION Inflation has not had any significant effect on our operating costs. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, called SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at fair value. The statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000; however, it may be adopted earlier. It cannot be applied retroactively to financial statements of prior periods. We have not yet determined the impact, if any, the adoption of SFAS No. 133 will have on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are listed under Item 14 in this report. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS We intend to file with the Securities and Exchange Commission within 90 days of the end of December 31, 1999 a definitive proxy statement pertaining to our annual meeting of stockholders to be held in May 2000. Information regarding our directors and executive officers will appear under the caption "Election of Directors" in the proxy statement and is incorporated in this report by reference. 21 ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation will appear under the caption "Executive Compensation" in the proxy statement and is incorporated in this report by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management will appear under the caption "Ownership of Securities" in the proxy statement and is incorporated in this report by reference. ITEM 13. CERTAIN TRANSACTIONS Information regarding certain transactions will appear under the caption "Certain Transactions" in the proxy statement and is incorporated in this report by reference. PART IV ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K: (a)1. FINANCIAL STATEMENTS: See the Consolidated Financial Statements beginning on Page 23 hereafter, which is incorporated by reference. 22 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of ACTV, Inc.: We have audited the accompanying consolidated balance sheets of ACTV, Inc. and subsidiaries ("the Company") as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 14 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP March 3, 2000 New York, New York 23 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 1998 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 5,188,770 $ 8,816,368 Accounts receivable--net.................................. 501,768 1,160,036 Education equipment inventory............................. 110,405 -- Other..................................................... 773,613 1,589,430 ------------ ------------ Total current assets.................................... 6,574,556 11,565,834 ------------ ------------ Property and equipment--net................................. 2,365,775 3,392,219 ------------ ------------ Other assets: Patents and patents pending............................... 832,336 8,142,928 Software development costs................................ 1,098,756 2,183,950 Goodwill.................................................. 2,214,816 1,788,444 Other..................................................... 519,802 1,078,683 ------------ ------------ Total other assets...................................... 4,665,710 13,194,005 Total................................................. $ 13,606,041 $ 28,152,058 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable and accrued expenses..................... $ 955,686 $ 1,708,611 Deferred stock appreciation rights........................ 2,000,062 -- Preferred dividends payable............................... 200,305 -- ------------ ------------ Total current liabilities............................... 3,156,053 1,708,611 Long-term note payable.................................... 4,315,016 4,803,342 Put warrant............................................... 1,371,624 -- Minority interest......................................... -- 2,000,593 Stockholders' equity (deficiency): Preferred stock, $.10 par value, 1,000,000 shares authorized Series A 120,000 shares authorized, issued and outstanding 56,300 at December 31, 1998, none at December 31, 1999..................................... 5,630 -- Series B stock 6,110 shares authorized, issued and outstanding 5,018 at December 31, 1998, none at December 31, 1999..................................... 2,805,961 -- Common stock, $.10 par value, 65,000,000 shares authorized: issued and outstanding 29,759,459 at December 31, 1998, 42,167,997 at December 31, 1999...... 2,975,946 4,216,800 Additional paid-in capital................................ 71,068,230 110,692,842 Loans receivable from stock sales......................... (199,900) -- Accumulated deficit....................................... (71,892,519) (95,270,130) ------------ ------------ Total stockholders' equity (deficiency)................. 4,763,348 19,639,512 ------------ ------------ Total................................................. $ 13,606,041 $ 28,152,058 ============ ============
See Notes to Consolidated Financial Statements 24 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Revenues............................................ $ 1,650,955 $ 1,405,838 $ 2,117,938 ------------ ------------ ------------ Costs and expenses: Cost of sales..................................... 471,956 218,514 174,032 Operating expenses................................ 1,360,838 2,004,996 3,241,086 Selling and administrative........................ 6,880,311 9,862,086 17,036,576 Depreciation and amortization..................... 327,681 1,106,359 1,576,664 Amortization of goodwill.......................... 426,372 426,372 426,372 Stock appreciation rights......................... (346,892) 2,000,062 1,950,330 ------------ ------------ ------------ Total costs and expenses........................ 9,120,266 15,618,389 24,405,060 ------------ ------------ ------------ Loss from operations................................ (7,469,311) (14,212,551) (22,287,122) ------------ ------------ ------------ Interest income..................................... 116,870 184,285 448,757 Interest (expense).................................. -- (932,247) (1,044,227) ------------ ------------ ------------ Interest (expense) income--net.................... 116,870 (747,962) (595,470) Minority interest--subsidiary preferred stock dividend and accretion............................ 3,006,242 5,428,638 -- Minority interest--subsidiary....................... -- -- (588) ------------ ------------ ------------ Net (loss).......................................... (10,358,683) (20,389,151) (22,883,180) Preferred stock dividends and accretion............. -- 479,173 494,431 ------------ ------------ ------------ Net (loss) applicable to common stockholders........ $(10,358,683) $(20,868,324) $(23,377,611) ============ ============ ============ Basic and diluted (loss) per common share........... $ (0.80) $ (0.98) $ (0.61) ============ ============ ============ Weighted average number of common sharese outstanding....................................... 12,883,848 21,399,041 38,219,009 ============ ============ ============
See Notes to Consolidated Financial Statements 25 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------ 1997 1998 1999 ------------ ------------ ------------ Cash flows from operating activities: Net loss applicable to common stockholders.......... $(10,358,683) $(20,868,324) $(23,377,611) ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization..................... 754,053 1,532,731 2,003,036 Stock appreciation rights......................... (701,517) 2,000,062 1,950,330 Amortization and accretion of deferred expenses related to debt financing....................... -- 241,565 864,147 Common stock issued for services.................. 443,125 2,016,023 6,383,560 Common stock issued for preferred dividends....... 408,085 162,595 -- Note issued in lieu of cash interest payment...... -- 686,641 -- Subsidiary preferred stock preferred dividends and accretions...................................... 2,598,156 5,749,309 -- Preferred stock accretion......................... -- 315,965 241,513 Other............................................. 43,188 -- -- Changes in assets and liabilities: Accounts receivable............................... 63,960 (198,724) (658,268) Education equipment inventory..................... 99,747 127,352 110,405 Other assets...................................... (241,117) (307,426) (722,963) Accounts payable and accrued expenses............. 287,504 (926,471) 506,558 ------------ ------------ ------------ Net cash used in operating activities........... (6,603,499) (9,468,702) (12,699,293) ------------ ------------ ------------ Cash flows from investing activities: Investment in patents and patents pending......... (50,000) (598,671) (7,515,343) Purchases of property and equipment............... (2,159,576) (531,573) (1,956,209) Investment in software development costs.......... (686,227) (797,677) (1,438,654) ------------ ------------ ------------ Net cash used in investing activities........... (2,895,803) (1,927,921) (10,910,206) Cash flows from financing activities: Net proceeds from debt issuance................... -- 4,462,990 -- Net proceeds from put warrant issuance............ -- 1,371,624 -- Redemption of preferred stock..................... -- (565,759) (5,792,538) Net proceeds from preferred stock transactions.... 2,045,163 -- 115,660 Net proceeds from subsidiary equity transactions.................................... -- -- 2,000,593 Net proceeds from equity financing................ 1,487,460 10,762,461 30,913,383 ------------ ------------ ------------ Net cash provided by financing activities....... 3,532,623 16,031,316 27,237,098 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents....................................... (5,966,679) 4,634,693 3,627,598 Cash and cash equivalents, beginning of period.... 6,520,756 554,077 5,188,770 ------------ ------------ ------------ Cash and cash equivalents, end of period.......... $ 554,077 $ 5,188,770 $ 8,816,368 ============ ============ ============
See Notes to Consolidated Financial Statements. 26 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK PREFERRED SERIES A PREFERRED SERIES B ADDITIONAL ----------------------- ----------------------- ------------------------ --------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN-CAPITAL ---------- ---------- ------------ -------- ----------- ---------- --------------- Balances December 31, 1996.................. 11,787,106 $1,178,711 -- $ -- -- $ -- $ 42,272,205 ---------- ---------- ------------ ------ ----------- ---------- ------------ Issuance of shares in connection with financings............ 733,333 73,333 86,200 8,620 3,447,778 Issuance of shares for services.............. 286,511 28,651 414,473 Issuance of shares in connection with exchange of preferred stock................. 1,795,661 179,566 1,994,980 Issuance of shares in connection with exercise of stock options............... 12,000 1,200 11,160 Net loss applicable to common stockholders... ---------- ---------- ------------ ------ ----------- ---------- ------------ Balances December 31, 1997.................. 14,614,611 $1,461,461 86,200 8,620 -- $ -- $ 48,140,596 ---------- ---------- ------------ ------ ----------- ---------- ------------ Issuance of shares in connection with financings............ 6,458,332 645,833 9,987,692 Issuance of Series B preferred stock....... 5,018 2,805,961 2,527,723 Issuance of shares for services.............. 373,592 37,359 508,083 Issuance of shares in connection with exchange of preferred stock................. 5,857,406 585,741 (29,900) (2,990) 2,535,660 Issuance of shares in connection with exercise of stock options............... 1,662,452 166,245 2,282,323 Issuance of warrants and shares in connection with financing activities............ 793,066 79,307 5,086,153 Net loss applicable to common stockholders... Preferred dividends..... ========== ========== ============ ====== =========== ========== ============ Balances December 31, 1998.................. 29,759,459 $2,975,946 56,300 $5,630 5,018 $2,805,961 $ 71,068,230 ========== ========== ============ ====== =========== ========== ============ Issuance of common shares................ 4,059,783 405,978 18,503,996 Issuance of shares for services provided..... 931,294 93,129 10,696,587 Issuance of shares in connection with exchange of preferred stock................. 1,061,690 106,169 (56,300) (5,630) Issuance of shares in connection with exercise of stock options, stock appreciation rights and warrants.......... 6,355,771 635,577 12,816,409 Preferred stock redemption............ (5,018) (2,805,961) (2,392,380) Net loss applicable to common stockholders... Preferred stock dividends and accretion............. ---------- ---------- ------------ ------ ----------- ---------- ------------ Balances December 31, 1999.................. 42,167,997 $4,216,800 -- -- -- -- $110,692,842 ========== ========== ============ ====== =========== ========== ============ DEFICIT ------------ Balances December 31, 1996.................. $(40,665,512) ------------ Issuance of shares in connection with financings............ Issuance of shares for services.............. Issuance of shares in connection with exchange of preferred stock................. Issuance of shares in connection with exercise of stock options............... Net loss applicable to common stockholders... (10,358,683) ------------ Balances December 31, 1997.................. $(51,024,195) ------------ Issuance of shares in connection with financings............ Issuance of Series B preferred stock....... Issuance of shares for services.............. Issuance of shares in connection with exchange of preferred stock................. Issuance of shares in connection with exercise of stock options............... Issuance of warrants and shares in connection with financing activities............ Net loss applicable to common stockholders... (20,389,151) Preferred dividends..... (479,173) ============ Balances December 31, 1998.................. $(71,892,519) ============ Issuance of common shares................ Issuance of shares for services provided..... Issuance of shares in connection with exchange of preferred stock................. Issuance of shares in connection with exercise of stock options, stock appreciation rights and warrants.......... Preferred stock redemption............ Net loss applicable to common stockholders... (22,883,180) Preferred stock dividends and accretion............. (494,431) ------------ Balances December 31, 1999.................. $(95,270,130) ============
See Notes to Consolidated Financial Statements. 27 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION--ACTV, Inc. was incorporated on July 8, 1983. ACTV, Inc., including its subsidiaries (the "Company" or "ACTV"), is a digital media company that has developed proprietary technologies, called Individualized Television and HyperTV. Individualized Television enables television programmers and advertisers to create individualized programming for digital television, and HyperTV enhances regular television content with information and interactivity available through the Internet. PRINCIPLES OF CONSOLIDATION--The Company's consolidated financial statements include the balances of its operating subsidiaries that are more than 50% owned and controlled. All significant intercompany transactions and account balances are eliminated. Minority interest represents an outside stockholder's 49% ownership of the common stock of Digital ADCO. PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost and depreciated on the straight-line method over their estimated useful lives (generally five years). Depreciation expense for the years ended December 31, 1997, 1998, and 1999 aggregated $286,883, $762,581, and $929,765, respectively. EDUCATION EQUIPMENT--Education equipment consists of standard personal computers adapted to provide individualized programming functionality, videocassette recorders, television monitors and computer printers that the Company holds in inventory. This inventory is carried on the Company's books at the lower of first-in, first-out cost or market. In 1999, the inventory balance of $110,405 was written-off due to a change of the Company's business. PATENTS AND PATENTS PENDING--The cost of patents, which for patents issued represents the consideration paid for the assignment of patent rights to the Company and for patents pending represents legal costs related directly to such patents pending, is being amortized on a straight-line basis over the estimated economic lives of the respective patents (averaging 10 years), which is less than the statutory life of each patent. The balances at December 31, 1998 and 1999, are net of accumulated amortization of $186,485, and $391,236, respectively. SOFTWARE DEVELOPMENT COSTS--The Company capitalizes costs incurred for the development of software products where economic and technological feasibility of such products has been established. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the respective products (5 years). The balance at December 31, 1998 and 1999 is net of accumulated amortization of $145,553, $249,662, respectively. CASH EQUIVALENTS--The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. REVENUE RECOGNITION--Sales are recorded as products are shipped or services are rendered. During 1999, we recognized $300,000 in revenues for advertising spots provided to the Company for services rendered. RESEARCH AND DEVELOPMENT--Research and development costs, which represent primarily refinements to Individualized Programming, were $820,475 for the year ended December 31, 1998, and $1,392,937 for the year ended December 31, 1999. EARNINGS PER SHARE--The Company adopted Statement of Financial Accounting Standards, called SFAS, No. 128, EARNINGS PER SHARE, which establishes standards for computing and presenting earnings 28 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) per share, called EPS, and simplifies the standards for computing EPS currently found in Accounting Principles Board, called APB, Opinion No. 15, "Earnings Per Share". Common stock equivalents under APB No. 15 are no longer included in the calculation of primary, or basic, EPS. Loss per common share equals net loss divided by the weighted average number of shares of the Company's common stock outstanding during the period. The Company did not consider the effect of stock options or convertible preferred stock upon the calculation of the loss per common share, as it would be anti-dilutive. INTANGIBLES--The excess of the purchase cost over the fair value of net assets acquired in an acquisition (goodwill) is being amortized on a straight-line basis over a period of 10 years. The Company evaluates the realizability of goodwill based upon the expected undiscounted cash flows of the acquired business. Impairments, if any, will be recognized through a charge to operations, in the period in which the impairment is deemed to exist. Based on such analysis, the Company does not believe that goodwill has been impaired. OTHER CURRENT ASSETS--The Company's consolidated balance sheets at December 31, 1998, and December 31, 1999, reflect balances of $434,575, and $932 respectively, related to cash advances made to executive officers. LONG-LIVED ASSETS--In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF, which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of, the Company reviews the carrying values of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. The Company did not record impairment losses for the year ended December 31, 1999. STOCK-BASED COMPENSATION--Effective December 31, 1997, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION("SFAS No. 123"). In conjunction with the adoption, the Company will continue to apply the intrinsic-value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", with pro forma disclosure of net loss and EPS as if the fair-value based method prescribed by SFAS No. 123 had been applied. USE OF ESTIMATES--The preparation of financial statements in conformity with general accepted accounting principles requires Management to make estimates and assumptions that effect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED--In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value. The statement requires that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of 29 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000; however, it may be adopted earlier. It cannot be applied retroactively to financial statements of prior periods. The Company has not yet determined the impact, if any, the adoption of SFAS No. 133 will have on its financial statements. RECLASSIFICATIONS--Certain reclassifications have been made in the December 31, 1997, and 1998 financial statements to conform to the December 31, 1999 presentation. 2. NATURE OF OPERATIONS The principal market for the Individualized Television is entertainment programming distributed over digital television systems. The Company expects Individualized Television to derive revenues from subscriber fees, advertising sales, and software and services related to targeted advertising. The Company derived all of its revenues for 1998 and 1999 from HyperTV, which is targeted at the entertainment and education markets. The Company anticipates that the most significant portion of future HyperTV revenues will be derived from the entertainment market, for which the Company introduced a HyperTV application in 1999. The Company subsequently entered into HyperTV programming alliances for this market with The Box Music Network, Showtime, New Line Television, and Turner Entertainment Group. The Company expects the sources of revenue from the entertainment market to be software licensing, data management services, Internet advertising and commerce, content creation fees, and program hosting fees. The Company expects to license third parties to perform much of the program hosting and content creation business for HyperTV in the future. Individual customers accounted for more than 10% of the Company's revenues during the years ended 1999, 1998, and 1997. For the year ended December 31, 1999, individual clients accounted for the following percentages of sales: 14%, 14%, 15%, and 17%. For the year ended December 31, 1998, individual customers accounted for the following percentages of sales: 14% and 40%. For the year ended December 31, 1997, an individual customer accounted for the following percentage of sales: 24%. 3. ESTIMATES USED IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of the Company's financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. 30 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 4. PROPERTY AND EQUIPMENT--NET Property and equipment--net at December 31, 1997, 1998, and 1999 consisted of the following (at cost):
1997 1998 1999 ---------- ---------- ---------- Machinery and equipment.................. $2,931,682 $3,250,720 $4,748,831 Office furniture and fixtures............ 501,435 713,968 1,172,067 ---------- ---------- ---------- Total.................................... 3,433,117 3,964,688 5,920,898 Less accumulated depreciation............ 836,332 1,598,913 2,528,679 ---------- ---------- ---------- Total.................................... $2,596,785 $2,365,775 $3,392,219 ========== ========== ==========
5. FINANCING ACTIVITIES COMMON STOCK FINANCING During the years ended December 31, 1998 and 1999, the Company raised approximately $10.8 and $18.9 million from sales of common stock to private institutional investors and from the exercise of stock options and warrants, totaling approximately $2.4 and $12.0 million. PREFERRED STOCK FINANCING During 1996, the Company raised approximately $11.0 million net from the proceeds of a private placement of common stock ($1.9 million in net proceeds) and of 5% exchangeable preferred stock issued by the Company's wholly-owned subsidiary ($9.1 million in net proceeds). This exchangeable preferred stock was convertible into common stock of ACTV, Inc., beginning January 1, 1997, at varying discounts to the market price of common stock. After September 1, 1997, holders of the exchangeable preferred stock were able to use the lesser of (i) the then current market price of the Company's common stock, or (ii) an average market price during the month of August 1997 as the price to which the discount was applied for conversions. In addition, the Company had the right to redeem the exchangeable preferred stock at a price equal to $25 times the number of shares being purchased, plus accrued and unpaid dividends (the "Redemption Price"). This right was exercisable by the Company only if the closing price of the Company's common stock was above $9.00 for thirty consecutive trading days prior to redemption. The exchangeable preferred stock was convertible into shares of common stock at a discounted conversion price. The discount ranged from 14% to a maximum of 30.375%. The extent of the beneficial conversion feature was approximately $4.0 million, representing the maximum difference between the discounted conversion price and the prevailing market price of the common stock. Preferred stock accretion of $2.5 million was recorded and included as minority interest for the year ended December 31, 1997. As of December 31, 1998, all of the exchangeable preferred stock had been converted. In November 1998, ACTV issued 5,018 shares of Series B convertible preferred stock ("Series B Stock"), common stock, and warrants to purchase approximately 1.95 million shares of common stock at $2.00 per share as a partial exchange for approximately 179,000 shares of the subsidiary 31 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 5. FINANCING ACTIVITIES (CONTINUED) exchangeable preferred stock. The excess of the fair value of this consideration over the carrying value of the exchangeable preferred stock for which the Series B Stock was issued is included in Minority Interest--Subsidiary Preferred stock dividend and accretion in the accompanying statement of operations. The Series B Stock had a liquidation preference $1,000 per share and paid a dividend, in cash or accumulated and paid in common stock upon conversion, of 10% per annum. The Series B Stock was fully redeemable by ACTV at any time at a 10% premium above face value plus accrued dividends. The holders of the Series B Stock were prohibited from converting any shares into common stock through November 13, 1999. Beginning November 13, 1999, the number of shares issued upon conversion was to be determined by dividing the liquidation value of $1,000 plus accrued dividends by the conversion price of $2.00 per common share. Beginning February 13, 2000, the number of shares issued upon conversion was to be determined by dividing the liquidation value of $1,000 plus accrued dividends by the conversion price of $1.33 per common share. The beneficial conversion feature related to the possible conversion of the Series B Stock at $1.33 per share, which equaled $2,527,723 at the issuance date, was attributed to additional paid-in-capital and was being accounted for as a charge to net loss applicable to common stockholders over the period from issuance through February 13, 2000. During May 1999, ACTV redeemed all of the outstanding Series B Stock for a total of approximately $5.8 million. The Series B Stock had been convertible into common stock at $2.00 per share beginning in November 1998. ACTV effectively redeemed the Series B Stock at an equivalent of $2.20 per common stock share, a price significantly less than the market price at the time of the redemption. The redemption avoided the possible future issuance of more than 2.8 million shares of common stock. DEBT FINANCING In January 1998, the ACTV subsidiaries, ACTV Entertainment, Inc. and The Texas Individualized Television Network, Inc. ("Texas Network") entered into a note purchase agreement, dated as of January 13, 1998 with certain private investors. Pursuant to the agreement, the investors purchased $5.0 million aggregate principal amount notes from the Company's subsidiaries. The notes bear interest at a rate of 13.0% per annum, payable semi-annually, with principal repayment in one installment on June 30, 2003. During the term of the notes, the Company may pay any four semi-annual interest payments in kind rather than in cash, with an increase in the rate applicable to such payments in kind to 13.75% per annum. The Company chose to make the first two semi-annual interest payments (June 30, 1998 and December 31, 1998) in kind. The note is secured by the assets of the Texas Network, and is guaranteed by ACTV, Inc. In connection with the purchase of such note, the investors received on January 14, 1998 a common stock purchase warrant (The "Warrant") of Texas Network that granted the investors either the right to purchase up to 17.5% of the fully-diluted shares of common stock of Texas Network or, through July 14, 1999, to exchange the Warrant for such number of shares of the Company's common stock, at the time of and giving effect to such exchange, that were equal to 5.5% of the fully diluted number of shares of common stock outstanding. 32 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 5. FINANCING ACTIVITIES (CONTINUED) For accounting purposes, the Company allocated approximately $1.4 million to the value of the Warrant, based on the market value of the Company's common stock into which the Warrant was convertible at issuance. The Warrant was included outside of Consolidated Stockholders' Equity (Deficiency) due to its cash put feature and the notes were recorded at a value of proceeds received less the value attributed to the Warrant. The difference between the recorded value of the notes and their principal value was being amortized as additional interest expense over the life of the notes. The Warrant was exchanged and exercised for the Company's common stock during the first quarter of 1999. The Company intends to repay the debt in full during the second quarter of 2000. 6. STOCKHOLDERS' EQUITY (DEFICIENCY) At December 31, 1999, the Company had reserved shares of Common Stock for issuance as follows: 1989 Qualified Stock Option Plan............................ 11,183 1989 Non-Qualified Stock Option Plan........................ 9,750 1996 Qualified Stock Option Plan............................ 302,483 1998 Qualified Stock Option Plan............................ 743,334 1999 Qualified Stock Option Plan............................ 1,399,500 Options granted outside of formal plans..................... 14,166,588 ---------- Total..................................................... 16,632,838 ==========
CONVERTIBLE PREFERRED STOCK At December 31, 1999, the Company was authorized to issue 1,000,000 shares of blank check preferred stock, par value $0.10 per share, of which 120,000 shares were designated Series A Convertible Preferred Stock and 6,110 shares were designated Series B Stock. There were 86,200 and 56,300 shares of Series A Preferred outstanding at December 31, 1997 and 1998, respectively. Prior to December 31, 1999, the holders converted all of the outstanding shares of Series A preferred stock and the Company cancelled the Series A designation. There were 0 and 5,018 shares of Series B Stock issued and outstanding as of December 31, 1997 and 1998, respectively. The Company redeemed all of the Series B Stock in May 1999 and cancelled the Series B Stock designation. 7. STOCK OPTIONS During 1989, the Board of Directors approved an employee incentive stock option plan. This plan provides for the granting to key employees of options to purchase up to 100,000 shares of common stock. The plan stipulates that the option price be not less than fair market value on the date of grant. Options granted will have an expiration date not to exceed ten years from the date of grant. At December 31, 1999, 96,500 options had been granted under this plan (net of cancellations), of which 85,317 had been exercised. 33 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 7. STOCK OPTIONS (CONTINUED) In addition, in August 1989, the Board of Directors approved a Non-Qualified Stock Option Plan (the "Non-Qualified Plan"), to be administered by the Board of Directors or a committee appointed by the Board. The Non-Qualified Plan provides for the granting to employees, officers, directors, consultants and independent contractors of options to purchase up to 100,000 shares of common stock. The Non-Qualified Plan stipulates that the option price be not less than fair market value at the date of grant, or such other price as the Board may determine. Options granted under this Plan expire on a date determined by the committee but in no event later than three months after the termination of employment or retainer. At December 31, 1999, 91,500 options had been granted under this plan (net of cancellations), of which 81,750 had been exercised. During 1996, the Board of Directors approved the Company's 1996 Stock Option Plan (the "1996 Option Plan"). The 1996 Option Plan provides for grants to employees and others who provide significant services to the Company of options to purchase up to 500,000 shares of common stock. As of December 31, 1999, the Company had granted 483,484 options under the plan (net of cancellations), of which 181,001 had been exercised. During 1998, the Board of Directors approved the Company's 1998 Stock Option Plan (the "1998 Option Plan"). The 1998 Option Plan provides for grants to employees and others who provide significant services to us of options to purchase up to 900,000 shares of common stock. As of December 31, 1999, the Company had issued 830,501 options under the plan (net of cancellations), of which 87,167 had been exercised. During 1999, the Board of Directors approved the Company's 1999 Stock Option Plan (the "1999 Option Plan"). The 1999 Option Plan provides for grants to employees and others who provide a significant service to the Company of options to purchase up to 1,500,000 shares of common stock. In addition, the 1999 Option Plan allows for options already issued to be consolidated under the Option Plan. As of December 31, 1999, the Company had issued 1,451,500 options under the 1999 Option Plan (net of cancellation), of which 218,000 were consolidated into the plan from stock appreciation rights plans. As of December 31, 1999, 10,000 options had been exercised under the 1999 Option Plan. At December 31, 1998, the Company also had outstanding options and warrants not issued pursuant to a formal plan that were issued to directors, certain employees, and consultants and pursuant to financing transactions for the purchase of 14,166,588 shares of common stock. The prices of these options and warrants range from $1.50 to $15.00 per share; they have expiration dates in the years 2000 through 2007. The options and warrants granted are not part of the stock option plans discussed above. 34 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 7. STOCK OPTIONS (CONTINUED) A summary of the status of the Company's stock options as of December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 WGTD. WGTD. WGTD. AVG. AVG. AVG. 1999 EXER 1998 EXER 1997 EXER SHARES PRICE SHARES PRICE SHARES PRICE ---------- -------- --------- -------- --------- -------- Outstanding at beginning Of period............ 7,850,007 3,539,218 3,328,718 Options and warrants granted.................. 14,759,501 $8.20 6,376,073 $1.91 339,683 $1.91 Options and warrants exercised................ 5,801,670 $1.98 1,844,951 $1.64 17,000 $0.73 Options and warrants terminated............... 175,000 $4.00 220,333 $2.86 112,183 $4.06 Outstanding at end Of period.................. 16,632,838 $7.44 7,850,007 $1.90 3,539,218 $1.81 Options and warrants exercisable at end of period...................................... 9,369,330 $9.08 5,782,275 $1.99 2,363,134 $1.87
The following table summarizes information about stock options outstanding at December 31, 1999:
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES 12/31/99 LIFE PRICE AT 12/31/99 PRICE - ------------------------ -------------- ----------- -------- ----------- -------- $0 to 4.00.............................. 6,638,338 5.2 Years $ 1.65 3,427,269 $ 1.69 $4.01 to 8.00........................... 3,082,500 1.2 Years $ 7.65 2,500,000 $ 8.00 $8.01 to 12.00.......................... 1,842,500 3.7 Years $ 9.78 675,000 $10.85 $12.01 to 15.00......................... 5,033,500 2.8 Years $14.00 5,000,000 $14.00 $15.01 to 25.00......................... 36,000 4.9 Years $20.26 0 N/A
The weighted average fair value of options granted during 1998 and 1999 was $.97 and $5.85 per share, respectively, excluding the value of options granted and terminated within the year. In the case of each issuance, options were issued at an exercise price that was higher than the fair market value of the Company's common stock on the date of grant. The Company applies APB No. 25 and related Interpretations in accounting for its stock option and purchase plans. Accordingly, no compensation cost has been recognized for option issuances. Had compensation cost for the Company's option issuances been determined based on the fair value at the grant dates consistent with the method of FASB Statement 123, the Company's net loss and loss per basic and diluted share for the years ended 35 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 7. STOCK OPTIONS (CONTINUED) December 31, 1997, 1998, and 1999 would have been increased to the pro forma amounts indicated below:
1997 1998 1999 ----------- ----------- ----------- NET LOSS TO COMMON STOCKHOLDERS As reported......................................... $10,358,683 $20,552,359 $23,377,611 Pro forma........................................... $10,574,807 $21,987,835 $25,780,428 NET LOSS PER BASIC AND DILUTED COMMON SHARE As reported......................................... $ 0.80 $ 0.96 $ 0.61 Pro forma........................................... $ 0.82 $ 1.02 $ 0.67
The Company estimated the fair value of options issued during 1997, 1998, and 1999 on the date of each grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield, expected volatility for 1997, 1998, 1999 of 57.3%, 49.5%, and 94.4%, respectively, and a risk free interest rate of 6% for all years. 8. STOCK APPRECIATION RIGHTS PLANS The Company's 1992 Stock Appreciation Rights Plan ("SARs Plan") was approved by the Company's stockholders in December 1992. Subject to adjustment as set forth in the 1992 SARs Plan, the aggregate number of stock appreciation rights to be granted could not exceed 900,000. The Company's 1996 SARs Plan was adopted by the Board of Directors in April 1996 and approved by the stockholders in July 1996. Subject to adjustment as set forth in the 1996 SARs Plan, the aggregate number of SARs to be granted pursuant to the 1996 SARs plan could not exceed 500,000; provided, however, that at no time could there be more than an aggregate of 900,000 outstanding, unexercised SARs granted pursuant to both the 1996 SARs Plan and the 1992 SARs Plan. The 1996 SARs Plan imposed no limit on the number of recipients to whom awards could be made. Both the 1992 and 1996 SARs Plans were administered by the Stock Appreciation Rights Committee of the Company's Board of Directors. SARs could not be exercised until six months from the date of grant. SARs issued pursuant to the 1992 SARs Plan vested in five equal annual installments beginning twelve months from the date of grant. SARs issued pursuant to the 1996 SARs Plan vested either in a lump sum or in such installments, which did not need to be equal, as the Committee determined. If a holder of SARs ceased to be an employee, director or consultant of the Company, or a subsidiary or affiliate, other than by reason of the holder's death or disability, any SARs that had not vested became void. Exercise of SARs also were subject to such further restrictions (including limits on the time of exercise) as were necessary to satisfy the requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission and any other applicable law or regulation (including, without limitation, federal and state securities laws and regulations). SARs were not transferable except by will or under the laws of descent and distribution or pursuant to a domestic relations order as defined in the Internal Revenue Code of 1986, as amended. 36 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 8. STOCK APPRECIATION RIGHTS PLANS (CONTINUED) Upon exercise of SARs the holder received for each share for which a stock appreciation right was exercised, as determined by the SARs Committee in its discretion, (a) shares of the Company's common stock, (b) cash, or (c) cash and shares of common stock, equal to the difference between (i) the fair market value per share of the common stock on the date of exercise of the stock appreciation right and (ii) the exercise price of a stock appreciation right, which amount could be no less than the fair market value per share of common stock on the date of grant of the SARs. Under the 1992 SARs Plan, as of December 31, 1998, the Company had granted 516,000 outstanding SARs (with an exercise price of $1.50 per share) to ten employees. The SARs expired between 2001 and 2006. Under the 1996 SARs Plan, as of December 31, 1998, the Company had granted 380,000 outstanding SARs (with an exercise price of $1.50 per share) to six employees. The SARs expired between 2002 and 2006. During 1998, no SARs were exercised. The Company's balance sheets at December 31, 1999 and December 31, 1998, reflect expense accruals of $0 and $2.0 million, respectively, related to the Company's SARs plan. No SARs were exercised for cash during the first three quarters of 1999. In May 1999, Messrs. Samuels, Reese and Crowley agreed to retroactively exercise their vested SARs for unregistered shares of common stock, based upon the closing market price of $3 15/16 on January 4, 1999. As a result, the SARs expense for the first three months of 1999 was approximately $3.2 million less than it would have been otherwise. In September 1999, all remaining SARs were converted into options that became part of the Company's 1999 Option Plan. This conversion resulted in a current period expense of $1.3 million with an additional charge of $381,000 to future periods when the corresponding options vest. In September 1999, the Company exchanged all of the outstanding SAR for stock options with the same exercise prices and vesting dates and cancelled its SAR plans. To account for this exchange, for the year ended December 31, 1999, the Company simultaneously incurred non-cash compensation expense of $1,254,000 as a component of selling and administrative expense and non-cash income of $2.6 million from the elimination of the SAR liability related. Additionally, the Company incurred a $381,000 non-cash charge to deferred expenses for rights that had not vested as of December 31, 1999. 9. INCOME TAXES The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Deferred income taxes reflect the net tax effects at an effective tax rate of 35.33% of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit 37 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 9. INCOME TAXES (CONTINUED) carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset as of December 31, 1997, December 31, 1998, and December 31, 1999 are as follows:
1997 1998 1999 ------------ ------------ ------------ Deferred tax assets: Operating loss carryforwards........ $ 16,131,213 $ 20,254,782 $ 27,388,791 Differences between book and tax basis of property................. 56,148 852,587 1,561,275 ------------ ------------ ------------ 16,187,361 21,107,369 28,950,066 Deferred tax liabilities: Differences between book and tax basis of property................. (181,104) (454,618) (305,561) ------------ ------------ ------------ 16,000,257 20,652,751 28,644,505 ------------ ------------ ------------ Valuation Allowance................. (16,000,257) (20,652,751) (28,644,505) ------------ ------------ ------------ Net deferred tax asset.............. $ 0 $ 0 $ 0 ============ ============ ============
The increase in the valuation allowance for the year ended December 31, 1998 and 1999, was approximately $4.7 and $8.0 million, respectively. There was no provision or benefit for federal income taxes as a result of the net operating loss in the current year. Section 382 of the Internal Revenue Code of 1986, as amended, limits the ability of a corporation that undergoes an "ownership change" to use its net operating losses to reduce its tax liability. The February 2000 follow on offering of our common stock may have triggered such an ownership change. In that event, we would not be able use our pre-ownership-change net operating losses in excess of the limitation imposed by Section 382. This limitation generally would be calculated by multiplying the value of our stock immediately before the ownership change by a specified rate, which was 5.72% for ownership changes that took place during January 2000. At December 31, 1998 and 1999, the Company has Federal net operating loss carryovers of approximately $57.3 and $77.5 million, respectively. These carryovers will expire between the years 1999 and 2014. 10. RETIREMENT PLAN The Company sponsors a 401(k) savings plan for employees who have completed at least one full year of service. The Company has a policy of matching employee 401(k) deferrals dollar for dollar up to the first 5% of each participating employee's annual compensation. Percentage vesting of the matching contributions is based on an employee's term of service with the Company, starting at 20% for employees with more than two years of service, and increasing ratably to 100% for employees with more than six years of service. To date, the Company has made all such contributions in the form of its common stock. For the 401(k) plan years 1997, 1998 and 1999, the Company contributed the common stock equivalent of $86,192, $132,162, and $154,565 respectively. 38 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 11. COMMITMENTS At December 31, 1999, future aggregate minimum lease commitments under non-cancelable operating leases, which expire in 2000, 2001, 2005 and 2015, were approximately $13,180,000. The leases contain customary escalation clauses, based principally on real estate taxes. Rent expense related to these leases for the years ended December 31, 1997, 1998, and 1999 aggregated $330,430, $422,729, and $518,882 respectively. The Company has employment agreements with certain key employees. These agreements extend for a period of a maximum of five years and contain non-competition provisions, which extend one year after termination of employment with the Company. The Company is committed to expend a total of approximately $2.3 per year under these agreements. 12. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables. The Company attempts to mitigate cash investment risks by placing such investments in insured depository accounts and with financial institutions that have high credit ratings. Concentrations of risk with respect to trade receivables exist because of the relatively few companies or other organizations (primarily educational or government bodies) with which the Company currently does business. The Company attempts to limit these risks by closely monitoring the credit of those to whom it is contemplating providing its products, and continuing such credit monitoring activities and other collection activities throughout the payment period. In certain instances, the Company will further minimize concentrations of credit risks by requiring partial advance payments for the products provided. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS For financial instruments, including cash and cash equivalents, accounts receivable and payable, and accruals, the carrying amounts approximated fair value because of their short maturity. The Notes Payable of the Texas Individualized Television Network, Inc. were issued in 1998 and management believes that its carrying value is representative of its fair value. 14. SEGMENT REPORTING ACTV, Inc., develops and markets proprietary technologies for individualized television programming ("Individualized Programming") and for television/Internet convergence ("HyperTV"). Since its inception, the Company has been engaged in the development of Individualized Programming, the production of programs that use Individualized Programming and marketing and sales of the various products and services incorporating Individualized Programming. During 1996, the Company conceptualized and developed HyperTV for the television/Internet convergence market. In 1997, the Company introduced to the education market eSchool-Registered Trademark- Online, which was the first commercial application of HyperTV. 39 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 14. SEGMENT REPORTING (CONTINUED) Information concerning the Company's business segments in 1997, 1998, and 1999 is as follows:
1997 1998 1999 ----------- ----------- ----------- REVENUES Individualized Television............. $ -- $ -- $ -- HyperTV............................... 1,650,955 1,405,838 2,117,938 Unallocated corporate................. -- -- -- ----------- ----------- ----------- Total................................. $ 1,650,955 $ 1,405,838 $ 2,117,938 ----------- ----------- ----------- DEPRECIATION & AMORTIZATION Individualized Television............. $ 172,123 $ 763,241 $ 891,729 HyperTV............................... 29,622 206,338 450,406 Unallocated Corporate................. 552,309 563,151 660,901 ----------- ----------- ----------- Total................................. $ 754,054 $ 1,532,730 $ 2,003,036 ----------- ----------- ----------- INTEREST EXPENSE (INCOME) Individualized Television............. $ (9,391) $ 850,770 $ 1,014,617 HyperTV............................... (8,128) (8,405) 1,211 Unallocated corporate................. (99,351) 94,403 (420,358) ----------- ----------- ----------- Total................................. $ (116,870) $ 936,768 $ 595,470 ----------- ----------- ----------- NET LOSS Individualized Television............. $ 2,678,832 $ 5,273,173 $ 6,203,020 HyperTV............................... 1,771,671 2,020,228 4,421,230 Unallocated corporate................. 5,908,180 13,574,923 12,753,361 ----------- ----------- ----------- Total................................. $10,358,683 $20,868,324 $23,377,611 ----------- ----------- ----------- CAPITAL EXPENDITURES Individualized Television............. $ 139,897 $ 947,710 $ 2,030,469 HyperTV............................... 273,778 361,716 2,768,824 Unallocated corporate................. 2,482,128 618,495 6,110,909 ----------- ----------- ----------- Total................................. $ 2,895,803 $ 1,927,921 $10,910,202 ----------- ----------- ----------- CURRENT ASSETS Individualized Television............. $ 290,421 $ 1,449,763 $ 1,857,450 HyperTV............................... 775,855 844,683 1,334,634 Unallocated corporate................. 337,255 4,280,110 8,373,750 ----------- ----------- ----------- Total................................. $ 1,403,531 $ 6,574,556 $11,565,834 ----------- ----------- ----------- TOTAL ASSETS Individualized Television............. $ 3,105,174 $ 4,708,444 $ 6,244,009 HyperTV............................... 1,023,170 1,250,825 4,712,644 Unallocated corporate................. 3,773,575 7,646,773 17,195,405 ----------- ----------- ----------- Total................................. $ 7,901,918 $13,606,042 $28,152,058 ----------- ----------- -----------
40 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 15. INVESTMENT AND ADJUSTMENTS In January 1995, the Company invested $274,325 in the common stock (approximately 15% of ownership interest) of a company, which had licensed the Company's Individualized Programming for commercialization in special-purpose theaters. The Company also performed executive production services for this company on a fee basis. During 1996, the Company recorded license fee and production service revenue from the company of $16,789 and $199,666, respectively. At December 31, 1996, the Company had unpaid receivables pursuant to such revenues of $82,746. During 1997, the company filed for liquidation under United States Bankruptcy laws. In anticipation of such filing, at December 31, 1996 the Company provided a reserve for the full amount of the receivables outstanding of $82,746 and a valuation allowance for its full investment in the Licensee of $274,325. 16. INCENTIVE COMPENSATION PROVISIONS For the year ended December 31, 1999, the Company incurred executive compensation expense of $4.4 million. Approximately $1.3 million of the yearly total was non-cash compensation attributable to the exchange of stock options for stock appreciation rights, as described above. An additional component of total compensation expense was approximately $3.1 million for the year, related to an incentive compensation provision that is based on changes in the market value of the Company's common stock during the twelve-month period ended March 31, 1999. The Company is accruing the total value of the award in four equal quarterly amounts, beginning March 31, 1999, since it is payable in quarterly installments that are contingent on continued employment of the executive receiving this compensation. The Company paid approximately 55% of the award, in the form of unregistered common stock. 17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The consolidated financial statements at December 31, 1998 and 1999, reflect non-cash activity during the years ended December 31, 1998 and 1999, that relate to stock appreciation rights, notes and stock issued in lieu of cash compensation, subsidiary preferred stock dividends and accretions, and preferred stock dividends payable. The non-cash stock appreciation rights activity for the years ended December 31, 1998 and 1999, increased by $2.0 million for both years. The stock issued in lieu of cash compensation for the years ended December 31, 1998 and 1999 was $2.0 million and $6.4 million, respectively. The notes issued in lieu of cash compensation for the years ended December 31, 1998 was $686,641. During the term of the notes issued in January 1998 by ACTV subsidiaries, ACTV Entertainment, Inc. and the Texas Network, the Company may pay any four semi-annual interest payments in kind rather than in cash. The Company chose to make the first two semi-annual interest payments in kind through issuance of notes (June 30, 1998 and December 31, 1998). The subsidiary preferred stock dividends and accretions for the years ended December 31, 1998 was $5.7 million and the preferred stock dividends payable for the years ended December 31, 1998 and 1999 increased by $162,595 and $115,660, respectively. The Company made no cash payments of interest or income taxes during the years ended December 31, 1997 and 1998. During the year ended December 31, 1999, the Company made cash 41 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED) interest payments of $739,263, related to the $5.0 million original fair value note, and no cash payments of income tax. 18. MINORITY INTEREST In November 1999, the Company formed a company with Motorola Broadband Communications Sector, formerly General Instrument Corporation, to develop applications for the delivery of addressable advertising to cable subscribers regardless of whether they have subscribed to an individualized television service. The applications developed through this company, Digital ADCO, would permit advertisers to deliver targeted messages to individual viewers based on 32 demographic information stored in their digital set-top boxes. The Digital ADCO system would allow different advertisements to go to different households watching the same television show. Under the terms of our agreement with Motorola Broadband, the Company licensed five of the Company's patents to Digital ADCO in exchange for 51% of the common stock of Digital ADCO. Motorola Broadband has licensed six of its patents, and made a $5.0 million capital commitment for 49% of Digital ADCO's common stock. Any capital contribution after Motorola Broadband has fulfilled its initial $5.0 million commitment will be made pro rata based on ownership interests. In November, the first $2.0 million of $5.0 million was contributed to the company by General Instruments with $3.0 million to follow in the next twelve months. 19. SUBSEQUENT EVENTS In February 2000, the Company completed a follow-on offering of 4.0 million common shares as well as 0.6 million common shares to cover the over-allotments of the Company's underwriters, Credit Suisse First Boston, Bear Stearns & Co. Inc., Lehman Brothers, and Salomon Smith Barney. The total common shares of 4.6 million were priced to the public at $30 per share or $138 million. Underwriting discounts and commissions of $1.80 per share or $8.28 million were deducted resulting in net proceeds of $28.70 per share or $129.7 million. The Company intends to use the net proceeds from our sale of shares in the offering to repay approximately $5.9 million of outstanding indebtedness; and for general corporate purposes, including working capital requirements, potential minority investments in strategic alliances and potential acquisition. (A)2. FINANCIAL STATEMENT SCHEDULE The following Financial Statement Schedule for the years ended December 31, 1999, December 31, 1998, and December 31, 1997 is filed as part of this Annual Report. 42 ACTV, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 19. SUBSEQUENT EVENTS (CONTINUED) SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN B COLUMN C COLUMN D COLUMN E ---------- ----------------------- ---------- ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- ---------- ---------- ---------- ---------- ---------- Year ended 12/31/97: Accounts receivable allowance for doubtful accounts...................... $ 82,746 $43,188 -- $82,746 $43,188 Reserve for investment losses............ $274,325 -- $274,325 -- -- Year ended 12/31/98: Accounts receivable allowance for doubtful accounts...................... $ 43,188 -- -- $43,188 -- Reserve for investment losses............ -- -- -- -- -- Year ended 12/31/99: Accounts receivable allowance for doubtful accounts...................... $ -- -- -- -- -- Reserve for investment losses............ -- -- -- -- --
During 1997, the balances of $82,746 of accounts receivable and $274,325 of investments were written off as uncollectable or unrecoverable, respectively. During 1998, there were no changes to either the accounts receivable allowance or investment loss reserve. Uncollectable accounts receivables in the amount of $43,188 were written off in 1999. 43 (a)3. EXHIBITS (inapplicable items omitted): 3.1.a Restated Certificate of Incorporation of ACTV, Inc. * 3.1.b Amendment to Certificate of Incorporation of ACTV, Inc. ** 3.1.c Deleted. 3.2 By-Laws of ACTV, Inc. * 9.1 Deleted. 9.2 Deleted. 10.1 First Amendment dated January 13, 1997 to Lease dated January 23, 1996 by and between ACTV, Inc., as the Tenant, and Rockefeller Center Properties, as the Landlord. **** 10.2 Form of 1989 Employee Incentive Stock Option Plan. * 10.3 Form of Amendment No. 1 to 1989 Employee Incentive Stock Option Plan. * 10.4 Form of 1989 Employee Non-qualified Stock Option Plan. * 10.5 Form of Amendment No. 1 to 1989 Employee Non-qualified Stock Option Plan. * 10.8 1996 Non-qualified Stock Option Plan. **** 10.9 1992 Stock Appreciation Rights Plan. **** 10.10 1996 Stock Appreciation Rights Plan. **** 10.11 Deleted--replaced by 10.40. 10.12 Deleted--replaced by 10.41. 10.13 Deleted--replaced by 10.42. 10.14 Master Programming License Agreement dated December 2, 1996, by and between ACTV, Inc. and Liberty/Fox Sports, LLC. **** 10.15 Enhancement License Agreement dated December 4, 1996, by and between ACTV, Inc. and Prime Ticket Networks, L.P., d/b/a Fox Sports West. ++, **** 10.16 Enhancement License Agreement dated February 28, 1997, by and between ACTV, Inc. and ARC Holding, Ltd., d/b/a Fox Sports Southwest. ++, **** 10.17 Agreement dated March 30, 1995 between General Instrument Corporation and ACTV, Inc.*** 10.18 Technical Services Agreement dated May 1995 between the David Sarnoff Research Center, Inc. and ACTV, Inc. *** 10.19 Deleted. 10.21(a) Deleted. 10.21(b) Deleted. 10.21(c) Option Agreement dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett. *** 10.21(d) Assignment dated September 29, 1995 between ACTV, Inc. and Richard H. Bennett. ***
44 10.21(e) Deleted--replaced by 10.44(a). 10.21(f) Deleted. 10.21(h) Deleted--replaced by 10.44(b). 10.21(j) Deleted--replaced by 10.44(c). 10.22 Deleted--expired. 10.23(a) Deleted--replaced by 10.43(a). 10.23(b) Deleted--replaced by 10.43(b). 10.23(c) Deleted--replaced by 10.43(c). 10.23(d) Deleted. 10.23(e) Deleted. 10.23(f) Deleted. 10.23(g) Deleted. 10.24(a) Stock Option Agreement, dated March 14, 1997, by and between HyperTV Networks, Inc. and William C. Samuels. + 10.24(b) Stock Option Agreement, dated March 14, 1997, by and between HyperTV Networks, Inc. and Bruce Crowley. + 10.24(c) Stock Option Agreement, dated October 1, 1997, by and between HyperTV Networks, Inc. and William Samuels. + 10.24(d) Stock Option Agreement, dated October 1, 1997, by and between HyperTV Networks, Inc. and Bruce Crowley. + 10.24(e) Stock Option Agreement, dated March 14, 1997, between HyperTV Networks, Inc. and David Reese. ++++ 10.25(a) Stock Option Agreement by and between ACTV Entertainment, Inc. and William Samuels dated March 14, 1997 and amended January 14, 1998. + 10.25(b) Stock Option Agreement by and between ACTV Entertainment, Inc. and David Reese dated March 14, 1997 and amended January 14, 1998. + 10.25(c) Stock Option Agreement, dated March 14, 1997, between ACTV Entertainment, Inc. and Bruce Crowley. ++++ 10.26(a) Stock Option Agreement by and between Florida Individualized Television Network, Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. + 10.26(b) Stock Option Agreement by and between Northwest Individualized Television Network, Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. + 10.26(c) Stock Option Agreement by and between New York Individualized Television Network, Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. + 10.26(d) Stock Option Agreement by and between San Francisco Individualized Television Network, Inc. and William Samuels dated June 3, 1997 and amended January 14, 1998. + 10.26(e) Stock Option Agreement by and between Los Angeles Individualized Television Network, Inc. and William Samuels dated March 14, 1997 and amended January 14, 1998. +
45 10.26(f) Deleted--superceded by 10.26(f)1. 10.26(f)1 Stock option agreement dated as of March 14, 1997, and amended on January 14, 1998 and January 4, 1999, among Texas Individualized Television Network, Inc., ACTV, Inc. and William Samuels. ++++ 10.26(g) Stock Option Agreement by and between Florida Individualized Television Network, Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. + 10.26(h) Stock Option Agreement by and between Northwest Individualized Television Network, Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. + 10.26(i) Stock Option Agreement between New York Individualized Television Network, Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. + 10.26(j) Stock Option Agreement between San Francisco Individualized Television Network, Inc. and David Reese dated June 3, 1997 and amended January 14, 1998. + 10.26(k) Stock Option Agreement between Los Angeles Individualized Television Network, Inc. and David Reese dated March 14, 1997 and amended January 14, 1998. + 10.26(l) Deleted--superceded by 10.26(l)1. 10.26(l)1 Stock option agreement dated as of August 18, 1999 among ACTV, David Reese and Texas Individualized Television Network, Inc. ++++ 10.27 ACTV Entertainment Shareholder Agreement dated March 14, 1997 and amended January 14, 1998. + 10.28 HyperTV Networks Shareholder Agreement dated March 14, 1997. + 10.29 HyperTV Networks Additional Shareholder Agreement dated October 1, 1997. + 10.30 Deleted--replaced by 10.45 10.31 Deleted--replaced by 10.46 10.32 The Los Angeles Individualized Television Network, Inc. Sublicense Agreement dated March 14, 1997 between ACTV Entertainment and The Los Angeles Individualized Television Network, Inc. + 10.33 The San Francisco Individualized Television Network, Inc. Sublicense Agreement dated January 1, 1989 between ACTV Entertainment and The San Francisco Individualized Television Network, Inc. + 10.34 The Texas Individualized Television Network, Inc. Sublicense Agreement dated March 14, 1997 between ACTV Entertainment and The Texas Individualized Television Network, Inc. + 10.35 The Los Angeles Individualized Television Network, Inc. Service Agreement dated March 14, 1997 between ACTV, Inc., ACTV Entertainment and The Los Angeles Individualized Television Network, Inc. + 10.36 The San Francisco Individualized Television Network, Inc. Service Agreement dated January 1, 1998 between ACTV, Inc., ACTV Entertainment and The San Francisco Individualized Television Network, Inc. + 10.37 The Texas Individualized Television Network, Inc. Service Agreement dated March 14, 1997 between ACTV, Inc., ACTV Entertainment and The Texas Individualized Television Network, Inc. +
46 10.38 Form of Note Purchase Agreement of the Texas Individualized Television Network dated as of January 13, 1998 ***** 10.39 Deleted. 10.40 Deleted--superceded by 10.40.1. 10.40.1 Amended employment agreement dated as of August 1, 1995 between ACTV, Inc. and William Samuels. ++++ 10.41 Deleted--superceded by 10.41.1. 10.41.1 Employment agreement dated as of August 1, 1995, as amended October 6, 1999, between ACTV, Inc. and David Reese. ++++ 10.42 Deleted--superceded by 10.42.1. 10.42.1 Employment agreement dated as of August 1, 1995, as amended October 6, 1999, between ACTV, Inc. and Bruce Crowley. ++++ 10.43(a) Deleted--superceded by 10.51. 10.43(b) Deleted--superceded by 10.52. 10.43(c) Deleted--superceded by 10.53. 10.44(a) Deleted--superceded by 10.44(a)1. 10.44(a)1 Amended stock option agreement dated December 1, 1995 between ACTV, Inc. and William Samuels. ++++ 10.44(b) Deleted--superceded by 10.44(b)1. 10.44(b)1 Amended stock option agreement dated December 1, 1995 between ACTV, Inc. and David Reese. ++++ 10.44(c) Deleted--superceded by 10.44(c)1. 10.44(c)1 Amended stock option agreement dated December 1, 1995 between ACTV, Inc. and Bruce Crowley. ++++ 10.45 Amended license agreement dated March 8, 1999, between ACTV, Inc. and ACTV Entertainment, Inc., amending and restating in full the agreement dated March 14, 1997. +++ 10.46 Amended license agreement dated March 8, 1999, between ACTV, Inc. and HyperTV Networks, Inc., amending and restating in full the agreement dated March 13, 1997. +++ 10.47 Patent assignment and license agreement between ACTV, Inc. and Earthweb, Inc. dated December 1, 1997. +++ 10.48 Deleted--superceded by 10.48.1. 10.48.1 Employment agreement dated January 1, 1999, as amended as of January 1, 2000, between ACTV, Inc. and Christopher Cline. ++++ 10.49 Amendment dated as of December 4, 1999 to HyperTV Networks, Inc. Option Agreements, between HyperTV Networks, Inc. and various officers and employees thereof, including William Samuels, David Reese and Bruce Crowley. ++++
47 10.50 Amendment dated as of December 4, 1999 to ACTV Entertainment, Inc. Option Agreements, between ACTV Entertainment, Inc. and various officers and employees thereof, including William Samuels, David Reese and Bruce Crowley. ++++ 10.51 Amended stock option agreement dated February 21, 1998 between ACTV, Inc. and William C. Samuels. ++++ 10.52 Amended stock option agreement dated February 21, 1998 between ACTV, Inc. and Bruce Crowley. ++++ 10.53 Amended stock option agreement dated February 21, 1998 between ACTV, Inc. and David Reese. ++++ 10.54 Lease dated as of December 1, 1999 between 225 Fourth, LLC, as landlord, and ACTV, Inc., as tenant. ++++ 21 Subsidiaries of the Registrant 27 Financial Data Schedule
* Incorporated by reference from Form S-1 Registration Statement (File No. 33-34618) ** Incorporated by reference to ACTV, Inc.'s Form 10-K for the year ended December 31, 1993. *** Incorporated by reference from Form S-1 Registration Statement (File No. 33-63879) which became effective on February 12, 1996. **** Incorporated by reference to ACTV, Inc.'s Form 10-K for the year ended December 31, 1996. ***** Incorporated by reference from the Exhibits to Schedule 13D filed by Value Partners, Ltd. on January 23, 1998. ****** Incorporated by reference from Form S-3 Registration Statement filed on December 30, 1998. + Incorporated by reference to ACTV, Inc.'s Form 10-K for the year ended December 31, 1997. ++ Certain information contained in this exhibit has been omitted and filed separately with the Commission along with an application for non-disclosure of information pursuant to Rule 24b-2 of the Securities Act of 1933, as amended. +++ Incorporated by reference to ACTV, Inc.'s Form 10-K for the year ended December 31, 1998. ++++ Filed herewith.
48 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized in the City of New York and State of New York on the 17th day of March 2000. ACTV, Inc. By: /s/ WILLIAM C. SAMUELS --------------------------------- William C. Samuels Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM C. SAMUELS Chairman of the Board, Chief Executive March 17, 2000 - ------------------------ Officer, President and Director William C. Samuels /s/ DAVID REESE President, Chief Operating Officer, March 17, 2000 - ------------------------ President--ACTV Entertainment, Inc., David Reese and Director /s/ BRUCE CROWLEY Executive Vice President, March 17, 2000 - ------------------------ President--HyperTV Networks, Inc. Bruce Crowley and Director /s/ CHRISTOPHER C. Senior Vice President, Chief March 17, 2000 CLINE Financial Officer - ------------------------ and Secretary Christopher C. Cline /s/ WILLIAM FRANK Director March 17, 2000 - ------------------------ William Frank /s/ MELVYN N. KLEIN Director March 17, 2000 - ------------------------ Melvyn N. Klein /s/ STEVEN W. SCHUSTER Director March 17, 2000 - ------------------------ Steven W. Schuster
II-6 EX-10.24(E) 2 EX-10.24(E) Amended 12-04-99 OPTION AGREEMENT OPTION AGREEMENT, dated as of March 14, 1997, between, ACTV Net, Inc., a Delaware corporation (the "Corporation") and David Reese (the "Holder"). WHEREAS, the Corporation desires to grant to the Holder, the right and option to purchase shares (the "Option Shares") of Class B Common Stock, $.01 par value per share (the "Class B Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. The Corporation hereby grants to the Holder an option (the "Option") to purchase from the Corporation 100,000 Option Shares, at a purchase price of $1.90 per Option Share (the "Option Price"). The Holder's right and option to purchase the Option Shares shall vest, subject to subsection 1(d) and Section 6, as follows: (i) 34,000 Option Shares vest July 1, 1997, (ii) 22,000 Option Shares vest on January 1, 1998; (iii) 22,000 Option Shares vest on July 1, 1998; (iv) 22,000 Option Shares vest on January 1, 1999, (each an "Installment") at the option Price, so long as the Holder is employed by the Corporation. Said right shall be cumulative. With respect to each Installment, the "Option Period" shall commence on the date said Installment vests and terminate on October 1, 2007. b. Except as limited by Section 5, an Installment may be exercised, in whole or part, by the Holder by delivery to the Corporation, at any time during the Option Period, of a written notice (the "Option Notice"), which Option Notice shall state the Holder's intention to exercise the Option, the date on which the Holder proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Holder, the Holder shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the stock certificate or other instrument registered in the name of the Holder, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Holder on the Closing Date against the delivery to the Corporation of a certified or bank check in the full amount of the aggregate purchase price therefor. d. Should ACTV, Inc. ("ACTV") undergo a Change in Control, as defined below, or should another corporation which can exercise control over the Corporation sell or attempt to sell all or substantially all of the assets of said Corporation, or should more than 50% of its voting power be acquired by a party which is not affiliated with or controlled by ACTV, then all of the Holder's rights to exercise the Option for all the Option Shares shall be accelerated so that the Installments to purchase all Option Shares shall be fully vested at the time of said event and the exercise price shall reduce to $.10 per share. A Change in Control shall be the occurrence of any one of the following events: (i) A person (other than a person who is an officer or a Director of ACTV on the effective date hereof), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of ACTV's securities having 30% or more of the combined voting power of then outstanding securities of ACTV that may be cast for the election of directors of ACTV; (ii) At any time, a majority of the Board-nominated slate of candidates for the Board of ACTV is not elected; (iii) ACTV consummates a merger in which it is not the surviving entity; (iv) Substantially all ACTV's assets are sold; or (v) ACTV's stockholders approve the dissolution or liquidation of ACTV. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder hereby represents and warrants to the Corporation that in the event the Holder acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Holder understands the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is exempt from registration. The certificate or certificates representing any Option Shares shall bear the following restrictive legend: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933; OR (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER 2 SUCH ACT (OR SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THEN AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. IN ADDITION, THIS CERTIFICATE OF STOCK AND THE SHARES REPRESENTED HEREBY ARE HELD SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN AN AGREEMENT BY AND AMONG THE SHAREHOLDERS OF THE CORPORATION AND THE CORPORATION DATED AS OF MARCH 6, 1997, AND ALL AMENDMENTS THERETO, AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS THEREOF. A COPY OF SUCH AGREEMENT WILL BE FURNISHED BY THE CORPORATION UPON REQUEST." SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of the Common Stock (the term "Common Stock" shall mean the Company's Class A Common Stock and/or the Class B Stock) (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Holder would have been entitled if the Holder had held shares of Class B Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganization, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: If, at any time during the Option Period, the number of shares of Common Stock outstanding is altered by a stock dividend payable in shares of Common Stock or by a subdivision or split-up or combination of shares of Common Stock, then, immediately 3 following the record date fixed for the determination of holders of shares of Common Stock, entitled to receive such subdivision or split-up or combination, the Option Price shall be appropriately increased or decreased and the number of shares of Common Stock issuable upon the exercise hereof shall be increased or decreased, pursuant to the formula set forth in Section 4.c. c. Upon each adjustment of the Option Price pursuant to the provisions of this Section 4, the number of shares of Common Stock issuable upon the exercise thereof shall be adjusted to the nearest full share of Common Stock by multiplying a number equal to the Option Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable immediately prior to such adjustment and dividing the product so obtained by the adjusted Option Price. d. Should additional shares of Class A Common Stock, $.01 par value, over and above the 4,000,000 shares presently authorized, be issued after the effective date of this Option Agreement, then the number of shares issuable upon exercise of this Option shall be increased by the same percentage that the total number of issued Class A Common Stock has been increased. e. The Corporation will use it best efforts to amend its certificate of incorporation to authorize additional Class B Stock should the number of shares of Class B Stock issuable upon exercise of the Option be increased in accordance with the terms of this agreement. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsection 5(b), the Option granted hereby shall terminate and the Option shall no longer be exercisable after March 14, 2007. b. OPTION RIGHTS UPON DEATH, DISABILITY, RESIGNATION. If a holder dies or becomes disabled while employed by the Corporation, ACTV, Inc. or any affiliate or subsidiary of ACTV, Inc. (collectively, the "ACTV Group"), or resigns from employment with the ACTV Group prior to his complete exercise of the Option, the Holder (or his heirs) may exercise his Option at any time during the option period, to the extent that the Holder was entitled to exercise the Option at the date such event, and the Class B Stock underlying the Option shall convert into Class A Stock on the second anniversary of the occurrence of such death, disability or resignation. SECTION 6. TERMINATION OF EMPLOYMENT. In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, the (i) all Options granted to the Holder hereunder shall become vested and immediately exercisable at an exercise price of $.10 per share adjusted for any stock splits 4 and capital reorganizations having a similar effect, subsequent to the effective date hereof, (ii) all Options may be exercised at any time during the Option Period and (iii) anything herein to the contrary notwithstanding, the Shares underlying the Option, whether exercised prior or subsequent to the termination shall not convert to Class A Stock except as set forth in the applicable Shareholder Agreement. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, approved assigns and approved transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation: ACTV Net, Inc. 1270 Avenue of the Americas New York, NY 10020 Attention: President If to the Holder, to: David Reese 30 Maclay Road Montville, New Jersey 07045 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. 5 SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV NET, INC. By: /s/ Illegible ------------- AGREED TO AND ACCEPTED BY HOLDER: /s/ David Reese - -------------------------------------- Signature /s/ Davis Reese - -------------------------------------- Print Name 6 EX-10.25(C) 3 EX-10.25(C) OPTION AGREEMENT OPTION AGREEMENT, dated as of March 14, 1997, between ACTV Entertainment, Inc., a Delaware corporation (the "Corporation") and Bruce Crowley (the "Holder"). WHEREAS, the Corporation desires to grant to the Holder, the right and option to purchase shares (the "Option Shares") of Class B Common Stock, $.01 par value per share (the "Class B Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. The Corporation hereby grants to the Holder an option (the "Option") to purchase from the Corporation 100,000 Option Shares, at a purchase price of $.10 per Option Share (the "Option Price"). The Holder's right and option to purchase the Option Shares shall vest, subject to subsection 1(d) and Section b, as follows: (i) 34,000 Option Shares vest July 1, 1997, (ii) 22,000 Option Shares vest on January 1, 1998; (iii) 22,000 Option Shares vest July 1, 1998; (iv) 22,000 Option Shares vest January 1, 1999 (each an "Installment") at the Option Price, so long as the Holder is employed by the Corporation. Said right shall be cumulative. With respect to each Installment, the "Option Period" shall commence on the date said Installment vests and terminate on March 14, 2007. b. Except as limited by Section 5, an Installment may be exercised, in whole or part, by the Holder by delivery to the Corporation, at any time during the Option Period, of a written notice (the "Option Notice"), which Option Notice shall state the Holder's intention to exercise the Option, the date on which the Holder proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Holder, the Holder shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the stock certificate or other instrument registered in the name of the Holder, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Holder on the Closing Date against the delivery to the Corporation of a certified or bank check in the full amount of the aggregate purchase price therefor. d. Should ACTV, Inc. ("ACTV") undergo a Change in Control, as defined below, or should another corporation which can exercise control over the Corporation sell or attempt to sell all or substantially all of the assets of said Corporation, or should more than 50% of its voting power be acquired by a party which is not affiliated with or controlled by ACTV, then all of the Holder's rights to exercise the Option for all the Option Shares shall be accelerated so that the Installments to purchase all Option Shares shall be fully vested at the time of said event at the exercisable price of $.10 per share. A Change in Control shall be the occurrence of any one of the following events: (i) A person (other than a person who is an officer or a Director of ACTV on the effective date hereof), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of ACTV's securities having 30% or more of the combined voting power of then outstanding securities of ACTV that may be cast for the election of directors of ACTV; (ii) At any time, a majority of the Board-nominated slate of candidates for the Board of ACTV is not elected; (iii) ACTV consummates a merger in which it is not the surviving entity; (iv) Substantially all ACTV's assets are sold; or (v) ACTV's stockholders approve the dissolution or liquidation of ACTV. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder hereby represents and warrants to the Corporation that in the event the Holder acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The holder understands the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is exempt from registration. The certificate or certificates representing any Option Shares shall bear the following restrictive legend: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933; OR (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAN AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. IN ADDITION, THIS CERTIFICATE OF STOCK AND THE SHARES REPRESENTED HEREBY ARE HELD SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN AN AGREEMENT BY AND AMONG THE SHAREHOLDERS OF THE CORPORATION AND THE CORPORATION DATED AS OF MARCH 6, 1997, AND ALL AMENDMENTS THERETO, AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS THEREOF. A COPY OF SUCH AGREEMENT WILL BE FURNISHED BY THE CORPORATION UPON REQUEST." SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of the Common Stock (the term "Common Stock" shall mean the Company's Class A Common Stock and/or the Class B Stock) (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or Person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Holder would have been entitled if the Holder had held shares of Class B Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: If, at any time during the Option Period, the number of shares of Common Stock outstanding is altered by a stock dividend payable in shares of Common Stock or by a subdivision or split-up or combination of shares of Common Stock, then, immediately 3 following the record date fixed for the determination of holders of shares of Common Stock, entitled to receive such subdivision or split-up or combination, the Option Price shall be appropriately increased or decreased and the number of shares of Common Stock issuable upon the exercise hereof shall be increased or decreased, pursuant to the formula set forth in Section 4.c. c. Upon each adjustment of the Option Price pursuant to the provisions of this Section 4, the number of shares of Common Stock issuable upon the exercise thereof shall be adjusted to the nearest full share of Common Stock by multiplying a number equal to the Option Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable immediately prior to such adjustment and dividing the product so obtained by the adjusted Option Price. d. Should additional shares of Class A Common Stock, $.01 par value, over and above the 4,000,000 shares presently authorized, be issued after the effective date of this Option Agreement, then the number of shares issuable upon exercise of this Option shall be increased by the same percentage that the total number of issued Class A Common Stock has been increased. e. The Corporation will use it best efforts to amend its certificate of incorporation to authorize additional Class B Stock should the number of shares of Class B Stock issuable upon exercise of the Option be increased in accordance with the terms of this agreement. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsection 5(b), the Option granted hereby shall terminate and the Option shall no longer be exercisable after March 14, 2007. b. OPTION RIGHTS UPON DEATH, DISABILITY, RESIGNATION. If a Holder dies or becomes disabled while employed by the Corporation, ACTV, Inc. or any affiliate or subsidiary of ACTV, Inc. (collectively, the "ACTV Group"), or resigns from employment with the ACTV Group prior to his complete exercise of the Option, the Holder (or his heirs) may exercise his Option at any time during the option period, to the extent that the Holder was entitled to exercise the Option at the date such event, and the Class B Stock underlying the Option shall convert into Class A Stock on the second anniversary of the occurrence of such death, disability or resignation. SECTION 6. TERMINATION OF EMPLOYMENT. In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, the (i) all Options granted to the Holder hereunder shall become vested and immediately exercisable at an exercise price of $.10 per share adjusted for any stock splits 4 and capital reorganizations having a similar effect, subsequent to the effective date hereof, (ii) all Options may be exercised at any time during the Option Period and (iii) anything herein to the contrary notwithstanding, the Shares underlying the Options, whether exercised prior or subsequent to the termination shall not convert to Class A Stock except as set forth in the applicable Shareholder Agreement. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, approved assigns and approved transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation: ACTV Entertainment, Inc. 1270 Avenue of the Americas New York, NY 10020 Attention: President If to the Holder, to: Bruce Crowley 257 West 17th Street, Apt. 4C New York, New York 10011 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This agreement shall be governed by, and construed in accordance with the laws of the State of Delaware. SECTION 10. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreement. 5 SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV ENTERTAINMENT, INC. By: /s/ D Reese ---------------------------- AGREED TO AND ACCEPTED BY HOLDER: /s/ Bruce Crowley - ------------------------- Signature Bruce Crowley - ------------------------- Print Name 6 EX-10.26(F)1 4 EX-10.26(F)1 Exhibit 10.26(f)1 Exchanged Agreement OPTION AGREEMENT OPTION AGREEMENT, dated as of March 14, 1997, and amended on January 14, 1998 and January 4, 1999, between The Texas Individualized Television Network, Inc. ("Texas") a Delaware corporation and ACTV, Inc. (the "Corporation") and William Samuels (the "Holder"). WHEREAS, the Holder has exercised his right on January 4, 1999 to exchange his Class B Common Stock options in Texas for an equal number of ACTV, Inc. options on the terms and subject to conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. The Corporation hereby grants to the Holder a fully vested option (the "Option") to purchase from the Corporation 250,000 Option Shares, at a purchase price of $1.50 per Option Share (the "Option Price"). The "Option Period" shall commence on the date hereof and terminate on March 14, 2007. b. Except as limited by Section 5, the Option may be exercised, in whole or part, by the Holder by delivery to the Corporation, at any time during the Option Period, of a written notice (the "Option Notice"), which Option Notice shall state the Holder's intention to exercise the Option, the date on which the Holder proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Holder, the Holder shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the stock certificate or other instrument registered in the name of the Holder, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the Holder on the Closing Date against the delivery to the Corporation of a certified or bank check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Holder hereby represents and warrants to the Corporation that in the event the Holder acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The holder understands the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is exempt from registration. The certificate or certificates representing any Option Shares shall bear the following restrictive legend: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933; OR (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER THE SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAN AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE. IN ADDITION, THIS CERTIFICATE OF STOCK AND SHARES REPRESENTED HEREBY AND HELD SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN AN AGREEMENT BY AND AMONG THE SHAREHOLDERS OF THE CORPORATION AND THE CORPORATION DATED AS OF MARCH 6, 1997, AND ALL AMENDMENTS THERETO, AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS THEREOF. A COPY OF SUCH AGREEMENT WILL BE FURNISHED BY THE COPRPORATION UPON REQUEST." SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of the Common Stock (the term "Common Stock" shall mean the Company's Class A Common Stock and/or the Class B Stock) (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Holder would have been entitled if the Holder had held shares of Class B Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows; If, at any time during the Option Period, the number of shares of Common Stock outstanding is altered by a stock dividend payable in shares of Common Stock or by a subdivision or split-up or combination of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock, entitled to receive such subdivision or split-up or combination, the Option Price shall be appropriately increased or decreased and the number of shares of Common Stock issuable upon the exercise hereof shall be increased or decreased, pursuant to the formula set forth in Section 4.c. c. Upon each adjustment of the Option Price pursuant to the provisions of this Section 4, the number of shares of Common Stock issuable upon the exercise hereof shall be adjusted to the nearest full share of Common Stock by multiplying a number equal to the Option Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable immediately prior to such adjustment and dividing the product so obtained by the adjusted Option Price. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsection 5(b), the Option granted hereby shall terminate and the Option shall no longer be exercisable after March 14, 2007. b. OPTION RIGHTS UPON DEATH, DISABILITY, RESIGNATION. If a Holder dies or becomes disabled while employed by the Corporation or resigns from employment with the Corporation prior to his complete exercise of the Option, the Holder (or his heirs) may exercise his Option at any time during the option period, to the extent that the Holder was entitled to exercise the Option at the date of such event. SECTION 6. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, approved assigns and approved transferees. SECTION 7. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Corporation: ACTV, Inc. 1270 Avenue of the Americas New York, NY 10020 Attention: Christopher C. Cline With a copy to: Gersten, Savage, Kaplowitz & Fredericks 101 East 52 Street New York, NY 10022 Attention: Jay Kaplowitz If to the Holder, to: William Samuels 2 East 75th Street New York, NY 10021 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of Delaware. SECTION 9. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and amends the previous option agreement dated March 14, 1997 and amended January 14, 1998 with Texas and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 10. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, INC. By: /s/ Christopher C. Cline ------------------------ Christopher C. Cline AGREED TO AND ACCEPTED BY HOLDER: /s/ WC Samuels - -------------------------------------- Signature - -------------------------------------- EX-10.26(1)1 5 EX-10.26(1)1 Exhibit 99.1 ACTV OPTION AGREEMENT Dated as of August 18, 1999 WHEREAS, THE TEXAS INDIVIDUALIZED TELEVISION NETWORK. INC., a Delaware corporation ("TexNet"), and DAVID REESE ("Holder") are parties to that certain Option Agreement dated as of March 14, 1997 (as amended January 14, 1998, the "TexNet Option Agreement"), granting to Holder the right and option to purchase 250,000 shares (the "TexNet Option Shares") of TexNet's Class B common stock, par value $.01 per share (the "TexNet Class B Stock"), at a price of $ 1.50 per TexNet Option Share; WHEREAS, Subsection 1(d) of the TexNet Option Agreement provides that the option granted thereunder to purchase the TexNet Option Shares may, after January 1, 1999, be exchanged, in whole or in part, for an option to purchase from ACTV. INC., a Delaware corporation ("ACTV"), an equal number of shares, i.e., 250,000 shares (the ACTV Option Shares"), of ACTV's common stock, par value $.10 per share (the "ACTV Common Stock"), at a price of $1.50 per ACTV Option Share; WHEREAS, the Holder desires to effect the foregoing exchange effective the date hereof on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged. TexNet, the Holder and ACTV hereby agree as follows: SECTION 1. Option to Purchase Common Stock. a. ACTV hereby grants to the Holder a fully-vested option (the "Option") to purchase from ACTV two hundred fifty thousand (250,000) ACTV Option Shares at a purchase price of $1.50 per ACTV Option Share (the "ACTV Option Price"). The "Option Period" shall commence on the date hereof and shall terminate in its entirety on (and shall thereupon cease to be exercisable, in any respect, from and after) March 14, 2007. b. Except as limited by Section 5 hereof, the Option may be exercised, in whole or part, by the Holder by delivery to ACTV, at any time during the Option Period, of a written notice (the "Option Notice"), which Option Notice shall state the Holder's intention to exercise the Option, the date on which the Holder proposes to purchase the ACTV Option Shares (the "Closing Date") and the number of ACTV Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by ACTV of an Option Notice from the Holder, the Holder shall be obligated to purchase that number of ACTV Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of ACTV Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of ACTV. Delivery of the stock certificate or other instrument registered in the name of the Holder, evidencing the ACTV Option Shares being purchased on the Closing Date, shall be made by ACTV to the Holder on the Closing Date against the delivery to ACTV of a certified or bank check in the full amount of the aggregate purchase price therefor. SECTION 2. Representations and Warranties of The Holder. The Holder hereby represents and warrants to ACTV that in the event the Holder acquires any ACTV Option Shares, such ACTV Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Holder understands the ACTV Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is exempt from registration. The certificate or certificates representing any Option Shares shall bear the following restrictive legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT'), AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (ii) AN OPINION OF COUNSEL, WHICH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR ACTV, INC. ("ACTV"), THAT AN EXEMPTION FROM REGISTRATION FOR SUCH SALE, OFFER, TRANSFER, HYPOTHECATION OR OTHER ASSIGNMENT IS AVAILABLE UNDER THE SECURITIES ACT. IN ADDITION, THIS STOCK CERTIFICATE OF STOCK AND THE SHARES REPRESENTED HEREBY ARE HELD SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN THAT CERTAIN AGREEMENT BY AND AMONG ACTV AND ITS SHAREHOLDERS DATED AS OF MARCH 6,1997. AS AMENDED, AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE TERMS AND PROVISIONS THEREOF. A COPY OF SUCH AGREEMENT WILL BE FURNISHED BY ACTV UPON WRITTEN REQUEST. SECTION 3. Reorganization; Mergers; Sales; Etc. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of the ACTV Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of ACTV with or into another corporation or the sale of all or substantially all the properties and assets of ACTV as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of ACTV or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Holder would have been entititled if the Holder had held shares of ACTV Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. Adjustment of Option Shares and Option Price. a. The number of ACTV Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of ACTV Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: If, at any time during the Option Period, the number of shares of ACTV Common Stock outstanding is altered by a stock dividend payable in shares of ACTV Common Stock or by a subdivision or split-up or combination of shares of ACTV Common Stock, then, immediately following the record date fixed for the determination of holders of shares of ACTV Common Stock entitled to receive such subdivision or split-up or combination, the Option Price shall be appropriately increased or decreased and the number of shares of ACTV Common Stock issuable upon the exercise hereof shall be increased or decreased, pursuant to the formula set forth in Section 4.c. c. Upon each adjustment of the Option Price pursuant to the provisions of this Section 4. the number of shares of ACTV Common Stock issuable upon the exercise hereof shall be adjusted to the nearest full share of ACTV Common Stock by multiplying a number equal to the Option Price in effect immediately prior to such adjustment by the number of shares of ACTV Common Stock issuable immediately prior to such adjustment and dividing the product so obtained by the adjusted Option Price. SECTION 5. Termination of the Options. a. Termination of Options in General. Subject to subsection 5(b), the Option granted hereby shall terminate and the Option shall no longer be exercisable in any respect after March 14, 2007. b. Option Rights Upon Death, Disability, Resignation. If the Holder dies or becomes disabled while employed by ACTV or resigns from ACTV's employment prior to his complete exercise of the Option, the Holder (or his heirs) may exercise his Option at any time during the Option Period, to the extent that the Holder was entitled to exercise the Option at the date such of such event. SECTION 6. Transfer of Option; Successors and Assigns. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of ACTV. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, approved assigns and approved transferees. SECTION 7. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to ACTV, to: ACTV, Inc. Attn: Day L. Patterson, Law Department 1270 Avenue of the Americas New York, NY 10020 If to TexNet, to: The Texas Individualized Television Network, Inc. Attn: Day L. Patterson, Law Department 1270 Avenue of the Americas New York, NY 10020 And if to the Holder, to: Mr. David Reese 30 Maclay Road Montville, NJ 07045 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communications shall be deemed to have given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. SECTION 9. Entire Agreement. This Agreement (i) contains the entire agreement between ACTV and the Holder with respect to the transactions contemplated herein, (ii) supercedes and replaces the TexNet Option Agreement, which agreement shall be deemed terminated hereby as of, and of no further force or effect from and after, the date hereof, and (iii) supersedes all previously written or oral negotiations, commitments, representations and agreements. SECTION 10. Amendments and Modifications. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of ACTV and the Holder; provided, that clause (ii) of Section 9 hereof may not be amended or modified in any respect without the prior written consent of all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first set forth above. ACTV, INC. By: /s/ Day L. Patterson ------------------------- Day L. Patterson, Sr. Vice President and General Counsel THE TEXAS INDIVIDUALIZED TELEVISION NETWORK, INC. By: /s/ Christopher C. Cline ------------------------- Christopher C. Cline, Secretary/Treasurer AGREED TO ACCEPTED BY HOLDER: /s/ David Reese - --------------- DAVID REESE ("Holder") EX-10.40(1) 6 EX-10.40(1) ACTV, INC. EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT made as of this 1st day of August, 1995, between ACTV, INC., a Delaware corporation, having an office at 1270 Avenue of the Americas, New York, New York 10020 (hereinafter referred to as "Employer") and WILLIAM C. SAMUELS, an individual residing at 139 East 19th Street, New York, New York 10003 (hereinafter referred to as "Employee"); W I T N E S S E T H: WHEREAS, Employer employs, and desires to continue to employ, Employee as Chairman of the Board of Directors and Chief Executive Officer of Employer; and WHEREAS, Employee is willing to continue to be employed as the Chairman of the Board of Directors and Chief Executive Officer of Employer in the manner provided for herein, and to perform the duties of the Chairman of the Board of Directors and Chief Executive Officer of Employer upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein set forth it is agreed as follows: 1. EMPLOYMENT OF CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER. Employer hereby employs Employee as Chairman of the Board of Directors and Chief Executive Officer of Employer. 2. TERM. a. Subject to Section 10 below and further subject to Section 2(b) below, the term of this Agreement shall end on December 31, 2003. Each 12 month period from January 1 through December 31 during the term hereof shall be referred to as an "Annual Period." During the term hereof, Employee shall devote substantially all of his business time and efforts to Employer and its subsidiaries and affiliates. b. Subject to Section 10 below, unless the Board of Directors of the Company (the "Board") of Employer shall determine to the contrary and shall so notify Employee in writing on or before the end of any Annual Period, then at the end of each Annual Period, starting December 31, 1999, the term of this Agreement shall be automatically extended for one (1) additional Annual Period to be added at the end of the then current term of this Agreement. 3. DUTIES. The Employee shall perform those functions generally performed by persons of such title and position, shall attend all meetings of the stockholders and the Board, shall perform any and all related duties and shall have any and all powers as may be prescribed by resolution of the Board, and shall be available to confer and consult with and advise the officers and directors of Employer at such times that may be required by Employer. Employee shall report directly and solely to the Board. 4. COMPENSATION. a. (i) Employee shall be paid a minimum of $295,000 for each Annual Period, commencing January 1, 1998. Employee shall be paid periodically in accordance with the policies of the Employer during the term of this Agreement, but not less than monthly. (ii) Employee is eligible for quarterly bonuses, if any, which will be determined and paid in accordance with policies set from time to time by the Compensation Committee of the Board. (iii)Employee shall be entitled to a leased car of his choice, the cost of which shall reduce the total cash compensation paid under section 4 (a)(i). b. (i) In the event of a "Change of Control" whereby (A) A person (other than a person who is an officer or a Director of Employer on the effective date hereof), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of Employer securities having 30% or more of the combined voting power of then outstanding securities of the Employer that may be cast for the election of directors of the Employer; (B) At any time, a majority of the Board-nominated slate of candidates for the Board is not elected; (C) Employer consummates a merger in which it is not the surviving entity; (D) Substantially all Employer's assets are sold; or (E) Employer's stockholders approve the dissolution or liquidation of Employer; then -2- (ii) (A) All stock options, warrants and stock appreciation rights ("Rights") granted by Employer to Employee under any plan or otherwise prior to the effective date of the Change of Control, shall become vested, accelerate and become immediately exercisable; at an exercise price of 10(cent) per stock appreciation right if applicable; and in addition the employee, at his option, shall receive a special compensation payment for the exercise cost of all vested options upon exercising those options any time within twelve months after the effective date of the change of control, adjusted for any stock splits and capital reorganizations having a similar effect, subsequent to the effective date hereof. In the event Employee owns or is entitled to receive any unregistered securities of Employer, then Employer shall use its best efforts to effect the registration of all such securities as soon as practicable, but no later than 120 days after the effective date of the registration statement; provided, however, that such period may be extended or delayed by Employer for one period of up to 60 days if, upon the advice of counsel at the time such registration is required to be filed, or at the time Employer is required to exercise its best efforts to cause such registration statement to become effective, such delay is advisable and in the best interests of Employer because of the existence of non-public material information, or to allow Employer to complete any pending audit of its financial statements; (B) Any outstanding principle and interest on loans to Employee pursuant to Section 4.g.(ii), below, shall be recalculated and reconstituted as if the rights were exercised under 4(b)(ii). (C) If upon said Change of Control, Employee is not retained as Chief Executive Officer or substantially similar position of Employer or the surviving entity, as applicable, under terms and conditions substantially similar to those herein, then in addition, Employee shall be eligible to receive a one-time bonus, equal on an after-tax basis to two times his then current annual base salary. To effectuate this provision, the bonus shall be "grossed-up" to include the amount necessary to reimburse Employee for his federal, state and local income tax liability on the bonus and on the "gross-up" at the respective effective marginal tax rates. In no event shall this bonus exceed 2.7 times Employee's then current base salary. Said bonus shall be paid within thirty (30) days of the Change of Control. c. Employer shall include Employee in its health insurance program available to Employer's executive officers. d. Employer shall maintain a life, accidental death and dismemberment insurance policy on Employee for the benefit of a beneficiary named by Employee in an amount not less -3- than $2,000,000. Ownership of the policy shall be assigned to Employee upon termination of Employee's employment under this Agreement. e.(i) A bonus plan shall be instituted for Employee which shall take account of the efforts of Employee in generating value to Employer's shareholders. Under said plan, Employee shall be entitled to an annual bonus payable for each 12 month period commencing April 1, 1995 in cash and/or unregistered securities of Employer, at the option of the Compensation Committee of the Board, equal to 2% of the increase for said 12 month period in the total market capitalization of Employer calculated upon the excess of the total of the average daily closing price (if applicable) of each class of Employer's shares for the last 90 days of the 12 month period, multiplied by the number of shares of each class outstanding as reported by Employer's Certified Public Accountants, (the "90 Day Average") over the Base, which shall be the greater of $50,000,000 or the highest previous 90 Day Average against which a bonus was paid under this bonus plan, if any. Should the Compensation Committee elect hereunder to pay Employee in unregistered securities, said securities shall be valued at 60% of the most recent 90 Day Average. Should Employer's shares no longer be publicly traded, the current 90 Day Average shall be determined by a 3 person panel, 1 person appointed each by Employer and Employee and 1 appointed by the former 2. The Employee shall be entitled to receive compensation under this plan for five fiscal years following expiration or termination of this employment contract, except that if Employee is terminated for cause as defined in Section 10.a.(i) hereof or resigns under section 10 (b)(ii) then said compensation shall continue for three fiscal years. Furthermore, in certain years the Employee's right to retain the entire amount of the bonus paid to the Employee under this Section 4(e)(i) may be subject to forfeiture upon the termination of the Employee's employment with Employer under either Section 10(a)(i) or 10(b)(ii) hereof during a defined time period mutually agreed upon between the Compensation Committee and the Employee. (ii) Employee shall also be entitled to participate pari passu in any other program established by Employer pursuant to which any executive officers receive a share of the profits of Employer. f. Employee shall have the right to participate in any other employee benefit plans established by Employer. g. Unless a pre-existing plan of Employer expressly forbids it, all Rights which may become exercisable -4- during the term hereof shall be paid for in cash only if Employee so elects, otherwise they may be paid for (i) by the transfer by Employee to Employer of so much of Employee's Rights which, when valued at the highest trading price of the underlying securities of Employer during the previous six months, will offset the price of the Rights then being exercised; (ii) by means of a non-recourse Note with interest at the lowest rate, if any, required to be charged by any governmental authority, to accrue and become due and payable with the principle, in an amount no greater than the exercise price, given by Employee to Employer and secured solely by the shares of stock being paid for thereby, which Note shall become due and payable at the earlier of the expiration hereof or, on a pro rata basis, the sale by Employee of all or part of the Rights or underlying stock which constitute security for the Note; or (iii) by any combination of cash and (ii) or (iii), above. 5. BOARD OF DIRECTORS. Employer agrees that so long as this Agreement is in effect, Employee will be nominated to the Board as part of management's slate of Directors. 6. EXPENSES. Employee shall be reimbursed for all of his actual out-of-pocket expenses incurred in the performance of his duties hereunder, provided such expenses are acceptable to Employer, which approval shall not be unreasonably withheld, for business related travel and entertainment expenses, and that Employee shall submit to Employer reasonably detailed receipts with respect thereto. 7. VACATION. Employee shall be entitled to receive four (4) weeks paid vacation time after each year of employment upon dates agreed upon by Employer. Upon separation of employment, for any reason, vacation time accrued and not used shall be paid at the salary rate of Employee in effect at the time of employment separation. 8. SECRECY. At no time shall Employee disclose to anyone any confidential or secret information (not already constituting information available to the public) concerning (a) internal affairs or proprietary business operations of Employer or (b) any trade secrets, new product developments, patents, programs or programming, especially unique processes or methods. 9. COVENANT NOT TO COMPETE. Subject to, and limited by, Section 11(b), Employee will not, at any time, anywhere in the world, during the term of this Agreement, and for one (1) -5- year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business(as identified herein) of Employer as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, director, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by Employee, his spouse or his children is permitted if such investment is not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business and further provided that said competitive enterprise or business is a publicly held entity whose stock is listed and traded on a national stock exchange or through the NASDAQ Stock Market. As used in this Agreement, the business of Employer shall be deemed to include the development and implementation of individualized television technology or programs. 10. TERMINATION. A. TERMINATION BY EMPLOYER (i) Employer may terminate this Agreement upon written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging by the Employee in conduct that constitutes activity in competition with Employer; (B) the conviction of Employee for the commission of a felony; and/or (C) the habitual abuse of alcohol or controlled substances. Notwithstanding anything to the contrary in this Section 10(a)(i), Employer may not terminate Employee's employment under this Agreement for Cause unless Employee shall have first received notice from the Board advising Employee of the specific acts or omissions alleged to constitute Cause, and such acts or omissions continue after Employee shall have had a reasonable opportunity (at least 10 days from the date Employee receives the notice from the Board) to correct the acts or omissions so complained of. In no event shall alleged incompetence of Employee in the performance of Employee's duties be deemed grounds for termination for Cause. (ii) Employer may terminate Employee's employment under this Agreement if, as a result of any physical or mental disability, Employee shall fail or be unable to perform his duties under this Agreement for any consecutive period of 90 days during any twelve-month period. If Employee's employment is terminated under this Section 10(a)(ii): (A) for the first six months after termination, Employee shall be paid 100% of his full compensation under Section 4(a) of this Agreement at -6- the rate in effect on the date of termination, and in each successive 12 month period thereafter Employee shall be paid an amount equal to 67% of his compensation under Section 4(a) of this agreement at the rate in effect on the date of termination; (B) Employer's obligation to pay life insurance premiums on the policy referred to in Section 4(d) shall continue in effect until five years after the date of termination; and (C) Employee shall continue to be entitled, insofar as is permitted under applicable insurance policies or plans, to such general medical and employee benefit plans (including profit sharing or pension plans) as Employee had been entitled to on the date of termination. Any amounts payable by Employer to Employee under this paragraph shall be reduced by the amount of any disability payments payable by or pursuant to plans provided by Employer and actually paid to Employee. (iii) This agreement automatically shall terminate upon the death of Employee, except that Employee's estate shall be entitled to receive any amount accrued under Section 4(a) and the pro-rata amount payable under Section 4(e) for the period prior to Employee's death and any other amount to which Employee was entitled of the time of his death. B. TERMINATION BY EMPLOYEE (i) Employee shall have the right to terminate his employment under this Agreement upon 30 days' notice to Employer given within 90 days following the occurrence of any of the following events (A) through (F) or within three years following the occurrence of event (G): (A) Employee is not elected or retained as Chairman of the Board of Directors, President and Chief Executive Officer of Employer. (B) Employer acts to materially reduce Employee's duties and responsibilities hereunder. Employee's duties and responsibilities shall not be deemed materially reduced for purposes hereof solely by virtue of the fact that Employer is (or substantially all of its assets are) sold to, or is combined with, another entity, provided that Employee shall continue to have the same duties and responsibilities with respect to Employer's interactive business, and Employee shall report directly to the chief executive officer and/or board of directors of the entity (or individual) that acquires Employer or its assets. (C) Employer acts to change the geographic location of the performance of Employee's duties from the New York Metropolitan area. For purposes of this Agreement, the New York Metropolitan area shall be deemed to be the area within 30 miles of midtown Manhattan. (D) A Material Reduction (as hereinafter defined) in Employee's rate of base compensation, or Employee's other benefits. "Material Reduction" shall mean a ten percent (10%) differential; -7- (E) A failure by Employer to obtain the assumption of this Agreement by any successor; (F) A material breach of this Agreement by Employer, which is not cured within thirty (30) days of written notice of such breach by Employer; (G) A Change of Control. (ii) Anything herein to the contrary notwithstanding, Employee may terminate this Agreement upon thirty (30) days written notice. c. If Employer shall terminate Employee's employment other than due to his death or disability or for Cause (as defined in Section 10(a)(i) of this Agreement), or if Employee shall terminate this Agreement under Section 10(b)(i), Employer's obligations under Section 4 shall be absolute and unconditional and not subject to any offset or counterclaim and Employee shall continue to be entitled to receive all amounts provided for by Section 4 and all additional employee benefits under Section 4 regardless of the amount of compensation he may earn with respect to any other employment he may obtain. 11. CONSEQUENCES OF BREACH BY EMPLOYER; EMPLOYMENT TERMINATION a. If this Agreement is terminated pursuant to Section 10(b)(i) hereof, or if Employer shall terminate Employee's employment under this Agreement in any way that is a breach of this Agreement by Employer, the following shall apply: (i) Employee shall receive as a bonus, and in addition to his salary continuation pursuant to Section 10.c., above, a cash payment equal to the Employee's total base salary as of the date of termination hereunder for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination; except that if this Agreement is terminated pursuant to Section 10(b)(i)(G), then Employee shall not be entitled to receive a bonus under this Section 11.a.(i) but shall instead receive a lump-sum payout of Employee's total base salary for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination. (ii) Employee shall be entitled to payment of any previously declared bonus and additional compensation as provided in Section 4(a), (b) and (e) above. b. In the event of termination of Employee's employment pursuant to Section 10(b)(i) of this Agreement, the provisions of Section 9 shall not apply to Employee. 12. REMEDIES Employer recognizes that because of Employee's special talents, stature and opportunities in the interactive television industry, and because of the special creative nature of and compensation practices of said industry and the material impact that individual projects can have on an interactive television company's results of operations, in the event of termination by Employer hereunder (except under Section 10(a)(i) or (iii), or in the event of termination by Employee under Section 10(b)(i) before the end of the agreed term, Company acknowledges and agrees that the provisions of this Agreement regarding further payments of base salary, bonuses and the exercisability of Rights constitute fair and reasonable provisions for the consequences of such termination, do not constitute a penalty, and such payments and benefits shall not be limited or reduced by amounts' Employee might earn or be able to earn from any other employment or ventures during the remainder of the agreed term of this Agreement. 13. EXCISE TAX. In the event that any payment or benefit received or to be received by Employee in connection with a termination of his employment with Employer would constitute a "parachute payment" within the meaning of Code Section 280G or any similar or successor provision to 280G and/or would be subject to any excise tax imposed by Code Section 4999 or any similar or successor provision then Employer shall assume all liability for the payment of any such tax and Employer shall immediately reimburse Employee on a "grossed-up" basis for any income taxes attributable to Employee by reason of such Employer payment and reimbursements. 14. ARBITRATION. Any controversies between Employer and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement, save and except for any breaches arising out of Sections 8 and 9 hereof, shall on the written request of either party served on the other be submitted to arbitration. Such arbitration shall comply with and be governed by the rules of the American Arbitration Association. An arbitration demand must be made within one (1) year of the date on which the party demanding arbitration first had notice of the existence of the claim to be arbitrated, or the right to arbitration along with such claim shall be considered to have been waived. An arbitrator shall be selected according to the procedures of the American Arbitration Association. The cost of arbitration shall be born by the losing party or in such proportions as the arbitrator shall decide. The arbitrator shall have no authority to add to, subtract from or otherwise modify the provisions of this Agreement, or to award punitive damages to either party. 15. ATTORNEYS' FEES AND COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which he may be entitled. 16. ENTIRE AGREEMENT; SURVIVAL. This Agreement, which was modified October 6, 1999, contains the entire agreement between the parties with respect to the transactions contemplated herein and supersedes, effective as of the date hereof any prior agreement or understanding between Employer and Employee with respect to Employee's employment by Employer. The unenforceability of any provision of this Agreement shall not effect the enforceability of any other provision. This Agreement may not be amended except by an agreement in writing signed by the Employee and the Employer, or any waiver, change, discharge or modification as sought. Waiver of or failure to exercise any rights provided by this Agreement and in any respect shall not be deemed a waiver of any further or future rights. b. The provisions of Sections 4, 8, 9, 10(a)(ii), 10(a)(iii), 10(c), 11, 12, 13, 14, 15, 18, 19 and 20 shall survive the termination of this Agreement. 17. ASSIGNMENT. This Agreement shall not be assigned to other parties. 18. GOVERNING LAW. This Agreement and all the amendments hereof, and waivers and consents with respect thereto shall be governed by the internal laws of the state of New York, without regard to the conflicts of laws principles thereof. 19. NOTICES. All notices, responses, demands or other communications under this Agreement shall be in writing and shall be deemed to have been given when a. delivered by hand; b. sent be telex or telefax, (with receipt confirmed), provided that a copy is mailed by registered or certified mail, return receipt requested; or c. received by the addressee as sent be express delivery service (receipt requested) in each case to the appropriate addresses, telex numbers and telefax numbers as the party may designate to itself by notice to the other parties: 10 (i) if to the Employer: ACTV, Inc. 1270 Avenue of the Americas New York, New York, 10020 Attention: Day Patterson Telefax: (212) 459-9548 Telephone: (212) 217-1600 Gersten, Savage, Kaplowitz LLP 101 East 52 Street New York, New York 10022 Attention: Jay M. Kaplowitz, Esq. Telefax: (212) 980-5192 Telephone: (212) 752-9700 (ii) if to the Employee: William C. Samuels 139 East 19th Street New York, New York 10003 20. SEVERABILITY OF AGREEMENT. Should any part of this Agreement for any reason be declared invalid by a court of competent jurisdiction, such decision shall not affect the validity of any remaining portion, which remaining provisions shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties that they would have executed the remaining portions of this Agreement without including any such part, parts or portions which may, for any reason, be hereafter declared invalid. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the day and year first above written. ACTV, INC. By: ----------------------------------- Day L. Patterson Senior Vice President and General Counsel ------------------------------------ WILLIAM C. SAMUELS 11 EX-10.41(1) 7 EX-10.41(1) EXHIBIT 10.41.1 ACTV, INC. EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT made as of this 1st day of August, 1995, and amended October 6, 1999, by and between ACTV, INC., a Delaware corporation, having an office at 1270 Avenue of the Americas, New York, New York 10020 (hereinafter referred to as "Employer") and DAVID REESE, an individual residing at 30 Maclay Road, Montville, New Jersey 07045 (hereinafter referred to as "Employee"); W I T N E S S E T H: WHEREAS, Employer employs, and desires to continue to employ, Employee as its President and Chief Operating Officer; and WHEREAS, Employee is willing to continue to be employed as the President and Chief Operating Officer of ACTV, Inc. in the manner provided for herein, and to perform the duties of the President and Chief Operating Officer of ACTV, Inc. upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein set forth it is agreed as follows: 1. EMPLOYMENT OF PRESIDENT AND CHIEF OPERATING OFFICER OF ACTV, INC. Employer hereby employs Employee as its President and Chief Operating Officer of ACTV, Inc. 2. TERM. Subject to Section 9 below, the term of this Agreement shall commence on August 1, 1995 and end on December 31, 2000. Each 12 month period from January 1 through December 31 during the term hereof shall be referred to as an "Annual Period." During the term hereof, Employee shall devote substantially all of his business time and efforts to Employer and its subsidiaries and affiliates. 3. DUTIES. The Employee shall perform any and all duties and shall have any and all powers as may be prescribed by the Chairman and Chief Executive Officer and shall be available to confer and consult with and advise the officers and directors of Employer at such times that may be required by Employer. Employee shall report directly and solely to the Chairman and Chief Executive Officer. 4. COMPENSATION. a. (i) Employee shall be paid a minimum of $245,000 for each Annual Period, commencing January 1, 1998. Employee shall be paid periodically in accordance with the policies of the Employer during the term of this Agreement, but not less than monthly. (ii) Employee is eligible for quarterly bonuses, if any, which will be determined and paid in accordance with policies set from time to time by the Board. (iii)Employee shall be entitled to a leased car of his choice, the cost of which shall reduce the total cash compensation paid under section 4 (a)(i). b. (i) In the event of a "Change of Control" whereby (A) A person (other than a person who is an officer or a Director of Employer on the effective date hereof), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of Employer securities having 30% or more of the combined voting power of then outstanding securities of the Employer that may be cast for the election of directors of the Employer; (B) At any time, a majority of the Board-nominated slate of candidates for the Board is not elected; (C) Employer consummates a merger in which it is not the surviving entity; (D) Substantially all Employer's assets are sold; or (E) Employer's stockholders approve the dissolution or liquidation of Employer; then (ii) (A) All stock options, warrants and stock appreciation rights ("Rights") granted by Employer to Employee under any plan or otherwise prior to the effective date of the Change of Control, shall become vested, accelerate and become immediately exercisable; at an exercise price of 10(cent) per stock appreciation right if applicable; and in addition the employee, at his option, shall receive a special compensation payment for the exercise cost of all vested options upon exercising those options any time within twelve months after the effective date of the change of control, adjusted for any stock splits and capital reorganizations having a similar effect, subsequent to the effective date hereof. In the event Employee owns or is entitled to receive any unregistered 2 securities of Employer, then Employer shall use its best efforts to effect the registration of all such securities as soon as practicable, but no later than 120 days after the effective date of the registration statement; provided, however, that such period may be extended or delayed by Employer for one period of up to 60 days if, upon the advice of counsel at the time such registration is required to be filed, or at the time Employer is required to exercise its best efforts to cause such registration statement to become effective, such delay is advisable and in the best interests of Employer because of the existence of non-public material information, or to allow Employer to complete any pending audit of its financial statements; (B) Any outstanding principle and interest on loans to Employee pursuant to Section 4.g.(ii), below, shall be recalculated and reconstituted as if the rights were exercised under 4 (b) (ii). (C) If upon said Change of Control, (i) a new Chief Executive Officer of Employer is appointed and (ii) Employee is not retained in his immediately prior position or a substantially similar position with Employer or the surviving entity, as applicable, then in addition, Employee shall be eligible to receive a one-time bonus, equal on an after-tax basis to two times his then current annual base salary. To effectuate this provision, the bonus shall be "grossed-up" to include the amount necessary to reimburse Employee for his federal, state and local income tax liability on the bonus and on the "gross-up" at the respective effective marginal tax rates. In no event shall this bonus exceed 2.7 times Employee's then current base salary. Said bonus shall be paid within thirty (30) days of the Change of Control. c. Employer shall include Employee in its health insurance program available to Employer's executive officers. d. Employer shall maintain a life, accidental death and dismemberment insurance policy on Employee for the benefit of a beneficiary named by Employee in an amount not less than $2,000,000. Ownership of the policy shall be assigned to Employee upon termination of Employee's employment under this Agreement. e. Employee shall also be entitled to participate pari passu in any other program established by Employer pursuant to which any executive officers receive a share of the profits of Employer. f. Employee shall have the right to participate in any other employee benefit plans established by Employer. g. Unless a pre-existing plan of Employer expressly forbids it, all Rights which may become exercisable during the term hereof shall be paid for in cash only if Employee so elects, otherwise they may be paid for. 3 (i) by the transfer by Employee to Employer of so much of Employee's Rights which, when valued at the highest trading price of the underlying securities of Employer during the previous six months, will offset the price of the Rights then being exercised; (ii) by means of a non-recourse Note with interest at the lowest rate, it any, required to be charged by any governmental authority, to accrue and become due and payable with the principle, in an amount no greater than the exercise price, given by Employee to Employer and secured solely by the shares of stock being paid for thereby, which Note shall become due and payable at the earlier of the expiration hereof or, on a pro rata basis, the sale by Employee of all or part of the Rights or underlying stock which constitute security for the Note; or (iii) by any combination of cash and (ii) or (iii), above. 5. EXPENSES. Employee shall be reimbursed for all of his actual out-of-pocket expenses incurred in the performance of his duties hereunder, provided such expenses are acceptable to Employer, which approval shall not be unreasonably withheld, for business related travel and entertainment expenses, and that Employee shall submit to Employer reasonably detailed receipts with respect thereto. 6. VACATION. Employee shall be entitled to receive four (4) weeks paid vacation time after each year of employment upon dates agreed upon by Employer. Upon separation of employment, for any reason, vacation time accrued and not used shall be paid at the salary rate of Employee in effect at the time of employment separation. 7. SECRECY. At no time shall Employee disclose to anyone any confidential or secret information (not already constituting information available to the public) concerning (a) internal affairs or proprietary business operations of Employer or (b) any trade secrets, new product developments, patents, programs or programming, especially unique processes or methods. 8. COVENANT NOT TO COMPETE. Subject to, and limited by, Section 10(b), Employee will not, at any time, anywhere in the world, during the term of this Agreement, and for one (1) year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business (as identified herein) of Employer as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, director, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by 4 Employee, his spouse or his children is permitted if such investment is not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business and further provided that said competitive enterprise or business is a publicly held entity whose stock is listed and traded on a national stock exchange or through the NASDAQ Stock Market. As used in this Agreement, the business of Employer shall be deemed to include the development and implementation of individualized television technology or programs. 9. TERMINATION. A. TERMINATION BY EMPLOYER (i) Employer may terminate this Agreement upon written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging by the Employee in conduct that constitutes activity in competition with Employer; (B) the conviction of Employee for the commission of a felony; and/or (C) the habitual abuse of alcohol or controlled substances. Notwithstanding anything to the contrary in this Section 9(a)(i), Employer may not terminate Employee's employment under this Agreement for Cause unless Employee shall have first received notice from the Board advising Employee of the specific acts or omissions alleged to constitute Cause, and such acts or omissions continue after Employee shall have had a reasonable opportunity (at least 10 days from the date Employee receives the notice from the Board) to correct the acts or omissions so complained of. (ii) Employer may terminate Employee's employment under this Agreement if, as a result of any physical or mental disability, Employee shall fail or be unable to perform his duties under this Agreement for any consecutive period of 90 days during any twelve-month period. If Employee's employment is terminated under this Section 9(a)(ii): (A) for the first six months after termination, Employee shall be paid 100% of his full compensation under Section 4(a) of this Agreement at the rate in effect on the date of termination, and in each successive 12 month period thereafter Employee shall be paid an amount equal to 67% of his compensation under Section 4(a) of this agreement at the rate in effect on the date of termination; (B) Employer's obligation to pay life insurance premiums on the policy referred to in Section 4(d) shall continue in effect until five years after the date of termination; and (C) Employee shall continue to be entitled, insofar as is permitted under applicable insurance policies or plans, to such general medical and employee benefit plans (including profit sharing or pension plans) as Employee had been entitled to on the date of termination. Any amounts payable by Employer to Employee under this paragraph shall be reduced by the amount of any disability payments payable by or pursuant to plans provided by Employer and actually paid to Employee. (iii) This agreement automatically shall terminate upon the death of Employee, except that Employee's 5 estate shall be entitled to receive any amount accrued under Section 4(a) and the pro-rata amount payable under Section 4(e) for the period prior to Employee's death and any other amount to which Employee was entitled of the time of his death. b. Termination by Employee (i) Employee shall have the right to terminate his employment under this Agreement upon 30 days' notice to Employer given within 90 days following the occurrence of any of the following events (A) through (D) or within three years following the occurrence of event (E): (A) Employer acts to change the geographic location of the of Employee's duties from the New York Metropolitan area. For purposes of this Agreement, the New York Metropolitan area shall be deemed to be the area within 30 miles of midtown Manhattan. (B) A Material Reduction (as hereinafter defined) in Employee's rate of base compensation, or Employee's other benefits. "Material Reduction" shall mean a ten percent (10%) differential; (C) A failure by Employer to obtain the assumption of this Agreement by any successor; (D) A material breach of this Agreement by Employer, which is not cured within thirty (30) days of written notice of such breach by Employer; (E) A Change of Control. (ii) Anything herein to the contrary notwithstanding, Employee may terminate this Agreement upon thirty (30) days written notice. c. If Employer shall terminate Employee's employment other than due to his death or disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if Employee shall terminate this Agreement under Section 9(b)(i), Employer's obligations under Section 4 shall be absolute and unconditional and not subject to any offset or counterclaim and Employee shall continue to be entitled to receive all amounts provided for by Section 4 and all additional employee benefits under Section 4 regardless of the amount of compensation he may earn with respect to any other employment he may obtain. 10. CONSEQUENCES OF BREACH BY EMPLOYER; EMPLOYMENT TERMINATION a. If this Agreement is terminated pursuant to Section 9(b)(i) hereof, or if Employer shall terminate Employee's 6 employment under this Agreement in any way that is a breach of this Agreement by Employer, the following shall apply: (i) Employee shall receive as a bonus, and in addition to his salary continuation pursuant to Section 9.c., above, a cash payment equal to the Employee's total base salary as of the date of termination hereunder for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination; except that if this Agreement is terminated pursuant to Section 9.(b)(i)(E), then Employee shall not be entitled to receive a bonus under this Section 10.a.(i) but shall instead receive a lump-sum payout of Employee's total base salary for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination. (ii) Employee shall be entitled to payment of any previously declared bonus and additional compensation as provided in Section 4(a), (b) and (e) above. b. In the event of termination of Employee's employment pursuant to Section 9(b)(i) of this Agreement, the provisions of Section 8 shall not apply to Employee. 11. REMEDIES Employer recognizes that because of Employee's special talents, stature and opportunities in the interactive television industry, and because of the special creative nature of and compensation practices of said industry and the material impact that individual projects can have on an interactive television company's results of operations, in the event of termination by Employer hereunder (except under Section 9(a)(i) or (iii), or in the event of termination by Employee under Section 9(b)(i) before the end of the agreed term, Company acknowledges and agrees that the provisions of this Agreement regarding further payments of base salary, bonuses and the exercisability of Rights constitute fair and reasonable provisions for the consequences of such termination, do not constitute a penalty, and such payments and benefits shall not be limited or reduced by amounts' Employee might earn or be able to earn from any other employment or ventures during the remainder of the agreed term of this Agreement. 12. EXCISE TAX. In the event that any payment or benefit received or to be received by Employee in connection with a termination of his employment with Employer would constitute a "parachute payment" within the meaning of Code Section 280G or any similar or successor provision to 280G and/or would be subject to any excise tax imposed by Code Section 4999 or any similar or successor provision then Employer shall assume all 7 liability for the payment of any such tax and Employer shall immediately reimburse Employee on a "grossed-up" basis for any income taxes attributable to Employee by reason of such Employer payment and reimbursements. 13. ARBITRATION. Any controversies between Employer and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement, save and except for any breaches arising out of Sections 7 and 8 hereof, shall on the written request of either party served on the other be submitted to arbitration. Such arbitration shall comply with and be governed by the rules of the American Arbitration Association. An arbitration demand must be made within one (1) year of the date on which the party demanding arbitration first had notice of the existence of the claim to be arbitrated, or the right to arbitration along with such claim shall be considered to have been waived. An arbitrator shall be selected according to the procedures of the American Arbitration Association. The cost of arbitration shall be born by the losing party or in such proportions as the arbitrator shall decide. The arbitrator shall have no authority to add to, subtract from or otherwise modify the provisions of this Agreement, or to award punitive damages to either party. 14. ATTORNEYS' FEES AND COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which he may be entitled. 15. ENTIRE AGREEMENT; SURVIVAL. This Agreement contains the entire agreement between the parties with respect to the transactions contemplated herein and supersedes, effective as of the date hereof any prior agreement or understanding between Employer and Employee with respect to Employee's employment by Employer. The unenforceability of any provision of this Agreement shall not effect the enforceability of any other provision. This Agreement may not be amended except by an agreement in writing signed by the Employee and the Employer, or any waiver, change, discharge or modification as sought. Waiver of or failure to exercise any rights provided by this Agreement and in any respect shall not be deemed a waiver of any further or future rights. b. The provisions of Sections 4, 7, 8, 9(a)(ii), 9(a)(iii), 9(c), 10, 11, 12, 13, 14, 17, 18 and 19 shall survive the termination of this Agreement. 16. ASSIGNMENT. This Agreement shall not be assigned to other parties. 17. GOVERNING LAW. This Agreement and all the amendments hereof, and waivers and consents with respect thereto 8 shall be governed by the internal laws of the state of New York, without regard to the conflicts of laws principles thereof. 18. NOTICES. All notices, responses, demands or other communications under this Agreement shall be in writing and shall be deemed to have been given when a. delivered by hand; b. sent be telex or telefax, (with receipt confirmed), provided that a copy is mailed by registered or certified mail, return receipt requested; or c. received by the addressee as sent be express delivery service (receipt requested) in each case to the appropriate addresses, telex numbers and telefax numbers as the party may designate to itself by notice to the other parties: (i) if to the Employer: ACTV, Inc. 1270 Avenue of the Americas New York, New York, 10020 Attention: Day Patterson Telefax: (212) 459-9548 Telephone: (212) 217-1600 Gersten, Savage, Kaplowitz LLP 101 East 52nd Street New York, New York 10022 Attention: Jay M. Kaplowitz, Esq. Telefax: (212) 980-5192 Telephone: (212) 752-9700 (ii) if to the Employee: David Reese 30 Maclay Road Montville, New Jersey 07045 19. SEVERABILITY OF AGREEMENT. Should any part of this Agreement for any reason be declared invalid by a court of competent jurisdiction, such decision shall not affect the validity of any remaining portion, which remaining provisions shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties that they would have executed the remaining portions of this Agreement without 9 including any such part, parts or portions which may, for any reason, be hereafter declared invalid. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the day and year first above written. ACTV, INC. By: ------------------------------------- WILLIAM C. SAMUELS Chairman ------------------------------------- DAVID REESE President 10 EX-10.42(1) 8 EX-10.42(1) Exhibit 10.42.1 ACTV, INC. EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT made as of this 1st day of August, 1995, and amended October 6, 1999, by and between ACTV, INC., a Delaware corporation, having an office at 1270 Avenue of the Americas, New York, New York 10020 (hereinafter referred to as "Employer") and BRUCE CROWLEY, an individual residing at 257 West 17th Street, New York, New York 10011 (hereinafter referred to as "Employee"); W I T N E S S E T H: WHEREAS, Employer employs, and desires to continue to employ, Employee as its Executive Vice President and President of HyperTV Networks, Inc.; and WHEREAS, Employee is willing to continue to be employed as the Executive Vice President of Employer and President of HyperTV Networks, Inc. in the manner provided for herein, and to perform the duties of the Executive Vice President of Employer and President of HyperTV Networks, Inc. upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein set forth it is agreed as follows: 1. EMPLOYMENT OF EXECUTIVE VICE PRESIDENT OF ACTV, INC. AND PRESIDENT OF HYPERTV NETWORKS, INC. Employer hereby employs Employee as Executive Vice President of ACTV Inc. and as President of HyprTV Networks, Inc. 2. TERM. Subject to Section 9 below, the term of this Agreement shall commence on August 1, 1995 and end on December 31, 2000. Each 12 month period from January 1 through December 31 during the term hereof shall be referred to as an "Annual Period." During the term hereof, Employee shall devote substantially all of his business time and efforts to Employer and its subsidiaries and affiliates. 3. DUTIES. The Employee shall perform any and all duties and shall have any and all powers as may be prescribed by the Chairman of ACTV, Inc. and shall be available to confer and consult with and advise the officers and directors of Employer at such times that may be required by Employer. Employee shall report directly and solely to the Chairman or his designee. 4. COMPENSATION. a. (i) Employee shall be paid a minimum of $245,000 for each Annual Period, commencing January 1, 1998. Employee shall be paid periodically in accordance with the policies of the Employer during the term of this Agreement, but not less than monthly. (ii) Employee is eligible for quarterly bonuses, if any, which will be determined and paid in accordance with policies set from time to time by the Board. (iii)Employee shall be entitled to a leased car of his choice, the cost of which shall reduce the total cash compensation paid under section 4 (a)(i). b. (i) In the event of a "Change of Control" whereby (A) A person (other than a person who is an officer or a Director of Employer on the effective date hereof), including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of Employer securities having 30% or more of the combined voting power of then outstanding securities of the Employer that may be cast for the election of directors of the Employer; (B) At any time, a majority of the Board-nominated slate of candidates for the Board is not elected; (C) Employer consummates a merger in which it is not the surviving entity; (D) Substantially all Employer's assets are sold; or (E) Employer's stockholders approve the dissolution or liquidation of Employer; then (ii) (A) All stock options, warrants and stock appreciation rights ("Rights") granted by Employer to Employee under any plan or otherwise prior to the effective date of the Change of Control, shall become vested, accelerate and become immediately exercisable; at an exercise price of 10(cent) per stock appreciation right if applicable; and in addition the employee, at his option, shall receive a special compensation payment for the exercise cost of all vested options upon exercising those options any time within twelve months after the effective date of the change of control, adjusted for any stock splits and capital reorganizations having a similar effect, subsequent to the effective date hereof. In the event Employee owns or is entitled to receive any unregistered securities of Employer, then Employer shall use its best efforts to effect the registration of all such securities as soon as practicable, but no later than 120 days after the effective date of the registration statement; provided, however, that such period may be extended or delayed by Employer for one period of up to 60 days if, upon the advice of counsel at the time such registration is required to be filed, or at the time Employer is required to exercise its best efforts to cause such registration statement to become effective, such delay is advisable and in the best interests of Employer because of the existence of non-public material information, or to allow Employer to complete any pending audit of its financial statements; (B) Any outstanding principle and interest on loans to Employee pursuant to Section 4.g.(ii), below, shall be recalculated and reconstituted as if the rights were exercised under 4 (b)(ii). (C) If upon said Change of Control, (i) a new Chief Executive Officer of Employer is appointed and (ii) Employee is not retained in his immediately prior position or a substantially similar position with Employer or the surviving entity, as applicable, then in addition, Employee shall be eligible to receive a one-time bonus, equal on an after-tax basis to two times his then current annual base salary. To effectuate this provision, the bonus shall be "grossed-up" to include the amount necessary to reimburse Employee for his federal, state and local income tax liability on the bonus and on the "gross-up" at the respective effective marginal tax rates. In no event shall this bonus exceed 2.7 times Employee's then current base salary. Said bonus shall be paid within thirty (30) days of the Change of Control. c. Employer shall include Employee in its health insurance program available to Employer's executive officers. d. After January 1, 1999, Employer shall maintain a life, accidental death and dismemberment insurance policy on Employee for the benefit of a beneficiary named by Employee in an amount not less than $750,000. Ownership of the policy shall be assigned to Employee upon termination of Employee's employment under this Agreement. e. Employee shall also be entitled to participate pari passu in any other program established by Employer pursuant to which any executive officers receive a share of the profits of Employer. f. Employee shall have the right to participate in any other employee benefit plans established by Employer. g. Unless a pre-existing plan of Employer expressly forbids it, all Rights which may become exercisable during the term hereof shall be paid for in cash only if Employee so elects, otherwise they may be paid for. (i) by the transfer by Employee to Employer of so much of Employee's Rights which, when valued at the highest trading price of the underlying securities of Employer during the previous six months, will offset the price of the Rights then being exercised; (ii) by means of a non-recourse Note with interest at the lowest rate, it any, required to be charged by any governmental authority, to accrue and become due and payable with the principle, in an amount no greater than the exercise price, given by Employee to Employer and secured solely by the shares of stock being paid for thereby, which Note shall become due and payable at the earlier of the expiration hereof or, on a pro rata basis, the sale by Employee of all or part of the Rights or underlying stock which constitute security for the Note; or (iii) by any combination of cash and (ii) or (iii), above. 5. EXPENSES. Employee shall be reimbursed for all of his actual out-of-pocket expenses incurred in the performance of his duties hereunder, provided such expenses are acceptable to Employer, which approval shall not be unreasonably withheld, for business related travel and entertainment expenses, and that Employee shall submit to Employer reasonably detailed receipts with respect thereto. 6. VACATION. Employee shall be entitled to receive four (4) weeks paid vacation time after each year of employment upon dates agreed upon by Employer. Upon separation of employment, for any reason, vacation time accrued and not used shall be paid at the salary rate of Employee in effect at the time of employment separation. 7. SECRECY. At no time shall Employee disclose to anyone any confidential or secret information (not already constituting information available to the public) concerning (a) internal affairs or proprietary business operations of Employer or (b) any trade secrets, new product developments, patents, programs or programming, especially unique processes or methods. 8. COVENANT NOT TO COMPETE. Subject to, and limited by, Section 10(b), Employee will not, at any time, anywhere in the world, during the term of this Agreement, and for one (1) year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business (as identified herein) of Employer as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, director, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by Employee, his spouse or his children is permitted if such investment is not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business and further provided that said competitive enterprise or business is a publicly held entity whose stock is listed and traded on a national stock exchange or through the NASDAQ Stock Market. As used in this Agreement, the business of Employer shall be deemed to include the development and implementation of individualized television technology or programs. 9. TERMINATION. a. TERMINATION BY EMPLOYER (i) Employer may terminate this Agreement upon written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging by the Employee in conduct that constitutes activity in competition with Employer; (B) the conviction of Employee for the commission of a felony; and/or (C) the habitual abuse of alcohol or controlled substances. Notwithstanding anything to the contrary in this Section 9(a)(i), Employer may not terminate Employee's employment under this Agreement for Cause unless Employee shall have first received notice from the Board advising Employee of the specific acts or omissions alleged to constitute Cause, and such acts or omissions continue after Employee shall have had a reasonable opportunity (at least 10 days from the date Employee receives the notice from the Board) to correct the acts or omissions so complained of. (ii) Employer may terminate Employee's employment under this Agreement if, as a result of any physical or mental disability, Employee shall fail or be unable to perform his duties under this Agreement for any consecutive period of 90 days during any twelve-month period. If Employee's employment is terminated under this Section 9(a)(ii): (A) for the first six months after termination, Employee shall be paid 100% of his full compensation under Section 4(a) of this Agreement at the rate in effect on the date of termination, and in each successive 12 month period thereafter Employee shall be paid an amount equal to 67% of his compensation under Section 4(a) of this agreement at the rate in effect on the date of termination; (B) Employer's obligation to pay life insurance premiums on the policy referred to in Section 4(d) shall continue in effect until five years after the date of termination; and (C) Employee shall continue to be entitled, insofar as is permitted under applicable insurance policies or plans, to such general medical and employee benefit plans (including profit sharing or pension plans) as Employee had been entitled to on the date of termination. Any amounts payable by Employer to Employee under this paragraph shall be reduced by the amount of any disability payments payable by or pursuant to plans provided by Employer and actually paid to Employee. (iii) This agreement automatically shall terminate upon the death of Employee, except that Employee's estate shall be entitled to receive any amount accrued under Section 4(a) and the pro-rata amount payable under Section 4(e) for the period prior to Employee's death and any other amount to which Employee was entitled of the time of his death. b. TERMINATION BY EMPLOYEE (i) Employee shall have the right to terminate his employment under this Agreement upon 30 days' notice to Employer given within 90 days following the occurrence of any of the following events (A) through (D) or within three years following the occurrence of event (E): (A) Employer acts to change the geographic location of the performance of Employee's duties from the New York Metropolitan area. For purposes of this Agreement, the New York Metropolitan area shall be deemed to be the area within 30 miles of midtown Manhattan. (B) A Material Reduction (as hereinafter defined) in Employee's rate of base compensation, or Employee's other benefits. "Material Reduction" shall mean a ten percent (10%) differential; (C) A failure by Employer to obtain the assumption of this Agreement by any successor; (D) A material breach of this Agreement by Employer, which is not cured within thirty (30) days of written notice of such breach by Employer; (E) A Change of Control. (ii) Anything herein to the contrary notwithstanding, Employee may terminate this Agreement upon thirty (30) days written notice. c. If Employer shall terminate Employee's employment other than due to his death or disability or for Cause (as defined in Section 9(a)(i) of this Agreement), or if Employee shall terminate this Agreement under Section 9(b)(i), Employer's obligations under Section 4 shall be absolute and unconditional and not subject to any offset or counterclaim and Employee shall continue to be entitled to receive all amounts provided for by Section 4 and all additional employee benefits under Section 4 regardless of the amount of compensation he may earn with respect to any other employment he may obtain. 10. CONSEQUENCES OF BREACH BY EMPLOYER; EMPLOYMENT TERMINATION a. If this Agreement is terminated pursuant to Section 9(b)(i) hereof, or if Employer shall terminate Employee's employment under this Agreement in any way that is a breach of this Agreement by Employer, the following shall apply: (i) Employee shall receive as a bonus, and in addition to his salary continuation pursuant to Section 9.c., above, a cash payment equal to the Employee's total base salary as of the date of termination hereunder for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination; except that if this Agreement is terminated pursuant to Section 9.(b)(i)(E), then Employee shall not be entitled to receive a bonus under this Section 10.a.(i) but shall instead receive a lump-sum payout of Employee's total base salary for the remainder of the term plus an additional amount to pay all federal, state and local income taxes thereon on a grossed-up basis as heretofore provided, payable within 30 days of the date of such termination. (ii) Employee shall be entitled to payment of any previously declared bonus and additional compensation as provided in Section 4(a), (b) and (e) above. b. In the event of termination of Employee's employment pursuant to Section 9(b)(i) of this Agreement, the provisions of Section 8 shall not apply to Employee. 11. REMEDIES Employer recognizes that because of Employee's special talents, stature and opportunities in the interactive television industry, and because of the special creative nature of and compensation practices of said industry and the material impact that individual projects can have on an interactive television company's results of operations, in the event of termination by Employer hereunder (except under Section 9(a)(i) or (iii), or in the event of termination by Employee under Section 9(b)(i) before the end of the agreed term, Company acknowledges and agrees that the provisions of this Agreement regarding further payments of base salary, bonuses and the exercisability of Rights constitute fair and reasonable provisions for the consequences of such termination, do not constitute a penalty, and such payments and benefits shall not be limited or reduced by amounts' Employee might earn or be able to earn from any other employment or ventures during the remainder of the agreed term of this Agreement. 12. EXCISE TAX. In the event that any payment or benefit received or to be received by Employee in connection with a termination of his employment with Employer would constitute a "parachute payment" within the meaning of Code Section 280G or any similar or successor provision to 280G and/or would be subject to any excise tax imposed by Code Section 4999 or any similar or successor provision then Employer shall assume all liability for the payment of any such tax and Employer shall immediately reimburse Employee on a "grossed-up" basis for any income taxes attributable to Employee by reason of such Employer payment and reimbursements. 13. ARBITRATION. Any controversies between Employer and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement, save and except for any breaches arising out of Sections 7 and 8 hereof, shall on the written request of either party served on the other be submitted to arbitration. Such arbitration shall comply with and be governed by the rules of the American Arbitration Association. An arbitration demand must be made within one (1) year of the date on which the party demanding arbitration first had notice of the existence of the claim to be arbitrated, or the right to arbitration along with such claim shall be considered to have been waived. An arbitrator shall be selected according to the procedures of the American Arbitration Association. The cost of arbitration shall be born by the losing party or in such proportions as the arbitrator shall decide. The arbitrator shall have no authority to add to, subtract from or otherwise modify the provisions of this Agreement, or to award punitive damages to either party. 14. ATTORNEYS' FEES AND COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which he may be entitled. 15. ENTIRE AGREEMENT; SURVIVAL. This Agreement contains the entire agreement between the parties with respect to the transactions contemplated herein and supersedes, effective as of the date hereof any prior agreement or understanding between Employer and Employee with respect to Employee's employment by Employer. The unenforceability of any provision of this Agreement shall not effect the enforceability of any other provision. This Agreement may not be amended except by an agreement in writing signed by the Employee and the Employer, or any waiver, change, discharge or modification as sought. Waiver of or failure to exercise any rights provided by this Agreement and in any respect shall not be deemed a waiver of any further or future rights. b. The provisions of Sections 4, 7, 8, 9(a)(ii), 9(a)(iii), 9(c), 10, 11, 12, 13, 14, 17, 18 and 19 shall survive the termination of this Agreement. 16. ASSIGNMENT. This Agreement shall not be assigned to other parties. 17. GOVERNING LAW. This Agreement and all the amendments hereof, and waivers and consents with respect thereto shall be governed by the internal laws of the state of New York, without regard to the conflicts of laws principles thereof. 18. NOTICES. All notices, responses, demands or other communications under this Agreement shall be in writing and shall be deemed to have been given when a. delivered by hand; b. sent be telex or telefax, (with receipt confirmed), provided that a copy is mailed by registered or certified mail, return receipt requested; or c. received by the addressee as sent be express delivery service (receipt requested) in each case to the appropriate addresses, telex numbers and telefax numbers as the party may designate to itself by notice to the other parties: (i) if to the Employer: ACTV, Inc. and ACTV Net, Inc. 1270 Avenue of the Americas New York, New York, 10020 Attention: Day Patterson Telefax: (212) 459-9548 Telephone: (212) 262-2570 Gersten, Savage, Kaplowitz LLP 101 East 52nd Street New York, New York 10022 Attention: Jay Kaplowitz, Esq. Telefax: (212) 980-5192 Telephone: (212) 752-9700 (ii) if to the Employee: Bruce Crowley 257 West 17th Street New York, New York 10011 19. SEVERABILITY OF AGREEMENT. Should any part of this Agreement for any reason be declared invalid by a court of competent jurisdiction, such decision shall not affect the validity of any remaining portion, which remaining provisions shall remain in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties that they would have executed the remaining portions of this Agreement without including any such part, parts or portions which may, for any reason, be hereafter declared invalid. IN WITNESS WHEREOF, the undersigned have executed this agreement as of the day and year first above written. ACTV, INC. By: ------------------------- WILLIAM C. SAMUELS Chairman ------------------------- BRUCE CROWLEY EX-10.44(A)1 9 EX-10.44(A)1 Exhibit 10.44(a)1 OPTION AGREEMENT OPTION AGREEMENT dated December 1, 1995, between ACTV, Inc., a Delaware corporation (the "Corporation") and William C. Samuels (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 1,473,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 1,473,000 vested Option Shares, excluding options previously exercised, at a purchase price of $1.50 per Option Share (the "Option Price"). With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2003. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the 2 Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. A. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after of December 31, 2003. B. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. C. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing up to December 31, 2003, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such 3 inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 4 If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: William C. Samuels 139 East 19th Street New York, NY 10003 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. ENTIRE AGREEMENT. This amended agreement which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreements. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. 5 IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: -------------------------------------- Day Patterson Senior Vice President, General Counsel Agreed: ----------------------------------- William C. Samuels EX-10.44(B)1 10 EX-10.44(B)1 Exhibit 10.44(b)1 OPTION AGREEMENT OPTION AGREEMENT dated December 1, 1995, between ACTV, Inc., a Delaware corporation (the "Corporation") and David Reese (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 926,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 926,000 vested Option Shares, excluding options previously exercised, at a purchase price of $1.50 per Option Share (the "Option Price"). With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2003. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the 2 Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. A. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after of December 31, 2003. B. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. C. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing up to December 31, 2003, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his 3 Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 4 If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: David Reese 30 Maclay Road Montville, NJ 07045 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. ENTIRE AGREEMENT. This amended agreement which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreements. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. 5 IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: ------------------------------------------------------ Day Patterson Senior Vice President, General Counsel Agreed: -------------------------------------------------- David Reese 6 EX-10.44(C)1 11 EX-10.44(C)1 Exhibit 10.44(c)1 OPTION AGREEMENT OPTION AGREEMENT dated December 1, 1995, between ACTV, Inc., a Delaware corporation (the "Corporation") and Bruce Crowley (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 564,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 564,000 vested Option Shares, excluding options previously exercised, at a purchase price of $1.50 per Option Share (the "Option Price"). With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2003. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the 2 Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after of December 31, 2003. b. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. c. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing up to December 31, 2003, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his 3 Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 4 If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: Bruce Crowley 257 west 17th Street New York, NY 10011 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. ENTIRE AGREEMENT. This amended agreement which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein and supersedes all previously written or oral negotiations, commitments, representations and agreements. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. 5 IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: ---------------------------- Day Patterson Senior Vice President, General Counsel Agreed: -------------------------- Bruce J. Crowley EX-10.48(1) 12 EX-10.48(1) Exhibit 10.48.1 ACTV, INC. EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of January 1, 1999, and amended as of January 1, 2000, by and between ACTV, INC., a Delaware corporation, having an office at 1270 Avenue of the Americas, Suite 2401, New York, New York 10020 (hereinafter referred to as "Employer"), and CHRISTOPHER C. CLINE, an individual residing at 514 West End Avenue, New York, New York 10024 (hereinafter referred to as "Employee") W I T N E S S E T H: WHEREAS, Employer employs, and desires to continue to employ, Employee as its Senior Vice President - New Business Development and Finance and Chief Financial Officer; and WHEREAS, Employee is willing to continue to be employed as, and is willing to continue to perform the duties of, the Senior Vice President - New Business Development and Finance and Chief Financial Officer of Employer in the manner provided for herein and upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the promises and mutual covenants herein set forth it is agreed as follows: 1. Employment by ACTV, Inc. Employer hereby employs Employee as Senior Vice President - New Business Development and Finance and Chief Financial Officer of Employer. 2. Term. Subject to Section 9 below, the term of this Agreement shall commence on January 1, 1999 and end on December 31, 2004. Each 12-month period from January 1st through December 31st during the term hereof shall be referred to as an "Annual Period." During the term hereof, Employee shall, whether in the foregoing position or in such other position as Employer may then be employing him, devote substantially all of his business time and efforts to Employer and its subsidiaries and affiliates. 3. Duties. The Employee shall perform any and all duties and shall have any and all powers as may be prescribed by Employer's Chairman and Chief Executive Officer and shall be available to confer and consult with and advise the officers and directors of Employer at such times that may be required by Employer. Employee shall report directly and solely to the Chairman or his designee. 4. Compensation. a. (i) Employee shall be paid a minimum of $150,000 for the initial Annual Period, commencing January 1, 1999, and shall be paid a minimum of $200,000 for each subsequent Annual Period, commencing January 1, 2000. Employee shall be paid periodically in accordance with the policies of the Employer during the term of this Agreement, but not less than monthly. (ii) Employee is eligible for bonuses, if any, which will be determined and paid in accordance with policies set from time to time by the Board. (iii) Employee shall be entitled to a leased car of his choice, the cost of which shall reduce the total cash compensation paid under section 4 (a) (i) b. (i) In the event of a "Change of Control" whereby: (A) A person (other than a person who is an officer or a Director of Employer on the effective date hereof) including a "group" as defined in Section 13(d) (3) of the Securities Exchange Act of 1934, becomes, or obtains the right to become, the beneficial owner of Employer securities having 30% or more of the combined voting power of then outstanding securities of the Employer that may be cast for the election of directors of the Employer; (B) At any time, a majority of the Board-nominated slate of candidates for the Board is not elected; (C) Employer consummates a merger in which it is not the surviving entity; (D) Substantially all Employer's assets are sold; or (E) Employer's stockholders approve the dissolution or liquidation of Employer; then (ii) (A) All stock options, warrants and stock appreciation rights ("Rights") granted by Employer to Employee under any plan or otherwise prior to the effective date of the Change of Control, shall become vested, accelerate and become immediately exercisable; at an exercise price of 10(cent) per stock appreciation right if applicable; and in addition the employee, at his option, shall receive a special compensation payment for the exercise cost of all vested options upon exercising those options any time within twelve months after the effective date of the change of control, adjusted for any stock splits and capital reorganizations having a similar effect subsequent to the effective date hereof. In the event Employee owns or is entitled to receive any unregistered securities of Employer, then Employer shall use its best efforts to effect the registration of all such securities as soon as practicable, but no later than 120 days after the effective date of the registration statement; provided, however, that such period may be extended or delayed by Employer for one period of up to 60 days if, upon the advice of counsel at the time such registration is required to be filed, or at the time Employer is required to exercise its best efforts to cause such registration statement to become effective, such delay is advisable and in the best interests of Employer because of the existence of non-public material information, or to allow Employer to complete any pending audit of its financial statements; (B) If upon said Change of Control, (i) a new Chief Executive Officer of Employer is appointed and (ii) Employee is not retained in his immediately prior position or a substantially similar position with Employer or the surviving entity, as applicable, then in addition, Employee shall be eligible to receive a one-time bonus, equal on an after-tax basis to his then current annual base salary. To effectuate this provision, the bonus shall be "grossed-up" to include the amount necessary to reimburse Employee for his federal, state and local income tax liability on the bonus and on the "gross-up" at the respective effective marginal tax rates. Said bonus shall be paid within thirty (30) days of the Change of Control. c. Employer shall include Employee in its health insurance program available to Employer's executive officers. d. After January 1, 2000, Employer shall maintain a life, accidental death and dismemberment insurance policy on Employee for the benefit of a beneficiary named by Employee in an amount not less than $750,000. Ownership of the policy shall be assigned to Employee upon termination of Employee's employment under this Agreement. e. Employee shall also be entitled to participate pari passu in any other program established by Employer pursuant to which any executive officers receive a share of the profits of Employer. f. Employee shall have the right to participate in any other employee benefit plans established by Employer. g. Unless a pre-existing plan of Employer expressly forbids it, all Rights which may become exercisable during the term hereof shall be paid for in cash only if Employee so elects, otherwise they may be paid for: (i) by the transfer by Employee to Employer of so much of Employee's Rights which, when valued at the highest trading price of the underlying securities of Employer during the previous six months, will offset the price of the Rights then being exercised; (ii) by means of a non-recourse Note with interest at the lowest rate, it any, required to be charged by any governmental authority, to accrue and become due and payable with the principal, in an amount no greater than the exercise price, given by Employee to Employer and secured solely by the shares of stock being paid for thereby, which Note shall become due and payable at the earlier of the expiration hereof or, on a pro rata basis, the sale by Employee of all or part of the Rights or underlying stock which constitute security for the Note; or (iii) by any combination of cash and (ii) or (iii), above. 5. Expenses. Employee shall be reimbursed for all of his actual out-of-pocket expenses incurred in the performance of his duties hereunder, provided such expenses are acceptable to Employer, which approval shall not be unreasonably withheld, for business related travel and entertainment expenses, and that Employee shall submit to Employer reasonably detailed receipts with respect thereto. 6. Vacation. Employee shall be entitled to receive three (3) weeks paid vacation time after each year of employment upon dates agreed upon by Employer. Upon separation of employment, for any reason, vacation time accrued and not used shall be paid at the salary rate of Employee in effect at the time of employment separation. 7. Secrecy. At no time shall Employee disclose to anyone any confidential or secret information (not already constituting information available to the public) concerning (a) internal affairs or proprietary business operations of Employer or (b) any trade secrets, new product developments, patents, programs or programming, especially unique processes or methods. 8. Covenant Not to Compete. Employee acknowledges and confirms that the Company is placing its confidence and trust in Employee. Accordingly, Employee covenants and agrees that he will not, during the term of his employment, and for a period of one (1) year thereafter, either directly or indirectly, engage in any business, either directly or indirectly (whether as a creditor, guarantor, financial backer, stockholder, director, officer, consultant, advisor, employee, member, inventor, producer, or otherwise) , with or for any company, enterprise, institution, organization or other legal entity (whether a sole proprietorship, a corporation, a partnership, a limited liability company, an association, or otherwise, and whether or not for profit), which is in competition with the ACTV Business (as defined herein) . As used in this Agreement, the term "ACTV Business" shall mean the invention, development, application, implementation, extension, operation and/or management by ACTV and/or any ACTV affiliate of any invention, software, technology, business, service or product of ACTV and/or any ACTV affiliate, including without limitation the convergence and digital television technologies commonly referred to by ACTV as "Individualized Television", "HyperTV" and "eSchool" Furthermore, Employee will not during the term of his employment, and for a period of one (1) year thereafter, individually or through any entity, directly or indirectly, become an employee, consultant, advisor, director, officer, producer, partner or joint or co-venturer of or to, or enter into any contract, agreement or arrangement with, any entity or business venture of any kind to or of which ACTV and/or any ACTV affiliate is a licensor or licensee or with which ACTV and/or any ACTV affiliate is a joint or co-venturer, partner or otherwise engaged in any on-going business relationship or discussions or negotiations with a view to entering into such a relationship to provide services or products, without the express prior written consent of ACTV. Employee hereby acknowledges and agrees that the ACTV Business extends throughout the United States, and that --given the nature of the ACTV Business -- ACTV and/or any ACTV affiliate can be harmed by competitive conduct anywhere in the United States. Employee therefore agrees that the covenants not to compete contained in this Section 8 shall be applicable in and throughout the United States, as well as throughout such additional non-U.S. areas in which ACTV and/or any ACTV affiliate may be (or has prepared written plans to be) doing business as of the date of termination of Employee's employment. Employee further warrants and represents that, because of his varied skill and abilities, he does not need to compete with the ACTV Business, and that this Agreement will therefore not prevent him from earning a livelihood. Employee acknowledges that the restrictions contained in this Section 8 constitute reasonable protections for ACTV and its affiliates in light of the foregoing and in light of the promises to Employee contained herein. Employee and the Company hereby agree that, if the period of time or the scope of the restrictive covenant not to compete contained in this Section 8 shall be adjudged unreasonable by any proper arbiter of a dispute hereunder, then the period of time and/or scope shall be reduced accordingly, so that this covenant may be enforced in such scope and during such period of time as is judged by such arbiter to be reasonable. 9. Termination. (i) For Cause. Employer may terminate this Agreement upon written notice for Cause. For purposes hereof, "Cause" shall mean (A) engaging by the Employee in conduct that constitutes activity in competition with Employer; (B) the conviction of Employee for the commission of a felony; and/or (C) the habitual abuse of alcohol or controlled substances. Notwithstanding anything to the contrary in this Section 9(a) (i) Employer may not terminate Employee's employment under this Agreement for Cause unless Employee shall have first received notice from the Board advising Employee of the specific acts or omissions alleged to constitute Cause, and such acts or omissions continue after Employee shall have had a reasonable opportunity (at least 10 days from the date Employee receives the notice from the Board) to correct the acts or omissions so complained of. (ii) Without Cause. Employer may terminate this Agreement without cause with no notice to Employee. In the event Employee is terminated without cause, Employee shall receive severance pay equal to six months. (iii) Disability. Employer may terminate Employee's employment under this Agreement if, as a result of any physical or mental disability, Employee shall fail or be unable to perform his duties under this Agreement for any consecutive period of 90 days during any twelve-month period. If Employee's employment is terminated under this Section 9(a) (iii) (A) for the first six months after termination, Employee shall be paid 100% of his full compensation under Section 4(a) of this Agreement at the rate in effect on the date of termination, and in each successive 12 month period thereafter Employee shall be paid an amount equal to 67% of his compensation under Section 4(a) of this agreement at the rate in effect on the date of termination; (B) Employer's obligation to pay life insurance premiums on the policy referred to in Section 4(d) shall continue in effect until five years after the date of termination; and (C) Employee shall continue to be entitled, insofar as is permitted under applicable insurance policies or plans, to such general medical and employee benefit plans (including profit sharing or pension plans) as Employee had been entitled to on the date of termination. Any amounts payable by Employer to Employee under this paragraph shall be reduced by the amount of any disability payments payable by or pursuant to plans provided by Employer and actually paid to Employee. (iv) Death. This Agreement shall automatically terminate upon the death of Employee, except that Employee's estate shall be entitled to receive any amount accrued under Section 4(a) and the pro-rata amount payable under Section 4(e) for the period prior to Employee's death and any other amount to which Employee was entitled of the time of his death. 10. Arbitration. Any controversies between Employer and Employee involving the construction or application of any of the terms, provisions or conditions of this Agreement, save and except for any breaches arising out of Sections 7 and 8 hereof, shall on the written request of either party served on the other be submitted to arbitration. Such arbitration shall comply with and be governed by the rules of the American Arbitration Association. An arbitration demand must be made within one (1) year of the date on which the party demanding arbitration first had notice of the existence of the claim to be arbitrated, or the right to arbitration along with such claim shall be considered to have been waived. An arbitrator shall be selected according to the procedures of the American Arbitration Association. The cost of arbitration shall be born by the losing party or in such proportions as the arbitrator shall decide. The arbitrator shall have no authority to add to, subtract from or otherwise modify the provisions of this Agreement, or to award punitive damages to either party. 11. Attorneys' Fees and Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which he may be entitled. 12. Entire Agreement; Survival. This Agreement contains the entire agreement between the parties with respect to Employer's employment of Employee and supersedes, effective as of the date hereof any prior agreement or understanding between Employer and Employee with respect to Employee's employment by Employer (other than that certain Confidentiality/Non-Disclosure Agreement dated as of November 1, 1993 between Employer and Employee, which agreement shall continue in full force and effect in accordance with the respective terms thereof) . The unenforceability of any provision of this Agreement shall not affect the enforceability of any other provision. This Agreement may not be amended except by an agreement in writing signed by the Employee and the Employer, or any waiver, change, discharge or modification as sought. Waiver of or failure to exercise any rights provided by this Agreement and in any respect shall not be deemed a waiver of any further or future rights. b. The provisions of Sections 4, 7, 8, 9 (a) (iii), 9(a) (iv), 14, 15 and 16 shall survive the termination of this Agreement. 13. Assignment. This Agreement shall not be assigned to other parties. 14. Governing Law. This Agreement and all the amendments hereof, and waivers and consents with respect thereto shall be governed by the internal laws of the state of New York, without regard to the conflicts of laws principles thereof. 15. Notices. All notices, responses, demands or other communications under this Agreement shall be in writing and shall be deemed to have been given when a. delivered by hand; b. sent be telex or telefax, (with receipt confirmed), provided that a copy is simultaneously mailed by registered or certified mail, return receipt requested; or c. received by the addressee as sent be express delivery service (receipt requested), in each case to the appropriate addresses, telex numbers and telefax numbers as the party may designate to itself by notice to the other parties: (i) if to the Employer: ACTV, Inc. 1270 Avenue of the Americas, Suite 2401 New York, New York, 10020 Attention: William C. Samuels Telefax: (212) 459-9548 Telephone: (212) 217-1600 With a copy to: ACTV, Inc. 1270 Avenue of the Americas, Suite 2401 New York, New York, 10020 Attention: Day L. Patterson - Law Dept. Telefax: (212) 459-9548 Telephone: (212) 217-1600 (ii) if to the Employee: Mr. Christopher C. Cline 514 West End Avenue, #7A New York, NY 10024 16. Severability of Agreement. Should any part of this Agreement for any reason be declared invalid by a court of competent jurisdiction, such decision shall not affect the validity of any remaining portion, which remaining [ILLEGIBLE] shall remain in full force and effect as if this [ILLEGIBLE] been executed with the invalid portion thereof eliminate [ILLEGIBLE] is hereby declared the intention of the parties that [ILLEGIBLE] have executed the remaining portions of this Agreement [ILLEGIBLE] including any such part, parts or portions which may, [ILLEGIBLE] reason, be hereafter declared invalid. IN WITNESS WHEREOF, the undersigned have execu[ILLEGIBLE] agreement as of the day and year first above written. ACTV, INC. By: /s/ William C. Samuels -------------------------- William C. Samuels, Chairman and CEO /s/ Christopher C. Cline ------------------------------ CHRISTOPHER C. CLINE EX-10.49 13 EX-10.49 Exhibit 10.49 AMENDMENT DATED AS OF DECEMBER 4, 1999 TO HYPERTV NETWORKS, INC. OPTION AGREEMENTS --------------------------------- This Amendment is dated as of December 4, 1999 (the "Amendment") and amends all of those certain Option Agreements (collectively, the "Option Agreements") between HyperTV Networks, Inc. (formerly ACTV Net, Inc.), a Delaware corporation (the "Com-pany"), and each and any of the seven individuals named on the signature pages hereof (each a "Holder" and collectively the "Holders"), of which Option Agreements four are dated as of March 14, 1997 and five are dated as of October 1, 1997. WHEREAS, the Company has, by means of the foregoing separate Option Agreements, granted to each Holder the right and option (the "Option") to purchase such number of shares (the "Option Shares") of the Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), of the Company as is specified in such Holder's respective Option Agreement(s), on the terms and conditions set forth therein; WHEREAS, the Company's parent corporation, ACTV, Inc. ("ACTV"), is presently pur-suing an underwritten public offering (the "Public Offering") of its common stock (the "Common Stock"), and as a holder of securities of ACTV or of one of its operating sub-sidiaries each Holder has an interest in the successful completion of the Public Offering; and WHEREAS, the parties to the Option Agreements wish to amend the terms and condi-tions thereof; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. AMENDMENTS. Each of the Option Agreements is hereby amended as follows: A. The second sentence of subsection 1(a) of each of the four Option Agreements dated as of March 14, 1997, and the second sentence of subsection 1(a) of such of the two Op-tion Agreements dated as of October 1, 1997 that presently include the clause "subject to subsection 1(d) and Section 6" in that second sentence, are hereby amended by deleting therefrom the clause "subject to subsection 1(d) and Section 6" and by substituting in place thereof the clause "subject to Section 6", as a consequence of which amendment that second sentence shall commence with the words "The Holder's right and option to purchase the Option Shares shall vest, subject to Section 6, as follows:". - 2 - B. Subsection 1(b) of each of the four Option Agreements dated as of March 14, 1997, and subsection 1(b) of each of such two of the Option Agreements dated as of October 1, 1997 that contain a Section 6 entitled "Termination of Employment", is hereby amended by deleting from the beginning of the first sentence thereof the clause "Except as limited by Section 5," and by substituting in place thereof the clause "Except as limited by sub-section 1(d), Section 5 and Section 6,"; and subsection 1(b) of each of the remaining three Option Agreements dated as of October 1, 1997 (none of which three Option Agreements contains a Section 6 entitled "Termination of Employment") is hereby amended by deleting from the beginning of the first sentence thereof the clause "Except as limited by Section 5," and by substituting in place thereof the clause "Except as limited by subsection 1(d) and Section 5,". C. The four Option Agreements dated as of March 14, 1997, and such two of the Option Agreements dated as of October 1, 1997 that contain a subsection 1(d), are each hereby amended by deleting therefrom subsection 1(d) in its entirety, and substituting in place thereof a new subsection 1(d), such new subsection 1(d) to be and read as follows; and such three of the Option Agreements dated as of October 1, 1997 that presently omit any subsection 1(d) are each hereby further amended by adding and inserting a new subsec-tion 1(d) therein, such new subsection 1(d) to be and read as follows: d. The Option may only be exercised upon a "Change in Control" (as such term is hereinafter defined). In the event that any other provision of this Option Agree-ment shall conflict in any respect with the foregoing restriction upon the exercise of the Option, the foregoing restriction shall be controlling. For purposes hereof, a "Change in Control" shall be deemed to have occurred upon either one of the following events: (i) the Board of Directors of ACTV, Inc. ("ACTV") shall determine that any person (other than a person who is an officer or director of ACTV on the effective date hereof), including any "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, has acquired, or is seek-ing to acquire, either (a) ACTV securities having 20% or more of the com-bined voting power of the then outstanding voting securities of ACTV or (b) the right to acquire ACTV securities having 20% or more of the combined voting power of the then outstanding voting securities of ACTV; and, as to either (a) or (b), such person or group is deemed, in the sole discretion of a majority of the independent members of the ACTV Board of Directors, (x) to have interests which are either not agreeable, compati-ble or in accordance with, or which are in conflict with, the interests of the other holders of the voting securities of ACTV or (y) is not a suitable ac-quiror because such person or group is unlikely to further ACTV's policy of acting as a broad licensor and/or joint venturer of ACTV's intellectual property, including ACTV's patents, and ACTV's related technology; or - 3 - (ii) a majority of the management-nominated slate of candidates for the ACTV Board of Directors shall not have been elected. D. The four Option Agreements dated as of March 14, 1997, and such two of the Option Agreements dated as of October 1, 1997 that contain a Section 6 entitled "Termination of Employment", are each hereby amended by deleting from Section 6 thereof the words "In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, then (i)" and by substituting in place thereof the words "In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, then upon a Change in Control (i)". 2. "SUNSET" CLAUSE. The parties hereto hereby expressly agree that this Amendment shall expire and be deemed null and void AB INITIO, and the amendment effected by Section 1 hereof shall be considered to be of no force and effect such that the original language of Section 1(d) of the Option Agreements shall be restored, in the event that a registration statement under the Securities Act of 1933, as amended, in connection with the Public Offering is not declared effective by the Securities and Exchange Commission by the date 120 calendar days after the date hereof. 3. SCOPE LIMITED. Except as expressly contemplated by Section 1 hereof, the Option Agreements are not amended or restated, and the interpretation or operation of any provision thereof is not affected or amended, in any way by this Amendment. 4. DEFINITIONS IN ORIGINAL. The capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Option Agreements. 5. EFFECT OF PRIOR AMENDMENT. The prior amendment to the Option Agreements, that prior amendment being Amendment No.1 dated as of December 3, 1999, is hereby termi-nated and rendered of no force or effect, and is hereby superseded in its entirety by this Amendment, effective as of the date hereof. 6. AMENDMENT BINDING. This instrument may be executed in one or more counterparts, all of which taken together shall be deemed to constitute one and the same instrument, and shall be binding upon each Holder that shall execute any such counterpart, and each such Holder's respective successors and assigns, without regard to whether or not all (or any) of the other Holders shall have theretofore executed (or shall thereafter execute) any such counterpart. [SIGNATURES ON NEXT PAGE.] - 4 - IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. ACTV ENTERTAINMENT, INC. THE HOLDERS By: --------------------------------- ------------------------------- Day L. Patterson, Cindi Baker Sr. Vice President ------------------------------- Christopher C. Cline ------------------------------- R. James Crook ------------------------------- Bruce J. Crowley ------------------------------- David Reese ------------------------------- William C. Samuels ------------------------------- Craig D. Ullman EX-10.50 14 EX-10.50 Exhibit 10.50 AMENDMENT DATED AS OF DECEMBER 4, 1999 TO ACTV ENTERTAINMENT, INC. OPTION AGREEMENTS --------------------------------- This Amendment is dated as of December 4, 1999 (the "Amendment") and amends all of those certain Option Agreements (collectively, the "Option Agreements") between ACTV Entertainment, Inc., a Delaware corporation (the "Company"), and each and any of the seven individuals named on the signature pages hereof (each a "Holder" and collectively the "Holders"), of which Option Agreements four are dated as of March 14, 1997 (certain of which were amended January 14, 1998), one is dated as of January 14, 1998, and two are dated as of January 15, 1998. WHEREAS, the Company has, by means of the foregoing separate Option Agreements, granted to each Holder the right and option (the "Option") to purchase such number of shares (the "Option Shares") of the Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), of the Company as is specified in such Holder's respective Option Agreement, on the terms and conditions set forth therein; WHEREAS, the Company's parent corporation, ACTV, Inc. ("ACTV"), is presently pur-suing an underwritten public offering (the "Public Offering") of its common stock (the "Common Stock"), and as a holder of securities of ACTV or of one of its operating sub-sidiaries each Holder has an interest in the successful completion of the Public Offering; and WHEREAS, the parties to the Option Agreements wish to amend the terms and condi-tions thereof; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. AMENDMENTS. Each of the Option Agreements is hereby amended as follows: A. Subsection 1(a) of each of the four Option Agreements dated as of March 14, 1997 (certain of which were amended January 14, 1998) and of the one Option Agreement dated as of January 14, 1998 is hereby amended by deleting from the second sentence thereof the clause "subject to subsection 1(d) and Section 6", and by substituting in place thereof the clause "subject to Section 6", as a consequence of which amendment that second sentence shall commence with the words "The Holder's right and option to purchase the Option Shares shall vest, subject to Section 6, as follows:". - 2 - B. Subsection 1(b) of each of the four Option Agreements dated as of March 14, 1997 (certain of which were amended January 14, 1998) and of the one Option Agreement dated as of January 14, 1998 is hereby amended by deleting from the beginning of the first sentence thereof the clause "Except as limited by Section 5," and by substituting in place thereof the clause "Except as limited by subsection 1(d), Section 5 and Section 6,"; and subsection 1(b) of each of the two Option Agreements dated as of January 15, 1998 is hereby amended by deleting from the beginning of the first sentence thereof the clause "Except as limited by Section 5," and by substituting in place thereof the clause "Except as limited by subsection 1(d) and Section 5,". C. Each of the four Option Agreements dated as of March 14, 1997 (whether or not amended January 14, 1998), and the one Option Agreement dated as of January 14, 1998, is hereby amended by deleting therefrom subsection 1(d) in its entirety, and inserting in place thereof a new subsection 1(d), such new subsection 1(d) to be and read as follows, and each of the two Option Agreements dated as of January 15, 1998 is hereby further amended by adding and inserting a new subsection 1(d) therein, such new subsection 1(d) to be and read as follows: d. The Option may only be exercised upon a "Change in Control" (as such term is hereinafter defined). In the event that any other provision of this Option Agree-ment shall conflict in any respect with the foregoing restriction upon the exercise of the Option, the foregoing restriction shall be controlling. For purposes hereof, a "Change in Control" shall be deemed to have occurred upon either one of the following events: (i) the Board of Directors of ACTV, Inc. ("ACTV") shall determine that any person (other than a person who is an officer or director of ACTV at the date hereof), including any "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, has acquired, or is seeking to ac-quire, either (a) ACTV securities having 20% or more of the combined voting power of the then outstanding voting securities of ACTV or (b) the right to acquire ACTV securities having 20% or more of the combined voting power of the then outstanding voting securities of ACTV; and, as to either (a) or (b), such person or group is deemed, in the sole discretion of a majority of the independent members of the ACTV Board of Directors, (x) to have interests which are either not agreeable, compatible or in accordance with, or which are in conflict with, the interests of the other holders of the voting securities of ACTV or (y) is not a suitable acquiror because such person or group is unlikely to further ACTV's policy of acting as a broad licensor and/or joint venturer of ACTV's intellectual property, in-cluding ACTV's patents, and ACTV's related technology; or (ii) a majority of the management-nominated slate of candidates for the ACTV Board of Directors shall not have been elected. - 3 - D. Section 6 of each of the four Option Agreements dated as of March 14, 1997 (certain of which were amended January 14, 1998) and of the one Option Agreement dated as of January 14, 1998 is hereby amended by deleting therefrom the words "In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, then (i)" and by substituting in place thereof the words "In the event that the Holder is terminated from employment with the ACTV Group for any reason during the Option Period, then upon a Change in Control (i)". 2. "SUNSET" CLAUSE. The parties hereto hereby expressly agree that this Amendment shall expire and be deemed null and void AB INITIO, and the amendment effected by Section 1 hereof shall be considered to be of no force and effect such that the original language of Section 1(d) of the Option Agreements shall be restored, in the event that a registration statement under the Securities Act of 1933, as amended, in connection with the Public Offering is not declared effective by the Securities and Exchange Commission by the date 120 calendar days after the date hereof. 3. SCOPE LIMITED. Except as expressly contemplated by Section 1 hereof, the Option Agreements are not amended or restated, and the interpretation or operation of any provision thereof is not affected or amended, in any way by this Amendment. 4. DEFINITIONS IN ORIGINAL. The capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Option Agreements. 5. EFFECT OF PRIOR AMENDMENT. The prior amendment to the Option Agreements, that prior amendment being Amendment No.1 dated as of December 3, 1999, is hereby termi-nated and rendered of no force or effect, and is hereby superseded in its entirety by this Amendment, effective as of the date hereof. 6. AMENDMENT BINDING. This instrument may be executed in one or more counterparts, all of which taken together shall be deemed to constitute one and the same instrument, and shall be binding upon each Holder that shall execute any such counterpart, and each such Holder's respective successors and assigns, without regard to whether or not all (or any) of the other Holders shall have theretofore executed (or shall thereafter execute) any such counterpart. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. ACTV ENTERTAINMENT, INC. THE HOLDERS By: --------------------------- -------------------------------- Name: David Alworth Title: - 4 - ------------------------------- Richard Barron ------------------------------- Christopher C. Cline ------------------------------- Bruce J. Crowley ------------------------------- Brent Imai ------------------------------- David Reese ------------------------------- William C. Samuels EX-10.51 15 EX-10.51 Exhibit 10.51 OPTION AGREEMENT OPTION AGREEMENT dated February 21, 1998, between ACTV, Inc., a Delaware corporation (the "Corporation") and William C. Samuels (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 1,362,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 1,362,000 Option Shares, at a purchase price of $1.60 per Option Share (the "Option Price"). The Employee's right and option to purchase the Option Shares shall vest annually commencing January 1, 2000 until January 1, 2002, with respect to installments of 454,000 Option Shares at the Option Price, so long as the Employee is employed by the Corporation. Said right shall be cumulative so that as of January 1, 2002, Optionee shall have the fully vested right to purchase 1,362,000 Option Shares. In the event that the Employee's employment with the Corporation terminates prior to January 1 of any year, the Employee shall not have the right or option to purchase any part of the installment of 454,000 Option Shares that would have otherwise vested on such January 1. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2006. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock b. If, at any time through December 31, 2001 of the Option Period, the Corporation issues any previously unissued Common Stock over and beyond the number of shares outstanding February 21, 1998, then the number of shares subject to the Option shall be adjusted such that the holder thereof shall have the right to exercise the Option for the same percentage of the issued and outstanding Common Stock of the 2 Corporation as he held option shares on February 21, 1998. c. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after the earlier of December 31, 2006, except in the case of death or disability. b. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. c. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. 3 SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing January 1, 2000 and expiring December 31, 2006, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. 4 SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: William C. Samuels 139 East 19th Street New York, New York 10003 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. 5 SECTION 10. ENTIRE AGREEMENT. This Agreement, which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein, and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: ------------------------------- Day Patterson Senior Vice President, General Counsel Agreed: ---------------------------- William C. Samuels 6 EX-10.52 16 EX-10.52 Exhibit 10.52 OPTION AGREEMENT OPTION AGREEMENT dated February 21, 1998, between ACTV, Inc., a Delaware corporation (the "Corporation") and Bruce Crowley (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 521,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 521,000 Option Shares, at a purchase price of $1.60 per Option Share (the "Option Price"). The Employee's right and option to purchase the Option Shares shall vest annually commencing January 1, 2000 until January 1, 2002, with respect to installments of 173,667 in 2000 and 173,666 in 2001 and 2002 Option Shares at the Option Price, so long as the Employee is employed by the Corporation. Said right shall be cumulative so that as of January 1, 2002, Optionee shall have the fully vested right to purchase 521,000 Option Shares. In the event that the Employee's employment with the Corporation terminates prior to January 1 of 2001 or 2002, the Employee shall not have the right or option to purchase any part of the installment of 173,666 Option Shares that would have otherwise vested on such January 1. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2006. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. If, at any time through December 31, 2001 of the Option Period, the Corporation issues any previously unissued Common Stock over and beyond the number of shares outstanding February 21, 1998, then the number of shares subject to the Option shall be adjusted such that the holder thereof shall have the right to exercise the Option for the same percentage of the issued and outstanding Common Stock of the 2 Corporation as he held option shares on February 21, 1998. c. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after the earlier of December 31, 2006 or one year after the date of termination of employment, except in the case of death or disability. b. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. c. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. 3 SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing January 1, 2000 and expiring December 31, 2006, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. 4 SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz, Esquire Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: Bruce Crowley 257 West 17th Street, Apt. 4C New York, New York 10011 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. 5 SECTION 10. ENTIRE AGREEMENT. This Agreement, which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein, and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: ------------------------------- Day Patterson Senior Vice President, General Counsel Agreed: ------------------------------- Bruce Crowley 6 EX-10.53 17 EX-10.53 Exhibit 10.53 OPTION AGREEMENT OPTION AGREEMENT dated February 21, 1998, between ACTV, Inc., a Delaware corporation (the "Corporation") and David Reese (the "Employee"). The Corporation desires to grant to the Employee the right and option to purchase up to 856,000 shares (the "Option Shares") of Common Stock (the "Common Stock"), of the Corporation, on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the receipt of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby agree as follows: SECTION 1. OPTION TO PURCHASE COMMON STOCK. a. Subject to Section 5 hereof, the Corporation hereby grants to the Employee an option (the "Option") to purchase from the Corporation 856,000 Option Shares, at a purchase price of $1.60 per Option Share (the "Option Price"). The Employee's right and option to purchase the Option Shares shall vest annually commencing January 1, 2000 until January 1, 2002, with respect to installments of 285,334 in 2000 and 285,333 in 2001 and 2002 Option Shares at the Option Price, so long as the Employee is employed by the Corporation. Said right shall be cumulative so that as of January 1, 2002, Optionee shall have the fully vested right to purchase 856,000 Option Shares. In the event that the Employee's employment with the Corporation terminates prior to January 1 of 2001 and 2002, the Employee shall not have the right or option to purchase any part of the installment of 285,333 Option Shares that would have otherwise vested on such January 1. With respect to the Option, the "Option Period" shall commence on the date hereof and terminate on December 31, 2006. b. The Option may be exercised by the Employee by delivery to the Corporation, at any time commencing one year from the date hereof, of a written notice (the "Option Notice"), which Option Notice shall state the Employee's intention to exercise the Option, the date on which the Employee proposes to purchase the Option Shares (the "Closing Date") and the number of Option Shares to be purchased on the Closing Date, which Closing Date shall be no later than 30 days nor earlier than 10 days following the date of the Option Notice. Upon receipt by the Corporation of an Option Notice from the Employee, the Employee shall be obligated to purchase that number of Option Shares to be purchased on the Closing Date set forth in the Option Notice. c. The purchase and sale of Option Shares acquired pursuant to the terms of this Option Agreement shall be made on the Closing Date at the offices of the Corporation. Delivery of the Stock certificate or other instrument registered in the name of the Employee, evidencing the Option Shares being purchased on the Closing Date, shall be made by the Corporation to the holder of this Option on the Closing Date against the delivery to the Corporation of a check in the full amount of the aggregate purchase price therefor. SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. The Employee hereby represents and warrants to the Corporation that in the event the Employee acquires any Option Shares, such Option Shares will be acquired for his own account, for investment and not with a view to the distribution thereof. The Employee understands that except as set forth in Section 6 hereof, the Option Shares will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of their issuance in a transaction exempt from the registration requirements of the Securities Act pursuant to Section 4 (2) thereof and that they must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or the transaction is except from registration. SECTION 3. REORGANIZATION; MERGERS; SALES; ETC. If, at any time during the Option Period, there shall be any capital reorganization, reclassification of Common Stock (other than a change in par value or from par value to nor par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), the consolidation or merger of the Corporation with or into another corporation or of the sale of all or substantially all the properties and assets of the Corporation as an entirety to any other corporation or person, the unexercised and fully vested portion of this Option shall, after such reorganization, reclassification, consolidation, merger or sale, be exercisable for the kind and number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold to which the Employee would have been entitled if the Employee had held shares of Common Stock issuable upon the exercise hereof immediately prior to such reorganization, reclassification, consolidation, merger or sale. The provisions of this Section 3 shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers and sales. SECTION 4. ADJUSTMENT OF OPTION SHARES AND OPTION PRICE. a. The number of Option Shares subject to this Option during the Option Period shall be cumulative as to all prior dates of calculation and shall be adjusted for any stock dividend, subdivision, split-up or combination of Common Stock. b. If, at any time through December 31, 2001 of the Option Period, the Corporation issues any previously unissued Common Stock over and beyond the number shares outstanding February 21, 1998, then the number of shares subject to the Option shall be adjusted such that the holder thereof shall have the right to exercise the Option for the same percentage of the issued and outstanding Common Stock of the Corporation as he held option shares on February 21, 1998. c. The Option Price shall be subject to adjustment from time to time as follows: (1) If, at any time during the Option Period, the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, immediately following the record date fixed for the determination of holders of shares of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Option Price shall be appropriately decreased so that the number of shares of Common Stock issuable upon the exercise hereof shall be increased in proportion to such increase in outstanding shares. (2) If, at any time during the Option Period, the number of shares of Common Stock outstanding is decreased by a combination of outstanding shares of Common Stock, then, immediately following the record date for such combination, the Option Price shall be appropriately increased so that the number of shares of Common Stock issuable upon the exercise hereof shall be decreased in proportion to such decrease in outstanding shares. SECTION 5. TERMINATION OF THE OPTIONS. a. TERMINATION OF OPTIONS IN GENERAL. Subject to subsections (b) - (c) of this Section, the Option granted hereby shall terminate and the Option shall no longer be exercisable after the earlier of December 31, 2006 or one year after the date of termination of employment, except in the case of death or disability. b. OPTION RIGHTS UPON DISABILITY. If an Employee becomes disabled while employed by the Corporation or any affiliate or subsidiary, the Board of Directors or the Stock Option Committee of the Corporation, will allow the Option to be fully exercised, to the extent that the Employee was entitled to exercise the Option at the date of his disability. c. DEATH OF THE OPTIONEE. In the event that an Employee shall die while he is an employee of the Corporation and prior to his complete exercise of the Option, the Option may be exercised in whole or in part only: (i) by the Employee's estate or on behalf of such person or persons to whom the Employee's rights pass under his Will or by the laws of descent and distribution, (ii) to the extent that the Employee was entitled to exercise the Option at the date of his death, and (iii) prior to the expiration of the term of the Option. SECTION 6. PIGGYBACK REGISTRATION. a. If, at any time commencing January 1, 2000 and expiring December 31, 2006, the Corporation proposes to register any of its securities under the Securities Act (other than in connection with a merger or pursuant to Form S-8 or other comparable Form) it will give written notice by registered mail, at least thirty (30) days prior to the filing of such registration statement, to the Employee of its intention to do so. If the Employee notifies the Corporation within ten (10) days after receipt of any such notice of his desire to include any Option Shares, owned by him (on a fully vested basis) in such proposed registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement, the Corporation shall afford the Employee the opportunity to have any of his Option Shares registered under such registration statement; provided that (i) such inclusion does not pose any significant legal problem and (ii) if such registration statement is filed pursuant to an underwritten public offering, the underwriter approves such inclusion. b. Notwithstanding the provisions of this Section 6, the Corporation shall have the right at any time after it shall have given written notice pursuant to this Section 6 (irrespective of whether a written request for inclusion of any Option Shares shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. c. Employee will cooperate with the Corporation in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Corporation and executing and returning all documents reasonably requested in connection with the registration and sale of the Option Shares. In addition, Employee will comply with all applicable provisions of state and federal securities laws, including rule 10b-6 and will not, during the course of a distribution, purchase any of the securities being distributed. d. All expenses incurred in any registration of the Option Shares under this Agreement shall be paid by the Corporation, including, without limitation, printing expenses, fees and disbursements of counsel for the Corporation, expenses of any audits to which the Corporation shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Option Shares under federal and state securities laws, and expenses of complying with the securities or blue sky laws of any jurisdictions; provided, however, the Corporation shall not be liable for (a) any discounts or commissions to any underwriter; (b) any stock transfer taxes incurred with respect to Option Shares sold in the offering or (c) the fees and expenses of counsel for Employee, provided that the Corporation will pay, the costs and expenses of Employee's counsel when the Corporation's counsel is representing all selling security holders. SECTION 7. TRANSFER OF OPTION; SUCCESSORS AND ASSIGNS. This Agreement (including the Option) and all rights hereunder shall not be transferable at any time without the prior written consent of the Corporation. This Agreement and all the rights hereunder shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and transferees. SECTION 8. NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If the Corporation, to: ACTV, Inc. 1270 Avenue of the Americas - Suite 2401 New York, New York 10020 Attention: Day Patterson, Senior Vice President, General Counsel With a copy to: Jay Kaplowitz Gersten, Savage, Kaplowitz & Fredericks 101 East 52nd Street New York, New York 10022 If to the Employee, to: David Reese 30 Maclay Road Montville, New Jersey 07045 or to such other address as the party to whom notice is to be given may have furnished to the other party in writing in accordance herewith. If mailed as aforesaid, any such communication shall be deemed to have been given on the third business day following the day on which the piece of mail containing such communication is posted. SECTION 9. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 10. ENTIRE AGREEMENT. This Agreement, which includes December 31, 1999 updated information, contains the entire agreement between the parties hereto with respect to the transactions contemplated herein, and supersedes all previously written or oral negotiations, commitments, representations and agreement. SECTION 11. AMENDMENTS AND MODIFICATIONS. This Agreement, or any provision hereof, may not be amended, changed or modified without the prior written consent of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Option Agreement to be executed and delivered as of the date first above written. ACTV, Inc. By: ----------------------------------- Day Patterson Senior Vice President, General Counsel Agreed: -------------------------------- David Reese EX-10.54 18 EX-10.54 Exhibit 10.54 225 FOURTH, LLC Landlord TO ACTV, INC. Tenant ----------------------------------- Lease ----------------------------------- Dated as of December 1, 1999 TABLE OF CONTENTS
Page ---- ARTICLE 1 PREMISES; TERM; USE ............................................. 1 1.01 DEMISE ............................................................ 1 1.02 TERM .............................................................. 2 1.03 POSSESSION DATE ................................................... 2 1.04 TENANT DELAY ...................................................... 3 1.05 USE ............................................................... 3 1.06 TEMPORARY SPACE ................................................... 4 1.07 ADDITIONAL 19TH FLOOR SPACE ....................................... 5 ARTICLE 2 RENT ............................................................ 6 2.01 RENT .............................................................. 6 2.02 FIXED RENT ........................................................ 6 2.03 ADDITIONAL CHARGES ................................................ 7 2.04 TAX PAYMENTS ...................................................... 7 2.05 [INTENTIONALLY OMITTED] ........................................... 9 2.06 TAX PROVISIONS .................................................... 9 2.07 ELECTRIC CHARGES .................................................. 10 2.08 MANNER OF PAYMENT ................................................. 12 2.09 SECURITY .......................................................... 12 2.10 EXPENSE ESCALATION ................................................ 15 ARTICLE 3 LANDLORD COVENANTS .............................................. 16 3.01 LANDLORD SERVICES ................................................. 16 ARTICLE 4 LEASEHOLD IMPROVEMENTS; TENANT COVENANTS ........................ 19 4.01 INITIAL IMPROVEMENTS .............................................. 19 4.02 ALTERATIONS ....................................................... 22 4.03 LANDLORD'S AND TENANT'S PROPERTY .................................. 25 4.04 ACCESS AND CHANGES TO BUILDING .................................... 26 4.05 REPAIRS ........................................................... 26 4.06 COMPLIANCE WITH LAWS .............................................. 27 4.07 TENANT ADVERTISING ................................................ 28 4.08 RIGHT TO PERFORM TENANT COVENANTS ................................. 28 4.09 IMPROVEMENTS TO TEMPORARY SPACE ................................... 29 ARTICLE 5 ASSIGNMENT AND SUBLETTING ....................................... 29 5.01 ASSIGNMENT; ETC ................................................... 29 5.02 LANDLORD'S OPTION RIGHT ........................................... 30 5.03 ASSIGNMENT AND SUBLETTING PROCEDURES .............................. 33 5.04 GENERAL PROVISIONS ................................................ 35 5.05 ASSIGNMENT AND SUBLEASE PROFITS ................................... 36 ARTICLE 6 SUBORDINATION; DEFAULT; INDEMNITY ............................... 37 6.01 SUBORDINATION ..................................................... 37 6.02 ESTOPPEL CERTIFICATE .............................................. 39 6.03 DEFAULT ........................................................... 39 6.04 RE-ENTRY BY LANDLORD .............................................. 40 6.05 DAMAGES ........................................................... 41
-i- 6.06 OTHER REMEDIES .................................................... 42 6.07 RIGHT TO INJUNCTION ............................................... 42 6.08 CERTAIN WAIVERS: WAIVER OF TRIAL BY JURY .......................... 42 6.09 NO WAIVER ......................................................... 42 6.10 HOLDING OVER ...................................................... 43 6.11 ATTORNEYS' FEES ................................................... 43 6.12 NONLIABILITY AND INDEMNIFICATION .................................. 43 6.13 PROTEST OF LANDLORD CHARGES ....................................... 44 ARTICLE 7 INSURANCE; CASUALTY; CONDEMNATION ............................... 44 7.01 COMPLIANCE WITH INSURANCE STANDARDS ............................... 44 7.02 TENANT'S INSURANCE ................................................ 45 7.03 SUBROGATION WAIVER ................................................ 46 7.04 CONDEMNATION ...................................................... 46 7.05 CASUALTY .......................................................... 47 ARTICLE 8 MISCELLANEOUS PROVISIONS ........................................ 49 8.01 NOTICE ............................................................ 49 8.02 BUILDING RULES .................................................... 49 8.03 SEVERABILITY ...................................................... 50 8.04 CERTAIN DEFINITIONS ............................................... 50 8.05 QUIET ENJOYMENT ................................................... 50 8.06 LIMITATION OF LANDLORD'S LIABILITY ................................ 50 8.07 COUNTERCLAIMS ..................................................... 51 8.08 SURVIVAL .......................................................... 51 8.09 CERTAIN REMEDIES .................................................. 51 8.10 NO OFFER .......................................................... 51 8.11 CAPTIONS; CONSTRUCTION ............................................ 51 8.12 AMENDMENTS ........................................................ 52 8.13 BROKER ............................................................ 52 8.14 MERGER ............................................................ 52 8.15 SUCCESSORS ........................................................ 52 8.16 APPLICABLE LAW .................................................... 52 8.17 NO DEVELOPMENT RIGHTS ............................................. 52 8.18 SIGNAGE ........................................................... 53 8.19 BUILDING ACCESS ................................................... 53 ARTICLE 9 RENEWAL RIGHT ................................................... 53 9.01 RENEWAL RIGHT ..................................................... 53 9.02 RENEWAL RENT AND OTHER TERMS ...................................... 54 ARTICLE 10 EXPANSION SPACE ................................................ 56 10.01 EXPANSION SPACE .................................................. 56 10.02 ES INCLUSION DATE ................................................ 60 10.03 SERVICES ......................................................... 60 10.04 ALTERNATE SPACE .................................................. 60
-ii- EXHIBITS A Description of Land B Premises Floor Plan B-1 Temporary Space Floor Plan B-2 Additional 19th Floor Space Floor Plan C Rules and Regulations D [Intentionally Omitted] E General Tenant Cleaning Services F Landlord's Work G Landlord's Temporary Space Work H Form of Subordination, Non-Disturbance and Attornment Agreement I Form of Letter of Credit J [Intentionally Omitted] K Tenant's Financial Statement -i- INDEX OF DEFINED TERMS
Definition Where Defined - ---------- ------------- 19th Floor ............................................... Section 1.01 19th Floor Rent .......................................... Section 2.02 19th Floor Mezzanine ..................................... Section 1.01 19th Floor Mezzanine Rent ................................ Section 2.02 AAA ...................................................... Section 2.05 ADA ...................................................... Section 4.06 Additional Charges ....................................... Section 2.03 Additional Rent for Electricity .......................... Section 2.07 Additional 19th Floor Space .............................. Section 1.07 Aetna .................................................... Section 6.01 Affiliate ................................................ Section 5.01 Alterations .............................................. Section 4.02 Alternate Space .......................................... Section 10.04 Annual Rent .............................................. Section 9.02 Assignment Consideration ................................. Section 5.05 Alteration Plans ......................................... Section 4.02 Base Tax Amount .......................................... Section 2.04 Base Wage Rate ........................................... Section 4.01 Base Tax Year ............................................ Section 2.04 Broker ................................................... Section 8.13 Building A ............................................... Recitals Building B ............................................... Recitals Building ................................................. Recitals Business Days ............................................ Section 3.01 Business Hours ........................................... Section 3.01 Casualty ................................................. Section 7.05 Contractors .............................................. Section 4.01 Control .................................................. Section 5.01 Curing Party ............................................. Section 4.08 ES Election Period ....................................... Section 10.01 ES Inclusion Date ........................................ Section 10.02 ES Minimum Security Amount ............................... Section 10.01 Expansion Notice ......................................... Section 10.01 Expansion Option ......................................... Section 10.01 Expansion Space .......................................... Section 10.01 Expansion Space Alterations .............................. Section 10.01 Expansion Space Letter of Credit ......................... Section 10.01 Expansion Space Security Deposit ......................... Section 10.01 Expansion Space Tax Share ................................ Section 10.01 Expansion Space Work Contribution ........................ Section 10.01 Expiration Date .......................................... Section 10.01
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Definition Where Defined - ---------- ------------- Fair Market Rent ......................................... Section 9.02 First Temporary Space .................................... Section 1.06 First Temporary Space Occupancy Date ..................... Section 1.06 Fixed Rent ............................................... Section 2.02 Fixtures ................................................. Section 4.03 Improvements and Betterments ............................. Section 4.03 Indemnified Party ........................................ Section 6.12 Interest Rate ............................................ Section 2.09 Land ..................................................... Recitals Landlord ................................................. Introduction; ......................................................... Section 8.04 Landlord's Contribution .................................. Section 4.01 Landlord's Determination ................................. Section 9.02 Landlord's Initial Work .................................. Section 4.01 Landlord Services ........................................ Section 3.01 Landlord's Temporary Space Work .......................... Section 4.09 Laws ..................................................... Section 4.06 Lease .................................................... Recitals Local 32B - 32J .......................................... Section 2.10 Material Alteration ...................................... Section 4.02 Minimum Equity Amount .................................... Section 2.09 Minimum Security Amount .................................. Section 2.09 Multiplication Factor .................................... Section 2.10 New Tenant ............................................... Section 6.10 Original Premises ........................................ Section 1.01 Other Sublease Consideration ............................. Section 5.05 Premises ................................................. Section 1.01 Porters .................................................. Section 2.10 Possession Date .......................................... Section 1.03 Project .................................................. Recitals Pro Rata Share ........................................... Section 4.01 Realty Advisory Board .................................... Section 2.10 Renewal Notice ........................................... Section 9.01 Renewal Option ........................................... Section 9.01 Renewal Term ............................................. Section 9.01 Rent ..................................................... Section 2.01 Rent Notice .............................................. Section 9.02 Rental Value ............................................. Section 9.02 Rent Commencement Date ................................... Section 2.02 Rules and Regulations .................................... Section 3.01 Second Temporary Space ................................... Section 1.06 Successor Landlord ....................................... Section 6.01 Superior Lease ........................................... Section 6.01 Superior Lessor .......................................... Section 6.01 Superior Mortgage ........................................ Section 6 01
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Definition Where Defined - ---------- ------------- Superior Mortgagee ....................................... Section 6.01 Tax Payment .............................................. Section 2.04 Tax Year ................................................. Section 2.04 Taxes .................................................... Section 2.04 Temporary Space Vacancy Date ............................. Section 1.06 Tenant ................................................... Introduction Tenant Delay ............................................. Section 1.04 Tenant's Basic Cost ...................................... Section 5.05 Tenant's Initial Improvements ............................ Section 4.01 Tenant's Notice .......................................... Section 9.02 Tenant's Offer Notice .................................... Section 5.02 Tenant's Plans ........................................... Section 4.01 Tenant's Property ........................................ Section 4.03 Tenant's Tax Share ....................................... Section 2.04 Term ..................................................... Section 1.02 Termination Date ......................................... Section 1.06 Termination Notice ....................................... Section 1.06 Transfer Notice .......................................... Section 5.03 Wage Increase Charge ..................................... Section 2.10 Wage Rate ................................................ Section 2.10
-iii- LEASE (this "Lease"), dated as of December 1, 1999, between 225 FOURTH, LLC ("Landlord"), a Delaware limited liability company whose address is c/o Orda Management Corporation, 225 Park Avenue South, New York, New York 10003 and ACTV, Inc. ("Tenant"), a Delaware corporation whose address is 1270 Sixth Avenue, New York, New York prior to the commencement of the Term, and thereafter Tenant's address shall be that of the Building. W I T N E S S E T H WHEREAS, Landlord is willing to lease to Tenant and Tenant is willing to hire from Landlord, on the terms hereinafter set forth, certain space in the office building located at Block 874, Lot 1 in New York, New York and commonly known as 225 Park Avenue South, New York, New York (the "Building A") and in the office building located at Block 874, Lot 4 in New York, New York and commonly known as 233 Park Avenue South (the "Building B"; collectively Building A and Building B are referred to as the "Building") on the land more particularly described in Exhibit A (the "Land"; the Land and the Buildings and all plazas, sidewalks and curbs adjacent thereto are collectively called the "Project"). NOW, THEREFORE, Landlord and Tenant agree as follows: ARTICLE 1 Premises; Term; Use 1.01 Demise. (a) Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to the terms and conditions of this Lease, the entire 19th floor (the "19th Floor") and the 19th Floor Mezzanine (the "19th Floor Mezzanine"; together with the 19th Floor, the "Original Premises" or the "Premises") substantially as shown on the plan annexed as Exhibit B. Landlord and Tenant agree that the 19th Floor is conclusively deemed to contain 19,713 rentable square feet; the 19th Floor Mezzanine is conclusively deemed to contain 2,022 square feet; and the Original Premises is conclusively deemed to contain 21,735 rentable square feet. (b) Tenant acknowledges that the 19th Floor Mezzanine shall be demised as storage space; provided, however, that if Tenant, at Tenant's cost and expense, obtains a Certificate of Occupancy for the 19th Floor Mezzanine for a use other than storage space, and Tenant, at Tenant's cost and expense, brings the 19th Floor Mezzanine into compliance with any and all applicable Laws (hereinafter defined), including, without limitation, ADA (hereinafter defined), then Landlord shall permit Tenant to use the 19th Floor Mezzanine for any use that is lawfully permitted under the amended Certificate of Occupancy. Any representations and warranties made by Landlord in this Lease shall not apply to the 19th Floor Mezzanine. Tenant shall have the exclusive right to use the staircase located within the Premises for access from the 19th Floor to the 19th Floor Mezzanine. (c) Landlord shall provide Tenant with temporary office space, as set forth in Section 1.06(a) herein, until the Possession Date. -1- 1.02 Term. (a) The term of this Lease (the "Term") shall commence on the Possession Date and shall end, unless sooner terminated as herein provided, on the last day of the calendar month in which occurs the fifteenth (15) anniversary of the Rent Commencement Date (such date, as the same may be extended pursuant to Article 9, is called the "Expiration Date"). (b) Landlord represents to Tenant that, as of the date of this Lease, the Original Premises are subject to a lease agreement with the City University of New York, and Tenant acknowledges that this Lease shall not be effective with respect to the Original Premises (as opposed to First Temporary Space and Second Temporary Space) unless and until Landlord receives a signed termination agreement, approved by all necessary parties, from the City University of New York. Landlord agrees to provide Tenant with a copy of the executed termination agreement after Landlord's receipt of such agreement, provided that Landlord's failure to deliver a copy of such agreement shall not impair the validity of this Lease nor impose any liability therefore on Landlord. If Landlord has not received a signed termination agreement, approved by all necessary parties, from the City University of New York on or before December 31, 1999, Tenant shall have the right to terminate this Lease on or before February 15, 2000 by sending written notice to Landlord setting forth a termination date, which shall be not less than 30 days nor more than 90 days from the date of Tenant's notice. 1.03 Possession Date. (a) "Possession Date" shall mean the day on which Landlord's Initial Work (as defined below) is substantially completed in accordance with Section 1.03(c). Landlord shall use reasonable efforts to substantially complete Landlord's Initial Work on or before February 1, 2001. If Landlord's Initial Work is substantially completed prior to February 1, 2001, such date of substantial completion shall be the Possession Date. In the event that the Possession Date does not occur on or before February 1, 2001, then the Landlord shall provide Tenant with additional temporary office space, as provided in Section 1.06(b) herein. Landlord shall advise Tenant of the date Landlord's Initial Work is substantially completed and Landlord and Tenant shall promptly confirm the Possession Date, the Rent Commencement Date and the Expiration Date by a separate instrument to be prepared by Landlord; provided, that the failure to execute and deliver such instrument shall not affect the determination of such dates in accordance with this Lease. Tenant shall have the right to dispute the determination of the Possession Date by submitting such dispute to binding arbitration before the American Arbitration Association in the City of New York, County of New York; provided that Tenant has not commenced Tenant's Initial Improvements in the Premises or otherwise taken exclusive possession of the Premises prior to Landlord's proposed Possession Date. Pending the resolution of any dispute as to the Possession Date, Tenant shall pay Rent based upon Landlord's determination. (b) Landlord shall provide Tenant with written notice upon Landlord obtaining vacant possession of the Original Premises from The City University of New York, the tenant in possession of the space as of the date of this Lease. Landlord also shall provide Tenant with 5 business days' written notice of the anticipated date of completion of Landlord's Initial Work; provided, that failure to deliver the Premises to Tenant on the anticipated date of completion of Landlord's Initial Work shall not impair the validity of this Lease nor shall it delay the Possession Date under this Lease. -2- (c) Landlord's Initial Work shall be deemed to have been substantially completed on the date upon which Landlord's Initial Work has been completed, except for (A) minor details or adjustments, (B) items which, in accordance with good construction practice, should be performed after completion of Tenant's Initial Improvements and (C) any part of Landlord's Initial Work that is not completed due to Tenant Delay; provided, that in each case Landlord shall nevertheless remain obligated to complete Landlord's Initial Work. If Tenant takes exclusive possession of the Original Premises for the performance of Tenant's Initial Work or for any other reason, Landlord's Initial Work shall be deemed to be substantially complete. For purposes of this Section 1.03, Tenant shall be deemed to have taken exclusive possession of the Original Premises, notwithstanding the fact that Landlord may be performing the work described in items (A), (B) and (C) of this Section 1.03(c) in the Original Premises at such time as Tenant commences performance of Tenant's Initial Work. (d) If for any reason Landlord shall be unable to deliver possession of the Original Premises to Tenant on any date specified in this Lease for such delivery, Landlord shall have no liability to Tenant therefor and the validity of this Lease shall not be impaired, nor shall the Term be extended, by reason thereof. This Section 1.03 shall be an express provision to the contrary for purposes of Section 223-a of the New York Real Property Law and any other law of like import now or hereafter in effect. Nothing contained herein shall be deemed to diminish Tenant's rights under Section 1.06(e) of this Lease. (e) In no event shall the Possession Date occur prior to July 1, 2000. 1.04 Tenant Delay. "Tenant Delay" means any delay which Landlord may encounter in the performance of Landlord's obligations under this Lease solely by reason of any act or omission of any nature of Tenant, its agents or Contractors, including, without limitation, delays due to changes in or additions to Landlord's Initial Work requested by Tenant, delays by Tenant in submission of information or giving authorizations or approvals or delays due to the postponement of any Landlord's Initial Work at the request of Tenant. Tenant shall pay to Landlord any costs or expenses incurred by Landlord by reason of any Tenant Delay. 1.05 Use. The Premises shall be used and occupied by Tenant (and its permitted subtenants) solely as general and executive offices (including such ancillary uses in connection therewith as shall be reasonably required by Tenant in the operation of its business which may include, but shall not be limited to, a lunchroom and a kitchen, incidental to the use of the Premises as general and executive offices and each exclusively for the use of Tenant's employees); provided, that in no event shall the Premises be used for any of the following: (a) a banking, trust company, or safe deposit business, (b) a savings bank, a savings and loan association, or a loan company, (c) the sale of travelers' checks and/or foreign exchange, (d) a stock brokerage office or for stock brokerage purposes, (e) a restaurant, bar or for the sale of food or beverages, (f) photographic reproductions and/or offset printing, (g) an employment or travel agency or airline ticket counter, (h) a school or classroom, (i) medical or psychiatric offices, (j) conduct of an auction, (k) gambling activities, (l) conduct of obscene, pornographic or similar disreputable activities, (m) offices of an agency, department or bureau of the United States Government, any state or municipality within the United States or any foreign government, or any political subdivision of any of them, (n) offices of any charitable, religious, union or other not-for-profit -3- organization, or (o) offices of any tax exempt entity within the meaning of Section 168(h)(2) of the Internal Revenue Code of 1986, as amended, or any successor or substitute statute, or rule or regulation applicable thereto. The Premises shall not be used for any purpose which would tend to lower the character of the Building, create unreasonable or excessive elevator or floor loads, impair or interfere with any of the Building operations or the proper and economic heating, ventilation, air-conditioning, cleaning or other servicing of the Building, constitute a public or private nuisance, interfere with, annoy or disturb any other tenant or Landlord, or impair the appearance of the Building. 1.06 Temporary Space. (a) Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to the terms and conditions of this Lease, the entire 10th floor of Building B (the "First Temporary Space") substantially as shown on the plan annexed as Exhibit B-1. Landlord and Tenant agree that the First Temporary Space is conclusively deemed to contain 12,217 rentable square feet. Tenant shall occupy the First Temporary Space beginning on December 1, l999 ("First Temporary Space Occupancy Date"), and unless Tenant shall have exercised its option to lease the First Temporary Space for the Term of this Lease in accordance with Section 1.08 hereof, such occupancy of the First Temporary Space shall end two (2) weeks after substantial completion of Tenant's Initial Improvements, but, in no event, shall such occupancy extend beyond one hundred eighty (180) days after the Possession Date (the "Temporary Space Vacancy Date"). (b) In the event that the Possession Date shall not occur on or before February 1, 2001, Landlord shall lease to Tenant and Tenant shall hire from Landlord, subject to the terms and conditions of this Lease, additional space suitable for the uses permitted under this Lease of at least 8,000 square feet but no more than 12,000 square feet (the "Second Temporary Space" together with the First Temporary Space, the "Temporary Space") in either (i) Building A or (ii) Building B. Tenant shall occupy the Second Temporary Space beginning on February 1, 2001, and such occupancy of the Second Temporary Space shall end, unless sooner terminated as provided in this Lease, on the Temporary Space Vacancy Date. Tenant shall have the right to reject the Second Temporary Space offered by Landlord by notice to Landlord given within five (5) Business Days after Landlord has designated such space, provided that, if Tenant so rejects such Second Temporary Space, Landlord shall have no further obligation under this Section 1.06(b) to provide additional temporary space to Tenant. (c) The fixed rent for the First Temporary Space shall be at an annual rate of $32.00 per rentable square foot of the First Temporary Space for the period commencing on the First Temporary Space Occupancy Date and, subject to Article 10 hereof, ending on the Temporary Space Vacancy Date. The fixed rent for the Second Temporary Space shall be at an annual rate of $32.00 per square foot of the Second Temporary Space for the period commencing on February 1, 2001 and ending on Temporary Space Vacancy Date. Fixed rent for the First Temporary Space and, if applicable, the Second Temporary Space shall be payable by Tenant in equal monthly installments in advance on the first day of each calendar month after the date of this Lease, provided, that Tenant shall pay, upon the execution and delivery of this Lease by Tenant, the first full monthly installment of fixed rent for the First Temporary Space. -4- (d) Tenant shall pay such Additional Charges, as defined in Section 2.03, other than any Tax Payments described in Section 2.04 and any expense escalations described in Section 2.10, as are applicable to the occupancy of both the First Temporary Space and the Second Temporary Space. (e) Notwithstanding the foregoing, if Landlord does not deliver the Original Premises to Tenant on or prior to September 30, 2001, Tenant shall have the right to terminate this Lease by sending written notice (a "Termination Notice") to Landlord at least thirty (30) days prior to Tenant's desired termination date, which date shall be no later than 270 days after the date of the Termination Notice (the "Termination Date"). If Tenant has not delivered a Termination Notice and the Original Premises have not been delivered to Tenant on or prior to December 31, 2001, either Tenant or Landlord shall have the right to terminate this Lease by delivering a Termination Notice to the other party; provided that Landlord shall only have the right to terminate this Lease in accordance with this Section 1.06(e) if Landlord has made a reasonable effort to deliver the Original Premises to Tenant as required under this Lease. If Tenant delivers a Termination Notice pursuant to the preceding sentence, such Termination Notice shall set forth a Termination Date, which date shall be not less than 30 days nor more than 270 days from the date of the Termination Notice. If Landlord delivers a Termination Notice pursuant to the preceding sentence, Tenant, within ten (10) Business Days thereafter, shall deliver to Landlord a separate notice setting forth a Termination Date, which shall be not less than 30 days nor more than 270 days from the date of the Termination Notice delivered by Landlord. If Tenant has exercised the Expansion Option in accordance with Article 10 of this Lease, then, subject to the provisions set forth in this Section 1.06(e), (i) Landlord's right to terminate this Lease provided hereunder shall be limited to terminating this Lease solely with respect to the Original Premises and (ii) Tenant may elect to terminate this Lease solely with respect to the Original Premises, provided that Tenant notifies Landlord of such election in Tenant's Termination Notice. In the event of such an election, this Lease shall remain in full force and effect with respect to the Expansion Space. 1.07 Additional 19th Floor Space. Landlord hereby notifies Tenant that Landlord may elect to remove the unused, existing elevator shafts on the 19th Floor shown on Exhibit B-2 attached hereto and made a part hereof (the "Additional 19th Floor Space") provided that if Landlord elects to remove such elevator shafts, such removal shall be completed on or before the Possession Date herein. Landlord shall notify Tenant on or before April 1, 2000 of Landlord's intent to exercise its rights under this Section 1.07. In the event that Landlord elects to remove such elevator shafts, the area previously occupied by the Additional 19th Floor Space shall become part of the Original Premises. Upon notice from Landlord to Tenant that Landlord will deliver the Additional 19th Floor Space to Tenant on the Possession Date, and effective on the Possession Date, the Additional 19th Floor Space shall become part of the Original Premises, without any further act on the part of Landlord or Tenant and upon all of the terms and conditions of this Lease, except that, from and after the Possession Date: (i) Tenant's Tax Share shall be increased by 0.0457%; -5- (ii) the number of rentable square feet for the Original Premises shall be increased by 216 rentable square feet and the Original Premises shall be conclusively deemed to contain 21,951 rentable square feet; and (iii) the amount of Landlord's Contribution (as defined below) shall be increased by $7,560.00. ARTICLE 2 Rent 2.01 Rent. "Rent" shall consist of Fixed Rent and Additional Charges. 2.02 Fixed Rent. (a) The fixed rent for the 19th Floor ("19th Floor Rent") shall be (i) for the period commencing on the Rent Commencement Date and ending on the day immediately preceding the 5th anniversary of the Rent Commencement Date, Seven Hundred Nine Thousand Six Hundred Sixty-Eight and 00/100 ($709,668.00) Dollars per annum, payable in equal monthly installments of Fifty-Nine Thousand One Hundred Thirty-Nine and 00/100 ($59,139.00) Dollars (an annual rate of $36.00 per rentable square foot contained in the 19th Floor), (ii) for the period commencing on the 5th anniversary of the Rent Commencement Date and ending on the day immediately preceding the 10th anniversary of the Rent Commencement Date, Seven Hundred Sixty-Eight Thousand Eight Hundred Seven and 00/100 ($768,807.00) Dollars per annum, payable in equal monthly installments of Sixty-Four Thousand Sixty-Seven and 25/100 ($64,067.25) Dollars (an annual rate of $39.00 per rentable square foot contained in the 19th Floor) and (c) for the period commencing on the 10th anniversary of the Rent Commencement Date and ending on the Expiration Date, Eight Hundred Twenty-Seven Thousand Nine Hundred Forty-Six and 00/100 ($827,946.00) Dollars per annum, payable in equal monthly installments of Sixty-Eight Thousand Nine Hundred Ninety-Five and 50/100 ($68,995.50) Dollars (an annual rate of $42.00 per rentable square foot contained in the 19th Floor). The fixed rent for the 19th Floor Mezzanine (the "19th Floor Mezzanine Rent") shall be, for the period commencing on the Rent Commencement Date and ending on the Expiration Date, Forty Thousand Four Hundred Forty and 00/100 ($40,440.00) Dollars per annum, payable in equal monthly installments of Three Thousand Three Hundred Seventy and 00/100 ($3,370.00) Dollars (an annual rate of $20.00 per rentable square foot contained in the 19th Floor Mezzanine). The 19th Floor Rent and the 19th Floor Mezzanine Rent shall collectively be referred to as the "Fixed Rent." Fixed Rent shall be payable by Tenant in equal monthly installments in advance on the Rent Commencement Date and on the first day of each calendar month thereafter; provided, that Tenant shall pay, upon the Possession Date, the first full monthly installment of Fixed Rent; and provided further, that if the Rent Commencement Date is not the first day of a month, then Fixed Rent for the month in which the Rent Commencement Date occurs shall be prorated and paid on the Rent Commencement Date. "Rent Commencement Date" means the date occurring in the sixth (6th) month after the Possession Date which is the same numerical date in the month as the Possession Date except that if no same numerical date shall exist in such sixth (6th) month, the Rent Commencement Date shall be the last day of such sixth (6th) month. -6- (b) From and after the date hereof until August 1, 2000 (the "Election Period") and provided that Tenant provides Landlord with evidence reasonably satisfactory to Landlord that Tenant's Initial Improvements will cost a minimum of (i) Thirty-Five Dollars ($35) per rentable square foot of the 19th Floor and Twenty ($20) Dollars per rentable square foot of the 19th Floor Mezzanine or (ii) Forty-Five Dollars ($45) per rentable square foot of the 19th Floor and Ten Dollars ($10) per rentable square foot f the 19 Floor Mezzanine, Tenant shall have the right to elect not to receive Landlord's Contribution pursuant to Section 4.01(e) hereof and, in lieu thereof, receive a reduction in Fixed Rent of $4.23 per year per rentable square foot contained in the 19th Floor (i.e., $83,386.00 per year with respect to the 19th Floor) and $2.42 per year per rentable square foot contained in the 19th Floor Mezzanine) (i.e., $4,893.24 per year with respect to the 19th Floor Mezzanine) plus any additional reduction resulting from the inclusion of the Additional 19th Floor Space in the Premises in accordance with Section 1.07 of this Lease. Tenant shall give Landlord such notice prior to the expiration of the Election Period. Time shall be of the essence with respect to the giving of such notice. 2.03 Additional Charges. "Additional Charges" means Tax Payments and all other sums of money, other than Fixed Rent, at any time payable by Tenant under this Lease, all of which Additional Charges shall be deemed to be rent. 2.04 Tax Payments. (a) "Base Tax Amount" means the Taxes (excluding any amounts described in Section 2.04(b)(iii)) payable for the calendar year 2001 (the "Base Tax Year"). If the Base Tax Amount shall be reduced, for any reason, such lesser amount shall be the Base Tax Amount used to compute Tenant's Tax Share (as defined below) of any increase in Taxes for each Tax Year. (b) "Taxes" means (i) the real estate taxes, sewer rents, water frontage charges, vault taxes, assessments and special assessments levied, assessed or imposed upon or with respect to Building A by any federal, state, municipal or other government or governmental body or authority, (ii) all taxes assessed or imposed with respect to the rentals payable under this Lease other than general income and gross receipts taxes; provided, that any such tax shall exclude Commercial Rent or Occupancy Taxes imposed pursuant to Title 11, Chapter 7 of the New York City Administrative Code so long as such tax is required to be paid by tenants directly to the taxing authority and (iii) any expenses incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the Project, which expenses shall be allocated to the Tax Year to which such expenses relate (provided that, such expenses shall not be allocated until Landlord receives the benefit, if any, of such a contest). If at any time the method of taxation shall be altered so that in lieu of or as an addition to or as a substitute for, the whole or any part of such real estate taxes, assessments and special assessments now imposed on real estate, there shall be levied, assessed or imposed (x) a tax, assessment, levy, imposition, fee or charge wholly or partially as a capital levy or otherwise on the rents received therefrom, or (y) any other additional or substitute tax, assessment, levy, imposition, fee or charge, including, without limitation, business improvement district and transportation taxes, fees and assessments, then all such taxes, assessments, levies, impositions, fees or charges or the part thereof so measured or based shall be included in "Taxes". If the owner, or lessee under a Superior Lease, of all or any part of the Building and/or the Land is an entity exempt from the payment of taxes described in clauses (i) and (ii), there shall be included in "Taxes" the taxes described in clauses (i) and (ii) -7- which would be so levied, assessed or imposed if such owner or lessee were not so exempt and such taxes shall be deemed to have been paid by Landlord on the dates on which such taxes otherwise would have been payable if such owner or lessee were not so exempt. Except as permitted in this Section 2.04(b), "Taxes" shall not include any franchise, estate, income, capital stock or transfer tax. (c) "Tax Year" means each period of 12 months, commencing on the first day of July of each such period, in which occurs any part of the Term, or such other period of 12 months occurring during the Term as hereafter may be adopted as the fiscal year for real estate tax purposes of the City of New York. (d) "Tenant's Tax Share" means 4.1879%. The parties hereto agree that the rentable square foot area of the 19th Floor shall be deemed to be 19,713 rentable square feet and, solely for the purpose of calculating Tenant's Tax Share, the rentable square foot area of Building A shall be deemed to be 470,717 rentable square feet. The Tenant's Tax Share has been determined by dividing the rentable square foot area of the 19th Floor by the rentable square foot area of Building A. (e) If Taxes for any Tax Year, including the Tax Year in which the Rent Commencement Date occurs, shall exceed the Base Tax Amount, Tenant shall pay to Landlord (each, a "Tax Payment") Tenant's Tax Share of the amount by which Taxes for such Tax Year are greater than the Base Tax Amount. Landlord shall give Tenant a statement showing the computation of Tenant's Tax Share, which statement shall cover only those Taxes which Landlord is then required to pay to the taxing authority and such statement shall be accompanied by copies of the applicable tax bills or other evidence showing the Taxes or tax assessments. If there shall be any increase or decrease in the Taxes for any Tax Year, the Tax Payment for such Tax Year shall be appropriately adjusted and paid or refunded, as the case may be, in accordance herewith. (f) If Landlord shall receive a refund of Taxes for any Tax Year, Landlord shall pay to Tenant Tenant's Share of the net refund (after deducting from such refund the costs and expenses of obtaining the same, including, without limitation, appraisal, accounting and legal fees, to the extent that such costs and expenses were not included in the Taxes for such Tax Year); provided, that (i) Tenant shall not be eligible to receive such payment if Tenant is in default of any payment of Fixed Rent beyond any applicable notice and grace period under the Lease beyond any notice and grace period, if applicable, and (ii) such payment to Tenant shall in no event exceed Tenant's Tax Payment paid for such Tax Year. (g) If the Taxes comprising the Base Tax Amount are reduced as a result of an appropriate proceeding or otherwise, the Taxes as so reduced shall for all purposes be deemed to be the Base Tax Amount and Landlord shall notify Tenant of the amount by which the Tax Payments previously made were less than the Tax Payments required to be made under this Section 2.04, and Tenant shall pay the deficiency within 10 days after demand therefor. (h) Landlord represents (i) that to its knowledge, without due inquiry, there is no abatement(s) or exemption(s) of Taxes applicable to the Building as of the date of the -8- Lease and (ii) Landlord has no actual knowledge of any pending abatement(s) or exemption(s) for the Base Tax Year. A filing for certiorari for the Base Tax Year shall not be deemed a violation of this provision. In the event there shall be abatement(s) or exemption(s) in effect for the Base Tax Year, such exemption(s)/abatement(s) shall not be taken into account in calculating the Base Tax Amount. 2.05 [INTENTIONALLY OMITTED] 2.06 Tax Provisions. (a) In any case provided in Section 2.04 in which Tenant is entitled to a refund, Landlord may, in lieu of making such refund, credit against future installments of Rent any amounts to which Tenant shall be entitled. Nothing in this Article 2 shall be construed so as to result in a decrease in the Fixed Rent. If this Lease shall expire before any such credit shall have been fully applied, then (provided Tenant is not in monetary default beyond any applicable notice and grace period under this Lease) Landlord shall refund to Tenant the unapplied balance of such credit. (b) Landlord's failure to render or delay in rendering any statement with respect to any Tax Payment or installment thereof shall not prejudice Landlord's right to thereafter render such a statement, nor shall the rendering of an incorrect statement for any Tax Payment or installment thereof prejudice Landlord's right to thereafter render a corrected statement therefor. (c) Landlord and Tenant confirm that the computations under this Article 2 are intended to constitute a formula for agreed rental escalation and may or may not constitute an actual reimbursement to Landlord for Taxes. If the Building shall be condominiumized, then Tenant's Tax Payments shall, if necessary, be equitably adjusted such that Tenant shall thereafter continue to pay the same share of the Taxes of the Building as Tenant would pay in the absence of such condominimization. If the size of either Building A or Building B shall be increased due to a recalculation of the rentable square footage of Building A or Building B or for any other reason, Tenant's Tax Share shall be recalculated to reflect the ratio of the rentable square feet in the Premises to the revised number of rentable square feet in Building A or Building B, as appropriate. (d) Each Tax Payment in respect of a Tax Year, which begins prior to the Possession Date or ends after the expiration or earlier termination of this Lease, and any tax refund pursuant to Section 2.04(f), shall be prorated to correspond to that portion of such Tax Year occurring within the Term. 2.07 Electric Charges. (a) Landlord shall supply the Original Premises with electric service equal to at least six (6) watts demand load per square foot of rentable space for lighting and receptacles, and six (6) watts demand load per square foot of rentable space for air conditioning, and shall cause Tenant's electric energy usage to be measured on a submetering basis. If the electric service supplied to the Original Premises is supplied by more than one (1) submeter, then the readings will be accumulated through a totalizing meter and billed on a coincident demand basis as if billed through a single meter. Landlord shall, at Landlord's expense, purchase and install the submeter(s). Tenant shall pay Landlord, as additional rent, within ten (10) days of receipt of its next rent bill, for the kw hours and kw demand used by Tenant at the service classification under which the public utility bills Landlord commensurate with the rate for -9- the usage as shown on Tenant's meters, plus five (5%) percent thereof for providing, reading and billing the submetering service; provided, that at no point will Tenant be entitled to time-of-day rates. Landlord shall have the sole right to select the provider of electricity for the Building. (b) If it shall become unlawful for Landlord to submeter Tenant's electric energy usage, such usage shall thereafter be paid for and measured as follows: (i) Tenant agrees to pay for its electric usage as additional rent (hereinafter referred to as the "Additional Rent for Electricity"). The Additional Rent for Electricity shall be determined initially by a survey of the Premises made by an electrical consultant or electrical engineer chosen by Landlord. The survey so made will determine the number of kw hours and kw demand based on the electrical equipment and fixtures in the Premises and the period of use thereof, and based thereon will determine the value, expressed in dollars per year, of Tenant's electric energy usage. The rate Tenant shall pay will be the service classification under which the public utility bills Landlord commensurate with the rate for usage as shown by the survey, plus five (5%) percent of such amount for Landlord's administrative costs; provided, that at no point will Tenant be entitled to time-of-day rates. The Additional Rent for Electricity so determined, as adjusted from time to time pursuant to subparagraphs (ii), (iii) and (iv), shall be paid by Tenant in equal monthly installments in advance on the first day of each month during the Term, without any set off or deduction of any kind. (ii) If the public utility rate schedule for the supply of electric current to the Building shall be increased or decreased subsequent to the date of the survey referred to above, or if there shall be an increase or decrease in the fuel adjustment or taxes, or if additional taxes, surcharges, or charges of any kind shall be imposed upon the sale or furnishing of such electric current, the Additional Rent for Electricity shall be increased or decreased by applying the changed rate, fuel adjustment and taxes to the kw hours and kw demand shown on the electric survey then in effect. (iii) If there shall be a change subsequent to the initial survey, or any future survey, in the Premises, or in the number of hours during which the Premises is used, or if Tenant's failure to maintain its installations in good order and repair causes greater consumption of electric current, or if Tenant uses electricity for purposes other than the use permitted hereunder, or if Tenant adds any fixtures, machinery or equipment which significantly increases its electricity usage, the Additional Rent for Electricity, theretofore adjusted, shall be increased by applying to the additional kw hours and kw demand furnished by Landlord the Service Classification Rate under which the public utility bills Landlord commensurate with the rate for the usage as shown by the survey, plus five (5%) percent of such amount for Landlord's administrative costs (provided, that at no point will Tenant be entitled to time-of-day rates). If Tenant's electricity usage shall decrease due to the use of its electric fixtures or equipment for lesser periods of time, or due to less or more efficient fixtures or equipment, the Additional Rent for Electricity, theretofore adjusted, shall be decreased by applying the Service Classification Rate aforesaid to the lesser kw hours and kw demand. (iv) Landlord and Tenant shall each have the right from time to time during the Term to have an electric rate consultant or electrical engineer survey the electric -10- current consumed by Tenant in the Premises. If such consultant determines that the value of the electric current furnished Tenant is more or less than the Additional Rent for Electricity, as most recently adjusted, such annual amount shall be further adjusted to equal the amount determined by said consultant. The cost of the survey shall be borne by the party ordering the same. (v) Landlord shall deliver a copy of the initial survey, and a copy of any future survey made pursuant to this Section 2.07(b), to Tenant, and Tenant shall have sixty (60) days within which it may protest the findings contained therein. If Tenant fails to protest within the sixty (60) day period, the findings contained in the survey shall be final. If Tenant protests within the sixty (60) day period (by sending Landlord a notice in the manner herein provided for the giving of notices), Tenant shall have a second survey made by an electric engineer or electric rate consultant of its choice, and deliver a copy thereof to Landlord within sixty (60) days of the date of the protest. If Landlord's and Tenant's surveyors are unable to agree upon the amount of electric energy consumed by Tenant, or the amount of any increase or decrease, or an any other matter contained in the surveys, the determination of the same shall be submitted to arbitration under the rules of the American Arbitration Association then obtaining. The determination of the electric rate consultant or engineer, or the American Arbitration Association if there is disagreement and the determination is submitted to arbitration made pursuant to this subparagraph, shall be binding on Landlord and Tenant. The parties hereto shall, within ten (10) days from the date of any such determination, execute, acknowledge and deliver to each other an agreement setting forth the adjusted Additional Rent for Electricity, but such increase or decrease shall be effective from the date of the increase or decrease (subparagraph (ii)), or change (subparagraph (iii)), or new survey (subparagraph (iv)), whether or not such agreement is executed, and notwithstanding the date of execution thereof. (c) Landlord shall not in any way be liable or responsible to Tenant, except where due to its negligence, for any loss, damage or expense which Tenant may sustain or incur if during the Term, by reason of the act or inaction of the public utility servicing the Building, either the quantity or character of electrical energy is changed or is no longer available or suitable for Tenant's requirements. Landlord shall not be obligated to increase the existing electrical capacity of any portion of the Building's systems, nor to provide any additional wiring or capacity to meet Tenant's requirements, other than as set forth in Section 2.07(a). Tenant shall make no substantial alteration or addition to the electrical equipment in the Premises as of the commencement of the Term, nor increase the use of electricity in the Premises without the prior written consent of the Landlord in each instance, which consent Landlord agrees not to unreasonably withhold or delay. Subject to Landlord's obligation set forth in Section 2.07(a) herein, Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the then existing feeders of the Building or the risers or wiring installations, and further agrees that Tenant may not use any electrical equipment which, in Landlord's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by any other tenants of the Building. 2.08 Manner of Payment. Tenant shall pay all Rent and all other sums as the same shall become due and payable under this Lease either by wire transfer of immediately available federal funds as directed by Landlord or by check (subject to collection) drawn on a New York Clearing House Association member bank, in each case at the times provided herein -11- without notice or demand and without setoff or counterclaim. All Rent shall be paid in lawful. money of the United States to Landlord at its office or such other place as Landlord may from time to time designate. If Tenant fails timely to pay any Rent, Tenant shall pay interest thereon from the date when such Rent became due to the date of Landlord's receipt thereof at the lesser of (i) 1 1/2% per month or (ii) the maximum rate permitted by law. Any Additional Charges for which no due date is specified in this Lease shall be due and payable on the 10th day after the date of Landlord's invoice therefor. All bills, invoices and statements rendered to Tenant with respect to this Lease shall be binding and conclusive on Tenant unless, within 60 days after receipt of same, Tenant notifies Landlord that it is disputing same. Notwithstanding anything to the contrary contained in this Lease, Rent shall be due and payable on the first day of the month, and failure to pay such Rent on or prior to the first day of any month shall be considered a default under this Lease and interest shall accrue as provided in this Section 2.08 from and after the first day the Rent becomes due and payable. 2.09 Security. (a) Upon the execution of this Lease, Tenant has delivered to Landlord, as security for the performance of Tenant's obligations under this Lease, either (i) the sum of $400,000.00, in certified or official bank check (the "Initial Security Deposit"), or (ii) an unconditional, irrevocable letter of credit in the amount of $400,000.00 in a form and issued by a bank reasonably satisfactory to Landlord (the "Initial Letter of Credit"). Within ten (10) days after notice from Landlord to Tenant that the Premises are vacant and Landlord is in possession of the Premises, Tenant shall deliver to Landlord, as further security for the performance of Tenant's obligations under this Lease, either (i) the sum of $1,400,000.00, in certified or official bank check (the "Additional Security Deposit" together with the Initial Security Deposit, the "Security Deposit") or (ii) an unconditional, irrevocable letter of credit in the amount of $1,400,000.00 in a form issued by a bank reasonably satisfactory to Landlord (the "Additional Letter of Credit" together with the Initial Letter of Credit, the "Letter of Credit"). The Letter of Credit shall provide that it is assignable by Landlord without charge and shall either (A) expire on the date which is 60 days after the expiration or earlier termination of this Lease (the "LC Date") or (B) be automatically self-renewing until the LC Date. If any Letter of Credit is not renewed at least 30 days prior to the expiration thereof or if Tenant holds over in the Premises without the consent of Landlord after the expiration or termination of this Lease, Landlord may draw upon the Letter of Credit and hold the proceeds thereof as security for the performance of Tenant's obligations under this Lease including, but not limited to, damages under Section 6.05 hereof. Landlord may draw on the Security Deposit or Letter of Credit (or the proceeds thereof) solely to remedy defaults by Tenant, which are beyond any applicable notice and grace period, in the payment or performance of any of Tenant's obligations under this Lease. If Landlord shall have so drawn upon the Security Deposit or the Letter of Credit (or the proceeds thereof), Tenant shall upon demand deposit with Landlord a sum equal to the amount so drawn by Landlord. Landlord hereby agrees that a Letter of Credit issued (i) in the form set forth in Exhibit I attached hereto and made a part hereof and (ii) by Amalgamated Bank shall be deemed to be reasonably satisfactory to Landlord. If Tenant delivers the Security Deposit to Landlord in cash, then the Security Deposit shall be kept in an interest-bearing account until applied in accordance with the terms of this Lease (it being understood that Landlord shall not be liable for failure to obtain any specific level of interest). Landlord shall pay such interest to Tenant, less a one (1%) percent administrative fee, no more frequently than annually, upon the request of Tenant. -12- (b) In the event that Tenant shall have prior to the expiration of the Election Period elected to forego receipt of Landlord's Contribution pursuant to Section 2.02(b) above, the amount of the Security Deposit required hereunder shall be reduced by seven hundred thirty thousand three hundred ninety-five ($730,395.00) dollars plus any amount added to Landlord's Contribution resulting from the inclusion of the Additional 19th Floor Space in accordance with Section 1.07 of this Lease. (c) If, at any time, Tenant (i) completes a secondary public offering of fifty million dollars ($50,000,000.00) or more (the "Minimum Equity Amount") or (ii) otherwise receives an equity infusion of the Minimum Equity Amount, which Minimum Equity Amount, by the terms of the documents governing the same, can be used by Tenant as working capital, then the Security Deposit required hereunder shall be reduced to one million dollars ($1,000,000.00). (d) If, prior to the expiration of the Election Period, Tenant has elected to forego receipt of Landlord's Contribution pursuant to Section 2.02(b) above, and if Tenant meets the requirements of Section 2.09(c) above, then the Security Deposit hereunder shall be reduced to five hundred thousand ($500,000) dollars (the "Minimum Security Amount"). (e) If, from and after the Possession Date, (A) there is not a monetary default beyond any applicable notice and grace period under this Lease and (B) Tenant delivers to Landlord evidence that it has a NOI (as defined below) of at least four million ($4,000,000.00) dollars and that the Tenant has maintained a NAV (as defined below) of at least twenty million ($20,000,000.00) dollars during the preceding twenty-four (24) month period, then the Security Deposit shall be reduced to five hundred thousand ($500,000.00) dollars. (f) If the Security Deposit has not otherwise been reduced to the Minimum Security Amount, then: (i) if, during the first five (5) years of the Term, there have not occurred more than three (3) monetary defaults beyond any applicable notice and grace period under this Lease, then upon the sixth (6th) anniversary of the Rent Commencement Date, the Security Deposit shall be reduced by four hundred thousand ($400,000) dollars; and (ii) if, during the first ten (10) years of the Term, there have not occurred more than six (6) monetary defaults beyond any applicable notice and grace period, then upon the eleventh (11th) anniversary of the Rent Commencement Date, the Security Deposit shall be reduced by four hundred thousand, ($400,000) dollars; and (g) If the Security Deposit is reduced pursuant to Section 2.09(f)(i) or (ii) above, and after the date of such reduction there occurs more than three (3) monetary defaults, beyond any applicable notice and grace period, within any five (5) year period, the Security Deposit required shall be increased to the amount of such Security Deposit immediately prior to such reduction and Tenant shall be required to deliver to Landlord as further security for the performance of Tenant's obligations under this Lease, within ten (10) days notice from Landlord and in accordance with the provisions of Section 2.09(a) above, four hundred thousand ($400,000) dollars. -13- (h) As used herein the term "NOI" shall mean net income, adjusted for non-cash charges, including, without limitation, depreciation, amortization, and deferred income taxes. The term "NAV" shall mean total assets, less total liabilities. Total assets shall not include (i) deferred charges, (ii) intangibles (including, without limitation, patents, software development costs or goodwill), or (iii) receivables from stockholders, officers, or affiliates. (i) Notwithstanding anything to the contrary contained in this Section 2.09, in no event shall the Security Deposit be reduced to less than the Minimum Security Amount. (j) In the event that Tenant is entitled to a reduction in the amount of the Security Deposit under Sections 2.09(c), (d), (e) or (f) above, Landlord shall (1) if the Security Deposit was paid in cash, return the amount of such reduction to Tenant by check or (2) if the Security Deposit was given in the form of a Letter of Credit, exchange the existing Letter of Credit for a Letter of Credit in the amount of the reduced Security Deposit. If, within thirty (30) days after receiving notice from Tenant that Tenant is entitled to a reduction in the Security Deposit, unless Landlord is disputing the same, Landlord does not return the amount of the reduction to Tenant or, if applicable, cooperate with Tenant in obtaining a new Letter of Credit for the reduced amount of the Security Deposit, then Tenant shall be entitled to interest, at the Interest Rate, on the amount of the reduction of the Security Deposit. "Interest Rate" means the lesser of (i) the prime rate from time to time announced by Citibank, N.A. (or, if Citibank, NA. shall not exist, such other bank in New York, New York, as shall be designated by Landlord in a notice to Tenant) to be in effect at its principal office in New York, New York plus 2% or (ii) the maximum rate permitted by law. 2.10 Expense Escalation. (A) As used in this Lease: (i) "Wage Rate" means the full minimum regular hourly rate of wages including, without limitation, adjustments of every kind, but specifically excluding fringe benefits, 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 (40) hour week to Porters in Class A office buildings pursuant to an Agreement between The Realty Advisory Board on Labor Relations, Incorporated, or any successor thereto ("Realty Advisory Board"), and Local 32B-32J of the Building Service Employees International Union ("Local 32B-32J"), 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 to Porters by Landlord or by Landlord's service contractors over a forty (40) hour week, 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 hours which 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 32B-32J 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 -14- total weekly rate of $135.0O divided by the total number of regular hours of employment, forty or $3.375). (ii) "Base Wage Rate" means the Wage Rate in effect for calendar year 2001. (iii) The term "Porters" means that classification of non-supervisory employees employed in and about the Building who devote a major portion of their time to 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 Local 32B-32J. (iv) "Multiplication Factor" shall mean the product obtained by multiplying the area of the Original Premises (which, for the purposes of this Article, the parties have agreed shall be 21,735 rentable square feet, as the same may be increased or decreased pursuant to the express provisions of this Lease) by one (1). (B) If the Wage Rate for any calendar year during the Term shall be greater than the Base Wage Rate, then Tenant shall pay, as additional rent, an amount (the "Wage Increase Charge") equal to the product obtained by multiplying the Multiplication Factor by the number of cents (including any fraction of a cent) by which the Wage Rage is greater than the Base Wage Rate, such payment to be made in equal monthly installments commencing with the first monthly installments of fixed 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 Section. Landlord shall give Tenant notice of each change in Wage Rate that will be effective to create or change Tenant's obligation to pay the Wage Increase Charge pursuant to the provisions of this Article, which notice shall contain Landlord's calculation of the Wage Increase Charge payable resulting from such increase in Wage Rate. The Wage Increase Charge shall be prorated, if necessary, to correspond with that portion of a calendar year occurring within the Term. Such notice shall be served in accordance with the terms of this Lease and shall be accompanied by such information which shall be reasonably necessary for Tenant to evaluate the accuracy thereof. (C) Every notice given by Landlord pursuant to Paragraph B of this Section shall be conclusive and binding upon Tenant unless (i) within ninety (90) days after the receipt of such notice, Tenant shall notify (a "Dispute Notice") Landlord that it disputes the correctness of the notice, specifying the particular respects in which the notice is claimed to be incorrect and (ii) if such dispute shall not have been settled by agreement, Tenant shall submit the dispute to binding arbitration before the American Arbitration Association in the City of New York, County of New York, within sixty (60) days after the date of the Dispute Notice. If such dispute is submitted to arbitration, the non-prevailing party shall, upon demand, reimburse the prevailing party for any attorney's fees, disbursements and other costs related to the arbitration. Pending the determination of such dispute, Tenant shall pay the Wage Increase Charge in accordance with Landlord's notice without prejudice to Tenant's position of such dispute. In the event such dispute shall be determined in Tenant's favor, Landlord shall, on demand, pay Tenant -15- the amount so overpaid by Tenant plus interest at the Interest Rate, which such interest shall be calculated from the date on which Tenant first paid the disputed Wage Increase Charge. (D) The Wage Rate is intended to be a substitute comparative index of economic costs and inflationary pressures 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 building, whether or not porters are employed in the Building and without regard to whether such employees are members of the union referred to in Paragraph A of this Section. ARTICLE 3 Landlord Covenants 3.01 Landlord Services. (a) Except as specifically provided otherwise herein, from and after the date that Tenant first occupies the Premises for the conduct of Tenant's business, Landlord shall furnish Tenant with the following services (collectively, "Landlord Services"): (i) (A) passenger elevator service to the 19th Floor, with at least three (3) passenger elevators available at all times during Business Hours on Business Days and at least one passenger elevator subject to call at all other times, it being agreed that two of such passenger elevators shall service floors 14 through 19 only and (B) freight elevator service to the Premises and use of the loading dock on a first come-first served basis (i.e., no advance scheduling) from 8:00 am. to 5:00 p.m. on Business Days, and on a reserved basis at all other times upon the payment of Landlord's actual cost for the use of the freight elevator and loading dock including, without limitation, the cost of an operator for the elevator; the use of all elevators shall be on a nonexclusive basis; (ii) reasonable quantities of hot and cold water to the floor(s) on which the Premises are located for core lavatory and cleaning purposes only; if Tenant requires water for any other purpose, Landlord shall furnish cold water at the Building core riser through a capped outlet to be installed at Tenant's expense located on the floor on which the Premises is located (within the core of the Building), and the cost of heating such water, as well as the cost of piping and supplying such water to the Premises, shall be paid by Tenant; Landlord may install and maintain, at Tenant's expense, meters to measure Tenant's consumption of cold water and/or hot water for such other purposes in which event Tenant shall reimburse Landlord for the quantities of cold water and hot water shown on such meters (including Landlord's standard charge for the production of such hot water, if produced by Landlord), on demand; (iii) electrical capacity equal to at least six (6) watts demand load per square foot of rentable space for lighting and receptacles, and six (6) watts demand load per square foot of rentable space for air conditioning; such electrical capacity shall be available at the electrical closet on the floor of the Building on which the Premises is located (it being understood -16- that Tenant shall be responsible for bringing such electrical capacity from the electrical closet to the Premises); subject to Landlord's obligation to provide the electrical capacity set forth herein, in no event shall Tenant's consumption of electricity exceed the capacity of existing feeders to the Building or the risers or wiring serving the Premises, nor shall Tenant be entitled to any unallocated power available in the Building unless, in Landlord's judgment (taking into account the then existing and future needs of other then existing and future tenants, and other needs of the Building), the same is available and necessary for Tenant's use; and (iv) cleaning services in accordance with Exhibit E attached hereto. Landlord shall not be required to perform any (A) extra cleaning work in the Premises required because of (w) carelessness, indifference, misuse or neglect on the part of Tenant, its subtenants or their respective employees or visitors, (x) interior glass partitions or an unusual quantity of interior glass surfaces, (y) non-building standard materials or finishes installed in the Premises and/or (z) the use of the Premises other than during Business Hours on Business Days and/or (B) removal from the Premises and the Building of any refuse of Tenant (x) in excess of that ordinarily accumulated in business office occupancy, including, without limitation, kitchen refuse and/or (y) at times other than Landlord's standard cleaning times. Notwithstanding the foregoing, Landlord shall not be required to clean any portions of the Premises used for preparation, serving or consumption of food or beverages, training rooms, data processing or reproducing operations, private lavatories or toilets or other special purposes requiring greater or more difficult cleaning work than office areas, and Tenant shall retain Landlord's cleaning staff or Landlord's cleaning contractor, as applicable, to perform such cleaning at Tenant's expense. Landlord's cleaning staff or Landlord's cleaning contractor, as applicable, shall have access to the Premises after 6:00 p.m. and before 8:00 a.m. and shall have the right to use, without charge therefor, all light, power and water in the Premises reasonably required to clean the Premises. (b) From and after the date that Tenant first occupies the First Temporary Space, and if Tenant takes occupancy of the Second Temporary Space as provided under Section 1.06(b), from and after the date that Tenant first occupies the Second Temporary Space, Landlord shall furnish Tenant with: (i) the Landlord Services described in Section 3.01(a) above, and (ii) heat, ventilation and air-conditioning to the Temporary Space during Business Hours on Business Days; if Tenant shall require heat, ventilation or air conditioning services at any other times, Landlord shall furnish such service at a rate that reasonably reflects the actual cost to Landlord of providing the service in question, which shall in no event be less than $150.00 per hour, for a minimum of four (4) hours; provided that if other tenants in Building B also have requested that Landlord provide such overtime service, the cost of such overtime service shall be divided pro rata among all tenants requesting such overtime service. Air-conditioning shall only be available from May 1st through October 15th. (iii) Landlord shall deliver to each floor of the Temporary Space 30 tons of air conditioning per floor with adequate condenser water (up to 30 tons) from Landlord's cooling towers to service such air conditioning from May 15th through October 15th on Business Days during Business Hours. Tenant shall have the right to install supplementary or -17- auxiliary air-cooled HVAC equipment to serve the Temporary Space, the specifications and installation of which system shall be subject to Landlord's approval. From May 1st through October 15th, if Tenant requires condenser water from Landlord's cooling towers for more extended hours or on Non-Business Days or on holidays, Landlord will furnish the same, at Tenant's expense, in an amount equal to $150.00 per hour, for a minimum of four (4) hours; provided that if other tenants in Building B also have requested that Landlord provide such overtime service, the cost of such overtime service shall be divided pro rata among all tenants requesting such overtime service. (c) Tenant acknowledges that (i) the 19th Floor Mezzanine shall be used as permitted under Section 1.01(b) herein and (ii) with the exception of electricity and cleaning as described in Sections 3.01(a)(iii) and (iv), the Landlord Services described in Section 3.01(a) above shall not be provided to the 19th Floor Mezzanine. (d) Landlord may stop or interrupt any Landlord Services, electricity, or other service and may stop or interrupt the use of any Building facilities and systems at such times as may be necessary and for as long as may reasonably be required by reason of accidents, strikes, or the making of repairs, alterations or improvements, or inability to secure a proper supply of fuel, gas, steam, water, electricity, labor or supplies, or by reason of any other cause beyond the reasonable control of Landlord. Landlord shall have no liability to Tenant by reason of any stoppage or interruption of any Landlord Service, electricity or other service or the use of any Building facilities and systems for any reason. Landlord shall use reasonable diligence (which shall not include incurring overtime charges) to make such repairs as may be required to machinery or equipment within the Project to provide restoration of any Landlord Services and, where the cessation or interruption of such Landlord Services has occurred due to circumstances or conditions beyond the Project boundaries, to cause the same to be restored by diligent application or request to the provider. (e) Without limiting any of Landlord's other rights and remedies, if Tenant shall be in monetary default beyond any applicable notice and grace period, Landlord shall not be obligated to furnish to the Premises any overtime service outside of Business Hours on Business Days, and Landlord shall have no liability to Tenant by reason of any failure to provide, or discontinuance of, any such service. (f) "Business Hours" means 8:00 a.m. to 6:00 p.m. "Business Days" means all days except Saturday, Sundays, holidays as outlined in the Rules and Regulations (as defined below) and any other days which are either (i) observed by both the federal and the state governments as legal holidays or (ii) designated as a holiday by the applicable building service union employee service contract or operating engineers contract. (g) "Rules and Regulations" means the rules and regulations attached hereto as Exhibit C, as the same may be modified or amended from time to time. If there is any conflict between the provisions of the Rules and Regulations and the provisions of this Lease, the provisions of this Lease will control. Landlord shall not discriminate against Tenant in the promulgation and enforcement of the Rules and Regulations of the Building. -18- (h) Tenant acknowledges that (i) both the 19th Floor and the 19th Floor Mezzanine are serviced by independent heating/cooling units, (specifically seven (7) ten-ton Carrier heating/cooling units and one (1) five-ton Carrier heating/cooling unit) for the purposes of providing heat, air-conditioning and ventilation to the 19th Floor and the 19th Floor Mezzanine and (ii) Landlord shall not be obligated to otherwise provide heat, air-conditioning and ventilation to the 19th Floor or the 19th Floor Mezzanine. Tenant shall maintain, at Tenant's sole cost and expense, the aforementioned independent heating/cooling units. (i) Landlord agrees to continue to operate the Building to the same standard that the Building is operated as of the date of this Lease. ARTICLE 4 Leasehold Improvements; Tenant Covenants 4.01 Initial Improvements. (a) Landlord, at Landlord's expense, shall perform or cause to be performed the initial work described on Exhibit F ("Landlord's Initial Work") in accordance with the provisions thereof. On the Possession Date, Tenant shall accept the Original Premises in its "as is" condition on such date; provided that Landlord's Initial Work shall be substantially complete as required under Section 1.03 above. All other improvements which do not constitute Landlord's Initial Work shall be performed by Tenant at Tenant's expense in accordance with Section 4.02. (b) Tenant agrees to improve the Original Premises and, if Tenant exercises Tenant's Expansion Option, the Expansion Space, in accordance with detailed specifications and working drawings to be prepared by Tenant's architect. The detailed specifications and working drawings are hereinafter referred to as "Tenant's Plans", and the work shown by the Tenant's Plans is hereinafter referred to as "Tenant's Initial Improvements". (c) Tenant shall proceed forthwith to cause Tenant's Plans to be prepared by an architect licensed as such in the State of New York. Tenant's Plans, including structural and mechanical drawings and specifications, shall be prepared at Tenant's sole cost and expense. Tenant shall submit at least three (3) full sets of Tenant's Plans to Landlord for Landlord's approval. Landlord agrees to review Tenant's Plans and to approve the same or make written exceptions thereto within thirty (30) days from the date of the submission of the plans. Landlord agrees not to unreasonably withhold or delay its approval of Tenant's Plans, and failure by Landlord to provide the written exceptions within the thirty (30) day period aforesaid shall be deemed approval of Tenant's Plans. If Landlord disapproves Tenant's Plans, Landlord shall provide Tenant with the written exceptions to Tenant's Plans and Tenant shall revise them and re-submit them to Landlord for approval. Landlord shall review the resubmitted Tenant's Plans and shall approve the same or make written exceptions thereto within fifteen (15) days from the date of the resubmission of the Plans. Upon approval by Landlord of Tenant's Plans, Tenant shall submit the same to the New York City Department of Buildings for approval, to the extent required by law, and for issuance of a building permit to perform the Improvements, if required by -19- law. Tenant acknowledges that preparation of a Fire Protection Plan with respect to the Premises may be a prerequisite to obtaining a sign-off on Tenant's Initial Improvements, and Tenant agrees to prepare the same at its expense if one is required. Landlord agrees, at Tenant's cost and expense, to cooperate with Tenant and Tenant's architect and engineer in providing information needed for the preparation of Tenant's Plans, the Fire Protection Plan, the application for a building permit and all other permits required for the Improvements, and to promptly execute all documents required to be signed by Landlord. (d) Tenant agrees to hire a reputable general contractor, construction manager or subcontractors and materialmen (hereinafter "Contractor(s)") from a list of contractors to be approved by Landlord (which approval shall not be unreasonably withheld or delayed) to perform Tenant's Initial Improvements in a good and workmanlike manner in accordance with (x) the approved Tenant's Plans and any material amendments or additions thereto approved by Tenant and Landlord and all municipal authorities having jurisdiction, and (y) all provisions of Laws and any and all permits and other requirements specified by any ordinance, law or public regulation. Tenant shall cause the Contractor(s) to obtain and maintain throughout the work, Workers' Compensation Insurance, New York State Disability Insurance and comprehensive general liability insurance, including contractual liability coverage, in an amount of not less thin $2 million combined single limit for bodily injury or death for any one occurrence, and for property damage, plus a $5 million umbrella policy. The liability coverage shall name Landlord and Orda Management Corporation as additional insured parties, and Tenant shall deliver to Landlord proper certificates of insurance confirming the coverages described above prior to commencement of Tenant's Initial Improvements. If Tenant acts as its own General Contractor or Construction Manager, Tenant shall obtain and maintain such insurance. All Contractor(s) shall be members of a union affiliated with the building trades in the City of New York that has jurisdiction over the Building and Tenant's Initial Improvements. (e) Unless Tenant shall have elected to forego the same pursuant to Section 2.02(b) above, Landlord agrees to contribute Thirty-Five ($35) Dollars per rentable square foot of the 19th Floor and Twenty ($20) Dollars per rentable square foot of the 19th Floor Mezzanine, for a total of $730,395.00 (subject to any amount added to Landlord's Contribution resulting from the inclusion of the Additional 19th Floor Space in accordance with Section 1.07 of this Lease), toward the cost of the Tenant's Initial Improvements ("Landlord's Contribution"). Landlord shall pay the Landlord's Contribution to Tenant's Contractor(s) over the duration of the construction, no more frequently than monthly, on receipt of a notice from Tenant of the names of the Contractor(s) who performed work or supplied materials with respect to Tenant's Initial Improvements, together with an Application and Certificate for Payment on AIA Document G702 and G703, or similar form, duly executed by the Contractor(s) to be paid, and Tenant's architect, who shall certify to Landlord (i) that the work performed and materials delivered under said application generally conform to Tenant's Plans, (ii) that the amount of such payment request approved by the architect is justified by the work, (iii) the percentage of Tenant's Initial Improvements completed by that date, (iv) that no less than 85% of the cost of work to be paid from Landlord's Contribution (i.e., $620,835.75) has been incurred in respect of hard costs and (v) that in said architect's opinion adequate funds remain to complete Tenant's Initial Improvements. Landlord may retain ten (10%) percent of each requested amount until ten (10) days after (w) substantial completion of Tenant's Initial Improvements, (x) delivery to Landlord -20- of waivers of mechanic's/materialmen's liens from all of Tenant's Contractor(s) for amounts paid to date, and statements from the Contractor(s) stating the balance owed, (y) receipt of invoices, requisitions, canceled checks or other documentary evidence showing payment of the cost of Tenant's Initial Improvements, and (z) receipt of two (2) sets of as-built drawings, or drawings marked "Final", of the improved Premises. For each request for payment made by Tenant, the amount of Landlord's Contribution to be paid to Tenant's Contractor(s) shall be determined by multiplying the amount due to Tenant's Contractors by the Pro Rata Share. "Pro Rata Share" shall mean the ratio of Landlord's Contribution to the total estimated cost of Tenant's Initial Improvements. (f) If Landlord fails to pay any portion of Landlord's Contribution as provided in Section 4.01(e) above within thirty (30) days from receipt of a notice from Tenant, Landlord shall pay to Tenant interest, at the Interest Rate, on the unpaid amount. (g) All fees payable to municipal authorities by reason of Tenant's Initial Improvements, and by reason of any hook-up into the Building's existing fire alarm and communication systems, shall be part of, and not in addition to, the Landlord's Contribution. (h) Tenant shall pay Orda Management Corporation, within ten (10) days after being billed therefor, the reasonable actual out of pocket fees and disbursements paid by Landlord to architects and engineers for reviewing Tenant's Plans; provided, that, in no event shall the cost to Tenant exceed two thousand five hundred ($2,500.00) dollars. (i) From the date of this Lease to the Possession Date, Landlord shall, upon reasonable notice from Tenant, arrange for Tenant and Tenant's architects to have reasonable access to the Premises during Business Hours and on Business Days for the purpose of permitting Tenant's architects and other consultants an opportunity to prepare plans for Tenant's Initial Work. (j) Tenant shall deliver to Landlord, within 30 days after the completion of Tenant's Initial Improvements, five sets of "as-built" drawings thereof prepared and certified by Tenant's architect. During the Term, Tenant shall keep records of Tenant's Initial Improvements including plans and specifications, copies of contracts, invoices, evidence of payment and all other records customarily maintained in the real estate business relating to Tenant's Initial Improvements and the cost of such improvements. Tenant shall, within 30 days after demand by Landlord, furnish to Landlord copies of such records. 4.02 Alterations. (a) Tenant shall make no improvements, changes or alterations in or to the Premises ("Alterations") without Landlord's prior written approval. Provided Tenant is not in default under this Lease beyond any applicable notice and/or cure period, Landlord shall not unreasonably withhold, delay or condition its approval to any Alteration that is not a Material Alteration. "Material Alteration" means an Alteration that (i) is not limited to the interior of the Premises or which affects the exterior (including the appearance) of the Building, (ii) is structural or affects the strength of the Building, (iii) affects the usage or the proper functioning of any of the Building systems, (iv) has a cost greater than $250,000 -21- (v) requires the consent of any Superior Mortgagee or Superior Lessor and/or (vi) requires a building permit. (b) Tenant, in connection with any Alteration, shall comply with the Rules and Regulations applicable thereto. Tenant shall not proceed with any Alteration unless and until Landlord approves Tenant's plans and specifications ("Alteration Plans") therefor in writing. Tenant shall submit at least three (3) full sets of Tenant's plans and specifications to Landlord for Landlord's approval. Landlord shall have thirty (30) days from the submission of Tenant's Alteration Plans to approve or disapprove of such plans. If Landlord fails to approve or disapprove Tenant's Alteration Plans during such period, the same shall be deemed approved. Landlord shall notify Tenant of which fixtures, equipment and improvements must be removed at the expiration of the Term when notifying Tenant of its approval or disapproval of Tenant's Alteration Plans; if Landlord does not so notify Tenant, then Landlord shall not require Tenant to remove such fixtures, equipment and improvements at the expiration of the Term. Any review or approval by Landlord of Tenant's Alteration Plans is solely for Landlord's benefit, and without any representation or warranty to Tenant with respect to the adequacy, correctness or efficiency thereof, its compliance with Laws or otherwise. (c) Tenant shall pay to Landlord upon demand Landlord's reasonable out-of-pocket costs and expenses (including, without limitation, the fees of any architect or engineer employed by Landlord or any Superior Lessor or Superior Mortgagee for such purpose) for reviewing Tenant's Alteration Plans and inspecting Alterations; provided, that in no event shall the cost to Tenant exceed two thousand five hundred ($2,500.00) dollars. (d) Before proceeding with any Alteration that will cost more than $50,000 (exclusive of the costs of decorating work and items constituting Tenant's Property), as estimated by a reputable contractor designated by Landlord, Tenant shall furnish to Landlord one of the following (as selected by Landlord): (i) a cash deposit, (ii) a performance bond and a labor and materials payment bond (issued by a corporate surety licensed to do business in New York reasonably satisfactory to Landlord) or (iii) an irrevocable, unconditional, negotiable letter of credit, issued by a bank and in a form satisfactory to Landlord; each to be equal to 125% of the cost of the Alteration, estimated as set forth above. Any such letter of credit shall be for one year and shall be renewed by Tenant each and every year until the Alteration in question is completed and shall be delivered to Landlord not less than 30 days prior to the expiration of the then current letter of credit, failing which Landlord may present the then current letter of credit for payment. Upon (A) the completion of the Alteration in accordance with the terms of this Section 4.02 and (B) the submission to Landlord of (x) proof evidencing the payment in full for said Alteration, (y) written unconditional lien waivers of mechanics' liens and other liens on the Project from all Contractors performing said Alteration and (z) all submissions required pursuant to Laws, the security deposited with Landlord (or the balance of the proceeds thereof, if Landlord has drawn on the same) shall be returned to Tenant. Upon Tenant's failure properly to perform, complete and fully pay for any Alteration, as determined by Landlord, Landlord may, upon notice to Tenant, draw on the security deposited under this Section 4.02(d) to the extent Landlord deems necessary in connection with said Alteration, the restoration and/or protection of the Premises or the Project and the payment of any costs, damages or expenses resulting therefrom. - 22 - (e) Tenant shall obtain (and furnish copies to Landlord of) all necessary governmental permits and certificates for the commencement and prosecution of Alterations and for final approval thereof upon completion, and shall cause Alterations to be performed in compliance therewith, and in compliance with all Laws and with the Alteration Plans approved by Landlord. Landlord agrees, at Tenant's cost and expense, to cooperate with Tenant and Tenant's architect and engineer in providing information needed for the preparation of Tenant's Alteration Plans, the application for a building permit, if necessary, and the application for all other permits required for Tenant's Alteration Plans, and to promptly execute all documents required to be signed by Landlord. Alterations shall be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the then standards for the Building established by Landlord. Alterations shall be performed by Contractors first approved by Landlord (which approval shall not be unreasonably withheld or delayed); provided, that any Alterations in or to the systems of the Building shall be performed only by the Contractor(s) designated by Landlord. With respect to such Contractors for Building systems (other than heat, ventilation and air conditioning, fire and safety), the Contractor(s) designated by Landlord shall demonstrate to the reasonable satisfaction of Tenant that the cost of the work in question is competitively priced. The performance of any Alteration shall not be done in a manner which would violate Landlord's union contracts affecting the Project, or create any work stoppage, picketing, labor disruption, disharmony or dispute or any interference with the business of Landlord or any tenant or occupant of the Building. Tenant shall immediately stop the performance of any Alteration if Landlord notifies Tenant that continuing such Alteration would violate Landlord's union contracts affecting the Project, or create any work stoppage, picketing, labor disruption, disharmony or dispute or any interference with the business of Landlord or any tenant or occupant of the Building. (f) Throughout the performance of Alterations, Tenant shall carry worker's compensation insurance in statutory limits, "all risk" Builders Risk coverage and general liability insurance, with completed operation endorsement, for any occurrence in or about the Project, under which Landlord and its agent and any Superior Lessor and Superior Mortgagee whose name and address have been furnished to Tenant shall be named as parties insured, in such limits as Landlord may reasonably require, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with evidence that such insurance is in effect at or before the commencement of Alterations and, on request, at reasonable intervals thereafter during the continuance of Alterations. (g) Should any mechanics' or other liens be filed against any portion of the Project by reason of the acts or omissions of, or because of a claim against, Tenant or anyone claiming under or through Tenant, Tenant shall cause the same to be canceled or discharged of record by bond or otherwise within 30 days after notice from Landlord. If Tenant shall fail to cancel or discharge said lien or liens within said 30 day period, Landlord may cancel or discharge the same and, upon Landlord's demand, Tenant shall reimburse Landlord for all costs incurred in canceling or discharging such liens, together with interest thereon at the Interest Rate from the date incurred by Landlord to the date of payment by Tenant, such reimbursement to be made within 10 days after receipt by Tenant of a written statement from Landlord as to the amount of such costs. Tenant shall indemnify and hold Landlord harmless from and against all costs (including, without limitation, attorneys' fees and disbursements and costs of suit), losses, - 23 - liabilities or causes of action arising out of or relating to any Alteration, including, without limitation, any mechanics' or other liens asserted in connection with such Alteration, unless such costs, losses, liabilities or causes of action result solely from the willful negligence of Landlord or Landlord's agents. (h) Tenant shall deliver to Landlord, within 30 days after the completion of an Alteration, five sets of "as-built" drawings thereof prepared and certified by Tenant's architect. During the Term, Tenant shall keep records of Material Alterations including plans and specifications, copies of contracts, invoices, evidence of payment and all other records customarily maintained in the real estate business relating to Alterations and the cost thereof and shall, within 30 days after demand by Landlord, furnish to Landlord copies of such records. (i) All Alterations to and Fixtures installed by Tenant in the Premises shall be fully paid for by Tenant in cash and shall not be subject to conditional bills of sale, chattel mortgages, or other title retention agreements. (j) [INTENTIONALLY OMITTED] 4.03 Landlord's and Tenant's Property. (a) All fixtures, equipment, improvements and appurtenances attached to (so that any such fixtures, equipment, improvements and appurtenances are incorporated into the Premises) or built into the Premises, whether or not at the expense of Tenant (collectively, "Fixtures"), shall be and remain a part of the Premises and shall not be removed by Tenant. All Fixtures constituting Improvements and Betterments shall be the property of Tenant during the Term and, upon expiration or earlier termination of this Lease, shall become the property of Landlord. All Fixtures other than Improvements and Betterments shall, upon installation, be the property of Landlord. "Improvements and Betterments" means (i) all Fixtures, if any, installed at the expense of Tenant, whether installed by Tenant or by Landlord (i.e., excluding any Fixtures paid for by Landlord directly or by way of an allowance) and (ii) all carpeting in the Premises. (b) All movable partitions, business and trade fixtures, machinery and equipment, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively, "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided, that if any Tenant's Property is removed, Tenant shall repair any damage to the Premises or to the Building resulting from the installation and/or removal thereof. Notwithstanding the foregoing, any equipment or other property identified in this Lease or in any leasehold improvement agreement as having been paid for with any allowance or credit granted by Landlord to Tenant shall not be considered Tenant's Property and shall be and remain a part of the Premises, shall, upon the expiration or earlier termination of this Lease, be the property of Landlord and shall not be removed by Tenant. (c) At or before the Expiration Date, or within 15 days after any earlier termination of this Lease, Tenant, at Tenant's expense, shall remove Tenant's Property from the Premises (except such items thereof as Landlord shall have expressly permitted to remain, which shall become the property of Landlord), and Tenant shall repair any damage to the Premises or the - 24 - Building resulting from any installation and/or removal of Tenant's Property. Any items of Tenant's Property which remain in the Premises after the Expiration Date, or more than 15 days after an earlier termination of this Lease, may, at the option of Landlord, be deemed to have been abandoned, and may be retained by Landlord as its property or disposed of by Landlord, without accountability, in such manner as Landlord shall determine, at Tenant's expense. (d) With respect to Tenant's Initial Improvements and Tenant's Expansion Space Alterations, as well as any other Alterations made pursuant to this Article 4 during the Term of this Lease, Landlord, by notice given to Tenant at any time prior to the Expiration Date or not later than 30 days after any earlier termination of this Lease, may require Tenant, notwithstanding Section 4.03(a), to remove all or any Fixtures that do not constitute a standard office installation, such as, by way of example only, kitchens, vaults, safes, raised flooring and interior stairwells; provided, however, that the removal of all or any Fixtures that constitute a standard office installation shall be governed by Section 4.02(b) above. If Landlord shall give such notice, then Tenant, at Tenant's expense, prior to the Expiration Date, or, in the case of an earlier termination of this Lease, within 15 days after the giving of such notice by Landlord, shall remove the same from the Premises, shall repair and restore the Premises to the condition existing prior to installation thereof and shall repair any damage to the Premises or to the Building due to such removal. 4.04 Access and Changes to Building. (a) Landlord reserves the right, at any time, to make changes in or to the Project as Landlord may deem necessary or desirable, and Landlord shall have no liability to Tenant therefor, provided any such change does not deprive Tenant of access to the Premises and does not affect the nature of the Project. Landlord may install and maintain pipes, fans, ducts, wires and conduits within or through the walls, floors or ceilings of the Premises. In exercising its rights under this Section 4.04, Landlord shall use reasonable efforts to minimize any interference with Tenant's use of the Premises for the ordinary conduct of Tenant's business and Landlord shall use reasonable efforts to cooperate with Tenant to minimize the visual appearance of any such pipes, fans, ducts, wires and conduits placed in the ceiling of the Original Premises. Tenant shall not have any easement or other right in or to the use of any door or any passage or any concourse or any plaza connecting the Building with any subway or any other building or to any public conveniences, and the use of such doors, passages, concourses, plazas and conveniences may, without notice to Tenant, be regulated or discontinued at any time by Landlord. (b) Except for the space within the inside surfaces of all walls, hung ceilings, floors, windows and doors bounding the Premises, all of the Building, including, without limitation, exterior Building walls, core corridor walls and doors and any core corridor entrance, any terraces or roofs adjacent to the Premises, and any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof as well as access thereto through the Premises, are reserved to Landlord and are not part of the Premises. Landlord reserves the right to name the Building and to change the name or address of the Building at any time and from time to time. (c) Landlord shall have no liability to Tenant if at any time any windows of the Premises are either temporarily darkened or obstructed by reason of any repairs, - 25 - improvements, maintenance and/or cleaning in or about the Building (or permanently darkened or obstructed if required by Law) or covered by any translucent material for the purpose of energy conservation, or if any part of the Building, other than the Premises, is temporarily or permanently closed or inoperable. (d) Landlord and persons authorized by Landlord shall have the right, upon prior notice to Tenant (except in an emergency), to enter the Premises (together with any necessary materials and/or equipment), to inspect or perform such work as Landlord may reasonably deem necessary or to exhibit the Premises to prospective purchasers or others or for any other purpose as Landlord may deem necessary or desirable and, during Business Hours during the last 18 months of the Term, to prospective tenants. Landlord shall have no liability to Tenant by reason of any such entry. Landlord shall not be required to make any improvements or repairs of any kind or character to the Premises during the Term, except as otherwise set forth in this Lease. 4.05 Repairs. Tenant shall keep the Premises (including, without limitation, all Fixtures) in good condition and, upon expiration or earlier termination of the Term, shall surrender the same to Landlord in the same condition as when first occupied, reasonable wear and tear excepted. Tenant's obligation shall include, without limitation, the obligation to repair all damage caused by Tenant, its agents, employees, invitees and licensees to the equipment and other installations in the Premises or anywhere in the Building. Any maintenance, repair or replacement to the windows (including, without limitation, any solar film attached thereto), the Building systems, the Building's structural components or any areas outside the Premises and which is Tenant's obligation to perform shall be performed by Landlord at Tenant's expense. Tenant shall not commit or allow to be committed any waste or damage to any portion of the Premises or the Building. 4.06 Compliance with Laws. (a) Tenant shall comply with all laws, ordinances, rules, orders and regulations (present, future, ordinary, extraordinary, foreseen or unforeseen) of any governmental, public or quasi-public authority and of the New York Board of Underwriters, the New York Fire Insurance Rating Organization and any other entity performing similar functions, at any time duly in force (collectively "Laws"), attributable to any work, installation, occupancy, use or manner of use by Tenant of the Premises or any part thereof. Nothing contained in this Section 4.06 shall require Tenant to make any structural changes unless the same are necessitated by reason of the use by Tenant of the Premises in a manner or for purposes other than normal and customary ordinary office purposes. Tenant shall procure and maintain all licenses and permits required for its business. (b) Anything contained in this Lease to the contrary notwithstanding, as part of Tenant's Initial Improvements, Tenant shall perform all work and make all installations necessary in order to fully sprinkler the Premises in compliance with the provisions of Local Law 5 of the New York City Administrative Code, as approved January 18, 1973, as amended from time to time (whether or not the Building is sprinklered or required to be sprinklered by such law). - 26 - (c) Except to the extent the same is Tenant's responsibility pursuant to Section 4.06(a) or (b) above or elsewhere in this Lease, Landlord shall comply with all Laws applicable to the common areas of the Building generally made available to tenants of the Building, but only if Tenant's use of the Premises shall be materially and adversely affected by non-compliance therewith, subject to Landlord's right to contest the applicability or legality of such Laws. (d) Solely with respect to the 19th Floor and the First Temporary Space, Landlord hereby represents to Tenant that, as of the date of this Lease, to its knowledge, without due inquiry, all base building systems, including the elevator cab and elevator system upgrades and the renovation of the building lobby, are in compliance with or are exempt from such compliance under the Americans with Disabilities Act ("ADA"). (e) Solely with respect to the Original Premises and the First Temporary Space, Landlord hereby represents to Tenant that, as of the date of this Lease, to its knowledge, without due inquiry, the sprinkler system servicing the Premises is in good-working order and is in compliance with the provisions of Local Law 5 of the New York City Administrative Code, as approved on January 18, 1973 and as amended from time to time and with the provisions of any other applicable rules and regulations of the City of New York. (f) Landlord hereby represents to Tenant that, as of the date of this Lease, to its knowledge, without due inquiry, there are no Hazardous Materials, as hereinafter defined, in the Original Premises or the First Temporary Space. "Hazardous Materials," as used herein, shall mean any flammables, explosives, radioactive materials, hazardous wastes, hazardous and toxic substances or related materials, asbestos or any materials containing asbestos, or any other substance or materials as defined by any Federal, state or local environmental law, ordinance, rule or regulation, including, without limitation, the Comprehensive Environmental Response Liability Act, as amended, the Resource Conservation and Recovery Act, as amended, and in the regulations adopted and publications promulgated pursuant to each of the foregoing, except that the term "Hazardous Materials" shall not include any such materials in amounts typically found in office buildings of a similar age and character as Building A. (g) Solely with respect to the 19th Floor and the First Temporary Space, Landlord represents to Tenant that, as of the date of this Lease, to its knowledge, without due inquiry, Landlord has not received any notice of violations from the New York City Department of Buildings, which violations, if present, would prevent Tenant from performing Tenant's Initial Improvements or from operating in the 19th Floor or the First Temporary Space as permitted under this Lease. (h) Except to the extent the same is Tenant's responsibility pursuant to Section 4.06(a) or (b) above or elsewhere in this Lease, Landlord shall comply with all Laws in effect as of the Possession Date applicable to the Original Premises prior to giving Tenant vacant possession of the Original Premises. - 27 - 4.07 Tenant Advertising. Tenant shall not use, and shall cause each of its Affiliates not to use, the name or likeness of the Building or the Project in any advertising (by whatever medium) without Landlord's consent (not to be unreasonably withheld or delayed). 4.08 Right to Perform Tenant Covenants. If Tenant fails to perform any of its obligations under this Lease, Landlord, any Superior Lessor or any Superior Mortgagee (each, a "Curing Party") may perform the same at the expense of Tenant (a) immediately and without notice in the case of emergency or in case such failure interferes with the use of space by any other tenant in the Building or with the efficient operation of the Building or may result in a violation of any Law or in a cancellation of any insurance policy maintained by Landlord and (b) in any other case if such failure continues beyond any applicable grace period. If a Curing Party performs any of Tenant's obligations under this Lease, Tenant shall pay to Landlord (as Additional Charges) the costs thereof, together with interest at the Interest Rate from the date incurred by the Curing Party until paid by Tenant, within 10 days after receipt by Tenant of a statement as to the amounts of such costs. If the Curing Party effects such cure by bonding any lien which Tenant is required to bond or otherwise discharge, Tenant shall obtain and substitute a bond for the Curing Party's bond and shall reimburse the Curing Party for the cost of the Curing Party's bond. 4.09 Improvements to Temporary Space. (a) Landlord, at Landlord's expense, has performed in the First Temporary Space the work described on Exhibit G ("Landlord's Temporary Space Work") in accordance with the provisions thereof. On the First Temporary Space Occupancy Date, Tenant shall accept the First Temporary Space in its "as is" condition on such date. All other improvements to the First Temporary Space which do not constitute Landlord's Temporary Space Work shall be performed by Tenant at Tenant's expense in accordance with Section 4.02 or, if applicable, in accordance with Section 1.08. (b) If applicable, Landlord, at Landlord's expense, shall perform or cause to be performed in the Second Temporary Space, Landlord's Temporary Space Work in accordance with the provisions of Exhibit G. All initial improvements to the Second Temporary Space which do not constitute Landlord's Temporary Space Work shall be performed by Tenant at Tenant's expense in accordance with Section 4.02. ARTICLE 5 Assignment and Subletting 5.01 Assignment; Etc. (a) Subject to Section 5.02, and except as expressly set forth otherwise in this Article 5, neither this Lease nor the term and estate hereby granted, nor any part hereof or thereof shall be assigned, mortgaged, pledged, encumbered or otherwise transferred voluntarily, involuntarily, by operation of law or otherwise, and neither the Premises, nor any part thereof shall be subleased, be licensed, be used or occupied by any person or entity other than Tenant or be encumbered in any manner by reason of any act or omission on the part of Tenant, and no rents or other sums receivable by Tenant under any sublease of all or any part of - 28 - the Premises shall be assigned or otherwise encumbered, without the prior consent of Landlord. The dissolution or direct or indirect transfer of control of Tenant (however accomplished including, by way of example, the admission of new partners or members or withdrawal of existing partners or members, or transfers of interests in distributions of profits or losses of Tenant, issuance of additional stock, redemption of stock, stock voting agreement, or change in classes of stock) shall be deemed an assignment of this Lease regardless of whether the transfer is made by one or more transactions, or whether one or more persons or entities hold the controlling interest prior to the transfer or afterwards. An agreement under which another person or entity becomes responsible for all or a portion of Tenant's obligations under this Lease shall be deemed an assignment of this Lease. No assignment or other transfer of this Lease and the term and estate hereby granted, and no subletting of all or any portion of the Premises shall relieve Tenant of its liability under this Lease or of the obligation to obtain Landlord's prior consent to any further assignment, other transfer or subletting. Any attempt to assign this Lease or sublet all or any portion of the Premises in violation of this Article 5 shall be null and void. (b) Notwithstanding Section 5.01(a), without the consent of Landlord, this Lease may be assigned to (i) an entity created by merger, reorganization or recapitalization of or with Tenant or (ii) a purchaser of all or substantially all of Tenant's assets; provided, in the case of both clause (i) and clause (ii), that (A) Landlord shall have received a notice of such assignment from Tenant, (B) the assignee assumes by written instrument reasonably satisfactory to Landlord all of Tenant's obligations under this Lease, (C) such assignment is for a valid business purpose and not to avoid any obligations under this Lease, and (D) the assignee shall have, immediately after giving effect to such assignment, a NAV that is at least equal to the greater of (i) the NAV shown on Exhibit K attached hereto and made a part hereof or (ii) the NAV of the Tenant named herein (i.e., ACTV, Inc.) at the time of such assignment. (c) Notwithstanding Section 5.01(a), without the consent of Landlord, Tenant may assign this Lease or sublet all or any part of the Premises to an Affiliate of Tenant; provided, that (i) Landlord shall have received a notice of such assignment or sublease from Tenant; and (ii) in the case of any such assignment. (A) the assignment is for a valid business purpose and not to avoid any obligations under this Lease, and (B) the assignee assumes by written instrument reasonably satisfactory to Landlord all of Tenant's obligations under this Lease. "Affiliate" means, any person or entity which controls or is controlled by Tenant. "Control" means ownership or voting control by Tenant, directly or indirectly, of 51% or more of the voting stock, partnership interests or other beneficial ownership interests of the entity in question. The transfer of the outstanding capital stock of any corporate Tenant (by persons or parties other than "insiders" within the meaning of the Securities Exchange Act of 1934, as amended) through the "over-the-counter" market or any recognized national securities exchange shall not be considered in the determination of whether control has been transferred. (d) Tenant represents to Landlord that, as of the date of this Lease, the financial statement attached hereto as Exhibit K (the "Financial Statement") is a true and correct statement of Tenant's NAV as of the date thereof Simultaneously with the delivery of the Expansion Notice to Landlord in accordance with Section 10.01, Tenant shall deliver a secretary's certificate to Landlord attaching thereto a true and correct statement of Tenant's NAV dated no earlier than sixty (60) days prior to the date of the Expansion Notice ("Updated Financial - 29 - Statement"). If Tenant's NAV as set forth in the Updated Financial Statement is not at least 60% of Tenant's NAV on the date set forth in the Financial Statement, Landlord shall have the right to terminate this Lease upon notice to Tenant given within thirty (30) days of receipt of Tenant's Updated Financial Statement. Such notice shall set forth a date for termination of this Lease, which date shall be no sooner than 90 days and no later than 120 days from the date of such notice. 5.02 Landlord's Option Right. (a) If Tenant desires to assign this Lease or sublet all or a portion of the Premises (other than in accordance with Sections 5.01(b) or 5.01(c)), Tenant shall give to Landlord notice ("Tenant's Offer Notice") thereof, specifying (i) in the case of a proposed subletting, the location of the space to be sublet and the terms of the subletting of such space, (ii) (A) in the case of a proposed assignment, Tenant's good faith offer of the consideration Tenant desires to receive or pay for such assignment or (B) in the case of a proposed subletting, Tenant's good faith offer of the fixed annual rent which Tenant desires to receive for such proposed subletting (assuming that a subtenant will pay for Taxes, expense escalations and electricity as described in Article 2 herein in the same manner, and utilizing the same base year or base amount, as Tenant pays for such amounts under this Lease) and (iii) the proposed assignment or sublease commencement date. (b) Tenant's Offer Notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at Landlord's option, (i) sublease such space from Tenant or (ii) have this Lease assigned to it or terminate this Lease (if the proposed transaction is an assignment or a sublease of all or substantially all of the Premises or a sublease of a portion of the Premises which, when aggregated with other subleases then in effect, covers all or substantially all of the Premises). Said option may be exercised by Landlord by notice to Tenant within 45 days after a Tenant's Offer Notice, together with all information required pursuant to Section 5.02(a), has been given by Tenant to Landlord. (c) If Landlord exercises its option under Section 5.02(b)(ii) to terminate this Lease, then this Lease shall terminate on the proposed assignment or sublease commencement date specified in the applicable Tenant's Offer Notice and all Rent shall be paid and apportioned to such date. (d) If Landlord exercises its option under Section 5.02(b)(ii) to have this Lease assigned to it (or its designee), then Tenant shall assign this Lease to Landlord (or Landlord's designee) by an assignment in form and substance reasonably satisfactory to Landlord, effective on the proposed assignment or sublease commencement date specified in the applicable Tenant's Offer Notice. Tenant shall not be entitled to consideration or payment from Landlord (or Landlord's designee) in connection with any such assignment. If the Tenant's Offer Notice provides that Tenant will pay any consideration or grant any concessions in connection with the proposed assignment, then Tenant shall pay such consideration and/or grant any such concessions to Landlord (or Landlord's designee) on the date Tenant assigns this Lease to Landlord (or Landlord's designee). (e) [INTENTIONALLY OMITTED] - 30 - (f) If Landlord exercises its option under Section 5.02(b)(i) to sublet the Premises, such sublease to Landlord or its designee (as subtenant) shall be in form and substance reasonably satisfactory to Landlord at the lower of (i) the rental rate per rentable square foot of Fixed Rent and Additional Charges then payable pursuant to this Lease or (ii) the rental set forth in the applicable Tenant's Offer Notice with respect to such sublet space, and shall be for the term set forth in the applicable Tenant's Offer Notice, and: (A) shall be subject to all of the terms 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 5.02(f); (B) shall be upon the same terms and conditions as those contained in the applicable Tenant's Offer Notice and otherwise on the terms 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 5.02(f); (C) shall permit the sublessee, without Tenant's consent, freely to assign such sublease or any interest therein or to sublet all or any part of the space covered by such sublease and to make any and all alterations and improvements in the space covered by such sublease; (D) shall provide that any assignee or further subtenant of Landlord or its designee may, at the election of Landlord, make alterations, decorations and installations in such space or any part thereon any or all of which 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 caused by such removal; and (E) shall provide that (1) 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, (2) any assignment or subletting by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord shall deem appropriate, (3) Landlord, at Tenant's expense, may make such alterations as may be required or deemed necessary by Landlord to demise separately the subleased space and to comply with any Laws relating to such demise, and (4) at the expiration of the term of such sublease, Tenant shall 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 such space in good order and condition. (g) If Landlord exercises its option under Section 5.02(b)(i) to sublet the Premises (or to have the Premises sublet to its designee) or if Landlord exercises its option under Section 5.02(b)(ii) to have this Lease assigned to it (or its designee) then Tenant shall not have any liability hereunder arising from, in connection with or relating to any default of such sublessee or assignee including, without limitation, the failure by such sublessee or assignee to pay any rent due thereunder (but such release of Tenant shall not operate to relieve the assignee from any liability for which Tenant should otherwise be liable). - 31 - (h) In the case of a proposed sublease, Tenant shall not sublet any space to a third party at a rental which is less (on a per rentable square foot basis) than the rental (on a per rentable square foot basis) specified in Tenant's Offer Notice with respect to such space, without complying once again with all of the provisions of this Section 5.02 and re-offering such space to Landlord at such lower rental. In the case of a proposed assignment, Tenant shall not assign this Lease to a third party where Tenant pays greater consideration or grants a greater concession to such third party for such assignment than the consideration offered to be paid or concession offered to be granted to Landlord in Tenant's Offer Notice without complying once again with all of the provisions of this Section 5.02 and re-offering to assign this Lease to Landlord and pay such consideration or grant such concession to Landlord. (i) If Landlord fails to respond to Tenant's Offer Notice within the 45 days after such Tenant's Offer Notice, together with all information required pursuant to Section 5.02(a), has been given by Tenant to Landlord, Landlord shall be deemed to have declined Tenant's offer; provided, that 15 days prior to the expiration of such 45 day period, Tenant shall send a second notice to Landlord with the phrase "Failure to respond shall be deemed to be a waiver of Landlord's Option Right under Section 5.02 of the Lease" in bold lettering at the top of such notice. (i) Landlord acknowledges and agrees that the foregoing provisions of Section 5.02 shall not apply to an assignment subject to Section 5.01(b) and Section 5.01(c) above. 5.03 Assignment and Subletting Procedures. (a) If Tenant delivers to Landlord a Tenant's Offer Notice with respect to any proposed assignment of this Lease or subletting of all or any portion of the Premises and Landlord does not timely exercise any of its options under Section 5.02, and Tenant thereafter desires to assign this Lease or sublet the Premises as specified in Tenant's Offer Notice, Tenant shall notify Landlord (a "Transfer Notice") of such desire, which notice shall be accompanied by (i) a copy of the proposed assignment or sublease and all related agreements, the effective date of which shall be at least 30 days after the giving of the Transfer Notice, (ii) 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 Premises, (iii) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial statement and (iv) such other information as Landlord may reasonably request, and Landlord's consent to the proposed assignment or sublease shall not be unreasonably withheld, delayed or conditioned provided that: (i) Such Transfer Notice shall be delivered to Landlord within three months after the delivery to Landlord of the applicable Tenant's Offer Notice. (ii) In Landlord's reasonable judgment the proposed assignee or subtenant will use the Premises in a manner that (A) is in keeping with the then standards of the Building, (B) is limited to the use expressly permitted under this Lease, and (C) will not violate any negative covenant then in effect as to use contained in any other Lease of space in the Building. - 32 - (iii) The proposed assignee or subtenant is, in Landlord's reasonable judgment, a reputable person or entity of good character and with sufficient financial worth considering the responsibility involved. (iv) Neither the proposed assignee or sublessee, nor any Affiliate of such assignee or sublessee, is then an occupant of any part of the Building. (v) The proposed assignee or sublessee is not a person with whom Landlord is then actively negotiating or has within the prior 3 months negotiated to lease space in the Building. (vi) The form of the proposed sublease shall be reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article 5. (vii) There shall not be more than 1 subtenant of the Original Premises and I subtenant of the Expansion Space and each such sublease shall not be for less than 5,000 rentable square feet. (viii) The aggregate rent to be paid by the proposed subtenant is not less than the fair rental value of the sublet space as sublet space (as reasonably determined by Landlord). (ix) Tenant shall reimburse Landlord on demand for any reasonable out-of-pocket costs incurred by Landlord in connection with said assignment or sublease, including, without limitation, the costs of making investigations as to the acceptability of the proposed assignee or subtenant, and legal costs incurred in connection with the granting of any requested consent. If Landlord denies Landlord's consent to the proposed assignment or sublease under this Section 5.03(a), Landlord shall specify the reasons for such denial, provided, however, that Landlords' failure to so specify such reasons shall not impose upon Landlord any obligation to consent to such proposed assignment or sublease nor result in any liability to Landlord in respect thereof. (b) If Landlord consents to a proposed assignment or sublease and Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within 45 days after the giving of such consent, then Tenant shall again comply with this Article 5 before assigning this Lease or subletting all or part of the Premises. (c) If Landlord fails to respond to a Transfer Notice within 35 days after such Transfer Notice, together with all information required pursuant to Section 5.03(a), has been given by Tenant to Landlord, Landlord shall be deemed to have consented to such proposed assignment or subletting; provided, that 5 days prior to the expiration of such 35 day period, Tenant shall send a second notice to Landlord with the phrase "Failure to respond shall be deemed consent to the assignment or subletting proposed in Tenant's Transfer Notice" in bold lettering at the top of such notice. - 33 - (d) If Tenant delivers to Landlord a Transfer Notice, together with all information required under Section 5.03(a) above, at the same time that Tenant delivers Tenant's Offer Notice as required under Section 5.02 above, then Landlord shall either (i) exercise its options under Section 5.02 or (ii) approve or deny (and, in the case of a denial, specifying the reasons for such denial; subject to the last sentence of subsection (a) above,) Tenant's request to assign this Lease or sublet the Premises under the provisions of Section 5.03 within 45 days after Tenant's Offer Notice, together with all information required pursuant to Section 5.02(a), and the Transfer Notice, together with all information required pursuant to Section 5.03(a), have been given by Tenant to Landlord. If Landlord fails to respond within 45 days after receiving Tenant's Offer Notice, together with all information required pursuant to Section 5.02(a) and the Transfer Notice, together with all information required pursuant to Section 5.03(b), Landlord shall be deemed to have consented to such proposed assignment or subletting; provided, that 15 days prior to the expiration of such 45 day period, Tenant shall send a second notice to Landlord with the phrase "Failure to respond shall be deemed to be a waiver of Landlord's Option Right under Section 5.02 of the Lease and consent to the assignment or subletting proposed in Tenant's Transfer Notice (such Tenant's Office Notice and Transfer Notice having been delivered simultaneously)" in bold lettering at the top of such notice. 5.04 General Provisions. (a) If this Lease is assigned, whether or not in violation of this Lease, Landlord may collect rent from the assignee. If the Premises or any part thereof are sublet or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant, and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected against Rent, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 5.01(a), or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance of Tenant's obligations under this Lease. (b) No assignment or transfer shall be effective until the assignee delivers to Landlord (i) evidence that the assignee, as Tenant hereunder, has complied with the requirements of Sections 7.02 and 7.03, and (ii) an agreement in form and substance satisfactory to Landlord whereby the assignee assumes Tenant's obligations under this Lease. (c) Notwithstanding any assignment or transfer, whether or not in violation of this Lease, and notwithstanding the acceptance of any Rent by Landlord from an assignee, transferee, or any other party, the original named Tenant and each successor Tenant shall remain fully liable for the payment of the Rent and the performance of all of Tenant's other obligations under this Lease. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant shall not be discharged, released or impaired in any respect by any agreement made by Landlord extending the time to perform, or otherwise modifying, any of the obligations of Tenant under this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of Tenant under this Lease. (d) Each subletting by Tenant shall be subject to the following: - 34 - (i) No subletting shall be (x) for a term (including any renewal or extension options contained in the sublease) ending later than one day prior to the Expiration Date or (y) for less than (A) 5,000 rentable square feet in the Original Premises and (B) 4,000 rentable square feet in the Expansion Space except for subleases to Affiliates. Tenant shall not be permitted to have more than one (1) subtenant of the Premises at any time; provided, however, that if Tenant exercises Tenant's Expansion Option, Tenant shall be permitted to have no more than one (1) subtenant in the Expansion Space and no more than one (1) subtenant (other than Affiliates) in the Original Premises at any time. (ii) No sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until there has been delivered to Landlord, both (A) an executed counterpart of such sublease, and (B) a certificate of insurance evidencing that (x) Landlord is an additional insured under the insurance policies required to be maintained by occupants of the Premises pursuant to Section 7.02, and (y) there is in full force and effect, the insurance otherwise required by Section 7.02. (iii) Each sublease shall provide that it is subject and subordinate to this Lease, and that in the event of termination, reentry or dispossess by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as 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 be liable for, subject to or bound by any item of the type that a Successor Landlord is not so liable for, subject to or bound by in the case of an attornment by Tenant to a Successor Landlord under Section 6.01(a). (e) Each sublease shall provide that the subtenant may not assign its rights thereunder or further sublet the space demised under the sublease, in whole or in part, without complying with all of the terms and conditions of this Article 5, including, without limitation, Section 5.05, which for purposes of this Section 5.04(e) shall be deemed to be appropriately modified to take into account that the transaction in question is an assignment of the sublease or a further subletting of the space demised under the sublease, as the case may be. (f) Tenant shall not publicly advertise the availability of the Premises or any portion thereof as sublet space or by way of an assignment of this Lease, without first obtaining Landlord's consent, which consent shall not be unreasonably withheld, conditioned or delayed, provided that Tenant shall in no event advertise the rental rate or any description thereof. 5.05 Assignment and Sublease Profits. (a) If the aggregate of the amounts payable as fixed rent and as additional rent on account of Taxes and electricity by a subtenant under a sublease of the Premises and the amount of any Other Sublease Consideration payable to Tenant by such subtenant, whether received in a lump-sum payment or otherwise, shall be in excess of Tenant's Basic Cost therefor at that time then, promptly after the collection thereof, Tenant shall pay to Landlord in monthly installments as and when collected, as Additional Charges, 50% of such excess. Tenant shall deliver to Landlord within 60 days after the end of each calendar year and within 60 days after the expiration or earlier termination of this Lease a statement specifying each sublease in effect during such calendar year or partial calendar year, the - 35 - rentable area demised thereby, the term thereof and a computation in reasonable detail showing the calculation of the amounts paid and payable by the subtenant to Tenant, and by Tenant to Landlord, with respect to such sublease for the period covered by such statement. "Tenant's Basic Cost" for sublet space at any time means the sum of (i) the portion of the Fixed Rent (as escalated pursuant to Section 2.10 of this Lease) and Tax Payments which is attributable to the sublet space, plus (ii) the amount payable by Tenant on account of electricity in respect of the sublet space, plus (iii) the amount of any costs reasonably incurred by Tenant in making changes in the layout and finish of the sublet space for the subtenant amortized on a straight-line basis over the term of the sublease or of Tenant's cash contribution to the subtenant in lieu thereof plus (iv) the amount of any reasonable brokerage commissions and reasonable legal fees paid by Tenant in connection with the sublease amortized on a straight-line basis over the term of the sublease. "Other Sublease Consideration" means all sums paid for the furnishing of services by Tenant and the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture or other personal property less, in the case of the sale thereof the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns. (b) Upon any assignment of this Lease, Tenant shall pay to Landlord 50% of the Assignment Consideration received by Tenant for such assignment, after deducting therefrom customary and reasonable closing expenses. "Assignment Consideration" means an amount equal to all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, without limitation, sums paid for the furnishing of services by Tenant and the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property, less, in the case of a sale thereof the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns). (c) This Section 5.05 shall not apply to any assignment or subletting pursuant to Section 5.01(b) or (c) of this Lease. ARTICLE 6 Subordination; Default; Indemnity 6.01 Subordination. (a) This Lease is subject and subordinate to each mortgage (a "Superior Mortgage") and each underlying lease (a "Superior Lease") which may now or hereafter affect all or any portion of the Project or any interest therein; provided that the Superior Mortgagee under such Superior Mortgage or Superior Lessor under such Superior Lease shall have executed and delivered a non-disturbance and attornment agreement substantially to the effect that so long as Tenant is not in default hereunder beyond any applicable notice and grace periods, (i) this Lease will not be terminated or cut off nor shall Tenant's possession hereunder be disturbed by enforcement of any rights given to such Superior Mortgagee or Superior Lessor pursuant to such Superior Mortgage or Superior Lease, and (ii) such Superior Mortgagee or Superior Lessor shall recognize Tenant as the tenant under this Lease. The lessor under a Superior Lease is called a "Superior Lessor" and the mortgagee under a Superior Mortgage is called a "Superior Mortgagee". Tenant shall execute, acknowledge and deliver any - 36 - instrument reasonably requested by Landlord, a Superior Lessor or Superior Mortgagee to evidence such subordination, in a form substantially the same as Exhibit H attached hereto but no such instrument shall be necessary to make such subordination effective. Notwithstanding anything contained in this Section 6.01 to the contrary, if any Superior Mortgagee or Superior Lessee executes and delivers a non-disturbance and attornment agreement either (i) in the form herein described and such agreement is not in any material respect inconsistent with the provisions of this Lease or (ii) in a form which is not in any material respect less favorable to Tenant as the non-disturbance and attornment agreement executed and delivered contemporaneously herewith by Tenant and the existing Superior Mortgagee or Superior Lessor, as applicable, and Tenant either fails or refuses to execute and deliver such agreement within 10 days after delivery of such agreement to Tenant, then this Lease shall automatically and without further act be deemed to be subject and subordinate to such Superior Mortgage or Superior Lease and such non-disturbance and attornment agreement shall then be deemed to be in effect with respect to such Superior Mortgage or Superior Lease. Tenant acknowledges and agrees that simultaneously herewith Tenant and the existing Superior Mortgagee and the existing Superior Lessor have executed and exchanged non-disturbance and attornment agreements which satisfy the requirements of this Section 6.01. Tenant shall execute any amendment of this Lease requested by a Superior Mortgagee or a Superior Lessor, provided such amendment shall not result in a material increase in Tenant's obligations under this Lease or a material reduction in the benefits available to Tenant. In the event of the enforcement by a Superior Mortgagee of the remedies provided for by law or by such Superior Mortgage, or in the event of the termination or expiration of a Superior Lease, Tenant, upon request of such Superior Mortgagee, Superior Lessor or any person succeeding to the interest of such mortgagee or lessor (each, a "Successor Landlord"), shall automatically become the tenant of such Successor Landlord without change in the terms or provisions of this Lease (it being understood that Tenant shall, if requested, enter into a new lease on terms identical to those in this Lease); provided, that any Successor Landlord shall not be (i) liable for any act, omission or default of any prior landlord (including, without limitation, Landlord); (ii) liable for the return of any monies paid to or on deposit with any prior landlord (including, without limitation, Landlord), except to the extent such monies or deposits are delivered to such Successor Landlord; (iii) subject to any offset, claims or defense that Tenant might have against any prior landlord (including, without limitation, Landlord); (iv) bound by any Rent which Tenant might have paid for more than the current month to any prior landlord (including, without limitation, Landlord) unless actually received by such Successor Landlord; (v) bound by any covenant to perform or complete any construction in connection with the Project or the Premises or to pay any sums to Tenant in connection therewith; or (vi) bound by any waiver or forbearance under, or any amendment, modification, abridgement, cancellation or surrender of, this Lease made without the consent of such Successor Landlord. Upon request by such Successor Landlord, Tenant shall execute and deliver an instrument or instruments, reasonably requested by such Successor Landlord, confirming the attornment provided for herein, but no such instrument shall be necessary to make such attornment effective. (b) Tenant shall give each Superior Mortgagee (including Aetna Life Insurance Company ("Aetna"), Landlord's mortgagee as of the date of this Lease) and each Superior Lessor a copy of any notice of default served upon Landlord, provided that Tenant has been notified of the address of such mortgagee or lessor. If Landlord fails to cure any default as - 37 - to which Tenant is obligated to give notice pursuant to the preceding sentence within the time provided for in this Lease, then each such mortgagee or lessor shall have an additional 30 days after receipt of such notice within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such 30 days, any such mortgagee or lessor has commenced and is diligently pursuing the remedies necessary to cure such default (including, without limitation, commencement of foreclosure proceedings or eviction proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated and Tenant shall not exercise any other rights or remedies under this Lease or otherwise while such remedies are being so diligently pursued. Nothing herein shall be deemed to imply that Tenant has any right to terminate this Lease or any other right or remedy, except as may be otherwise expressly provided for in this Lease. The address for Aetna is 151 Farmington Avenue, Hartford, CT 06156-9624. (c) Tenant acknowledges being advised by Landlord that Landlord's mortgage with Aetna Life Insurance Company contains a provision that Landlord may not waive any provision of any lease without Aetna's written consent. This restriction shall be enforceable by Landlord or Aetna or any future mortgagee whose mortgage contains such provision. 6.02 Estoppel Certificate. Each party shall, at any time and from time to time, within 20 days after written request by the other party, which request shall specifically state the time period in which the other party must respond, execute and deliver to the requesting party (or to such person or entity as the requesting party may designate) a statement certifying 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), certifying the Possession Date, Expiration Date and the dates to which the Fixed Rent and Additional Charges have been paid and stating whether or not the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which such party has knowledge, it being intended that any such statement shall be deemed a representation and warranty to be relied upon by the party to whom such statement is addressed. The responding party also shall include or confirm in any such statement such other information concerning this Lease as the other party may reasonably request. 6.03 Default. This Lease and the term and estate hereby granted are subject to the limitation that: (a) if Tenant defaults in the payment of any Rent, and such default continues for 10 days in the event of a default in the payment of Base Rent or 15 days in the event of a default in the payment of Additional Rent or any other sums due hereunder after Landlord gives to Tenant a notice specifying such default (provided, however, that Tenant acknowledges that Rent shall be due and payable on the first day of the month, and failure to pay such Rent on or prior to the first day of any month shall be considered a default under this Lease and interest shall accrue thereon as provided in Section 2.08 of this Lease from and after the first day the Rent becomes due and payable), or (b) if Tenant defaults in the keeping, observance or performance of any covenant or agreement (other than a default of the character referred to in Section 6.03(a), (c), - 38 - (d), (e) or (f), and if such default continues and is not cured within 30 days after Landlord gives to Tenant a notice specifying the same, or, in the case of a default which for causes beyond Tenant's reasonable control cannot with due diligence be cured within such period of 30 days, if Tenant shall not immediately upon the receipt of such notice, (i) advise Landlord of Tenant's intention duly to institute all steps necessary to cure such default and (ii) institute and thereafter diligently prosecute to completion all steps necessary to cure the same, or (c) if this Lease or the estate hereby granted would, by operation of law or otherwise, devolve upon or pass to any person or entity other than Tenant, except as expressly permitted by Article 5, or (d) if Tenant shall abandon the Premises (and the fact that any of Tenant's Property remains in the Premises shall not be evidence that Tenant has not abandoned the Premises), or (e) if Tenant defaults under any other lease with Landlord or under any other lease in a building managed by Orda Management Corporation which default shall continue beyond any applicable grace period provided under such other lease, or (f) if a default of the kind set forth in Section 6.03(a) or (b) shall occur and have been cured, and if a similar default shall occur more than once within the next 365 days, whether or not such similar defaults are cured within the applicable grace period, or (g) if Tenant fails to deliver to Landlord any security deposit or letter of credit within the time period required under Section 2.09 and, if applicable, Section 10.01, then, in any of such cases, in addition to any other remedies available to Landlord at law or in equity, Landlord shall be entitled to give to Tenant a notice of intention to end the Term at the expiration of 5 days from the date of the giving of such notice, and, in the event such notice is given, this Lease and the term and estate hereby granted shall terminate upon the expiration of such 5 days with the same effect as if the last of such 5 days were the Expiration Date, but Tenant shall remain liable for damages as provided herein or pursuant to law. 6.04 Re-entry by Landlord. If Tenant defaults in the payment of any Rent and such default continues for 5 days, or if this Lease shall terminate as in Section 6.03 provided, Landlord or Landlord's agents and servants may immediately or at any time thereafter re-enter into or upon the Premises, or any part thereof, without notice, either by summary dispossess proceedings or by any suitable action or proceeding at law, or by legal force or otherwise, without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any persons therefrom, to the end that Landlord may have, hold and enjoy the Premises. The words "re-enter" and "re-entering" as used in this Lease are not restricted to their technical legal meanings. Upon such termination or re-entry, Tenant shall pay to Landlord any Rent then due and owing (in addition to any damages payable under Section 6.05). - 39 - 6.05 Damages. If this Lease is terminated under Section 6.03, or if Landlord re-enters the Premises under Section 6.04, Tenant shall pay to Landlord as damages, at the election of Landlord, either: (a) a sum which, at the time of such termination or re-entry, represents the then value of the excess, if any, of (1) the aggregate of the Rent which, had this Lease not terminated, would have been payable hereunder by Tenant for the period commencing on the day following the date of such termination or re-entry to and including the Expiration Date over (2) the aggregate fair rental value of the Premises for the same period (for the purposes of this clause (a) the amount of Additional Charges which would have been payable by Tenant under Sections 2.04 and 2.05 shall, for each calendar year ending after such termination or re-entry, be deemed to be an amount equal to the amount of such Additional Charges payable by Tenant for the calendar year immediately preceding the calendar year in which such termination or re-entry shall occur), or (b) sums equal to the Rent that would have been payable by Tenant through and including the Expiration Date had this Lease not terminated or had Landlord not re-entered the Premises, payable upon the due dates therefor specified in this Lease; provided, that if Landlord shall relet all or any part of the Premises for all or any part of the period commencing on the day following the date of such termination or re-entry to and including the Expiration Date, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this Lease and of re-entering the Premises and of securing possession thereof, as well as the expenses of reletting, including, without limitation, altering and preparing the Premises for new tenants, brokers' commissions, legal fees and all other expenses properly chargeable against the Premises and the rental therefrom in connection with such reletting, it being understood that any such reletting may be for a period equal to or shorter or longer than said period; provided, further, that (i) in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord under this Lease, (ii) in no event shall Tenant be entitled, in any suit for the collection of damages pursuant to this Section 6.05(b), to a credit in respect of any net rents from a reletting except to the extent that such net rents are actually received by Landlord prior to the commencement of such suit, (iii) if the Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot rentable area basis shall be made of the rent received from such reletting and of the expenses of reletting and (iv) Landlord shall have no obligation to so relet the Premises and Tenant hereby waives any right Tenant may have, at law or in equity, to require Landlord to so relet the Premises. Suit or suits for the recovery of any damages payable hereunder by Tenant, or any installments thereof may be brought by Landlord from time to time at its election, and nothing contained herein shall require Landlord to postpone suit until the date when the Term would have expired but for such termination or re-entry. 6.06 Other Remedies. Nothing contained in this Lease shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by - 40 - reason of any default hereunder on the part of Tenant. Anything in this Lease to the contrary notwithstanding, during the continuation of any default by Tenant, Tenant shall not be entitled to exercise any rights or options, or to receive any funds or proceeds being held, under or pursuant to this Lease. 6.07 Right to Injunction. In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, including, but not limited to, holding over after the Expiration Date or the date of any earlier termination of this Lease, Landlord shall also have the right of injunction and, in the case of a threatened holdover, the right to bring a summary proceeding for possession of the Premises on the Expiration Date or the date of any earlier termination of this Lease. The specified remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled, and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not herein provided for. 6.08 Certain Waivers; Waiver of Trial by Jury. (a) Tenant waives and surrenders all right and privilege that Tenant might have under or by reason of any present or future law to redeem the Premises or to have a continuance of this Lease after Tenant is dispossessed or ejected therefrom by Landlord, by process of law or under the terms of this Lease or after any termination of this Lease. Tenant also waives the provisions of any law relating to notice and/or delay in levy of execution in case of any eviction or dispossession for nonpayment of rent, and the provisions of any successor or other law of like import. (b) Landlord and Tenant each waive trial by jury in any action in connection with this Lease. 6.09 No Waiver. Failure by either party to declare any default immediately upon its occurrence or delay in taking any action in connection with such default shall not waive such default but such party shall have the right to declare any such default at any time thereafter. Any amounts paid by Tenant to Landlord may be applied by Landlord, in Landlord's discretion, to any items then owing by Tenant to Landlord under this Lease. Receipt by Landlord of a partial payment shall not be deemed to be an accord and satisfaction (notwithstanding any endorsement or statement on any check or any letter accompanying any check or payment) nor shall such receipt constitute a waiver by Landlord of Tenant's obligation to make full payment. No act or thing done by Landlord or its agents shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord and by each Superior Lessor and Superior Mortgagee whose lease or mortgage provides that any such surrender may not be accepted without its consent. 6.10 Holding Over. If Tenant holds over without the consent of Landlord after expiration or termination of this Lease, Tenant shall (a) pay as holdover rental during the holdover tenancy an amount equal to (x) 150% for the first month of the holdover tenancy, (y) 175% for the second month of the holdover tenancy and (z) 200% for the third month and any additional month(s) of the holdover tenancy of the greater of (i) the fair market rental value of the Premises for such month (as reasonably determined by Landlord) or (ii) the Rent which Tenant was obligated to pay for the month immediately preceding the end of the Term; and (b) be liable to - 41 - Landlord for and indemnify Landlord against (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises (a "New Tenant") by reason of the late delivery of space to the New Tenant as a result of Tenant's holding over or in order to induce such New Tenant not to terminate its lease by reason of the holding over by Tenant, (ii) the loss of the benefit of the bargain if any New Tenant shall terminate its lease by reason of the holding over by Tenant and (iii) any claim for damages by any New Tenant. No holding over by Tenant after the Term shall operate to extend the Term. Notwithstanding the foregoing, the acceptance of any rent paid by Tenant pursuant to this Section 6.10 shall not preclude Landlord from commencing and prosecuting a holdover or summary eviction proceeding. 6.11 Attorneys' Fees. If Landlord places the enforcement of this Lease or any part thereof, or the collection of any Rent due or to become due hereunder, or recovery of the possession of the Premises, in the hands of an attorney, or files suit upon the same, or in the event any bankruptcy, insolvency or other similar proceeding is commenced involving Tenant, and Landlord prevails in such enforcement action, Tenant shall, upon demand, reimburse Landlord for Landlord's reasonable attorneys' fees and disbursements and court costs. 6.12 Nonliability and Indemnification. (a) Neither Landlord, any Superior Lessor or any Superior Mortgagee, nor any partner, director, officer, shareholder, principal, agent, servant or employee of Landlord, any Superior Lessor or any Superior Mortgagee (whether disclosed or undisclosed), shall be liable to Tenant for (i) any loss, injury or damage to Tenant or to any other person, or to its or their property, irrespective of the cause of such injury, damage or loss, nor shall the aforesaid parties be liable for any loss of or damage to property of Tenant or of others entrusted to employees of Landlord; provided, that, except to the extent of the release of liability and waiver of subrogation provided in Section 7.03 hereof, the foregoing shall not be deemed to relieve Landlord of any liability to the extent resulting from the negligence or the willful act or failure to act of Landlord, its agents, servants or employees in the operation or maintenance of the Premises or the Building, (ii) any loss, injury or damage described in clause (i) above caused by other tenants or persons in, upon or about the Building, or caused by operations in construction of any private, public or quasi-public work, or (iii) even if negligent, consequential damages arising out of any loss of use of the Premises or any equipment, facilities or other Tenant's Property therein. (b) Tenant shall indemnify and hold harmless Landlord, all Superior Lessors and all Superior Mortgagees and each of their respective members, partners, directors, officers, shareholders, principals, agents and employees (each, an "Indemnified Party"), from and against any and all claims arising from or in connection with (i) the conduct or management of the Premises or of any business therein, or any work or thing done, or any condition created, in or about the Premises, (ii) any act, omission or negligence of Tenant or any person claiming through or under Tenant or any of their respective members, partners, directors, officers, agents, employees or Contractors, (iii) any accident, injury or damage occurring in, at or upon the Premises, (iv) any default by Tenant in the performance of Tenant's obligations under this Lease and (v) any brokerage commission or similar compensation claimed to be due by reason of any proposed subletting or assignment by Tenant (irrespective of the exercise by Landlord of any of the options in Section 5.02(b); together with all costs, expenses and liabilities incurred in - 42 - connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys' fees and disbursements; provided, that the foregoing indemnity shall not apply to the extent such claim results from the negligence (other than negligence to which the release of liability and waiver of subrogation provided in Section 7.03 below applies) or willful misconduct of the Indemnified Party. If any action or proceeding is brought against any Indemnified Party by reason of any such claim, Tenant, upon notice from such Indemnified Party shall resist and defend such action or proceeding (by counsel reasonably satisfactory to such Indemnified Party). 6.13 Protest of Landlord Charges. Except as otherwise set forth in Section 2.10 of this Lease, Tenant shall have sixty (60) days from receipt of a bill or other request from Landlord for payment of any charge, other than the Fixed Rent, payable by Tenant under this Lease within which to protest the correctness of such charge. If Tenant fails to make such protest, which shall be made in the manner herein set forth for the giving of notices, within the sixty (60) day period aforementioned, the charge set forth in such bill or other request shall be deemed to have been accepted by Tenant and shall no longer be contestable by Tenant, time being of the essence. ARTICLE 7 Insurance; Casualty; Condemnation 7.01 Compliance with Insurance Standards. (a) Tenant shall not violate, or permit the violation of, any condition imposed by any insurance policy then issued in respect of the Project and shall not do, or permit anything to be done, or keep or permit anything to be kept in the Premises, which would subject Landlord, any Superior Lessor or any Superior Mortgagee to any liability or responsibility for personal injury or death or property damage, or which would increase any insurance rate in respect of the Project over the rate which would otherwise then be in effect or which would result in insurance companies of good standing refusing to insure the Project in amounts reasonably satisfactory to Landlord, or which would result in the cancellation of or the assertion of any defense by the insurer in whole or in part to claims under, any policy of insurance in respect of the Project. (b) If, by reason of any failure of Tenant to comply with this Lease, the premiums on Landlord's insurance on the Project shall be higher than they otherwise would be, Tenant shall reimburse Landlord, on demand, for that part of such premiums attributable to such failure on the part of Tenant. A schedule or "make up" of rates for the Project or the Premises, as the case may be, issued by the New York Fire Insurance Rating Organization or other similar body making rates for insurance for the Project or the Premises, as the case may be, shall be conclusive evidence of the facts therein stated and of the several items and charges in the insurance rate then applicable to the Project or the Premises, as the case may be. 7.02 Tenant's Insurance. Tenant shall maintain at all times during the Term (a) "all risk" property insurance covering all present and future Tenant's Property, Fixtures and - 43 - Tenant's Improvements and Betterments to a limit of not less than the full replacement cost thereof, and (b) commercial general liability insurance, including a contractual liability endorsement, and personal injury liability coverage, in respect of the Premises and the conduct or operation of business therein, with Landlord and its managing agent, if any, and each Superior Lessor and Superior Mortgagee whose name and address shall have been furnished to Tenant, as additional insureds, with limits of not less than $5,000,000 combined single limit for bodily injury and property damage liability in any one occurrence and (c) boiler and machinery insurance, if there is a boiler, supplementary air conditioner or pressure object or similar equipment in the Premises, with Landlord and its managing agent, if any, and each Superior Lessor and Superior Mortgagee whose name and address shall have been furnished to Tenant, as additional insureds, with limits of not less than $5,000,000 combined single limit and (d) when Alterations are in process, the insurance specified in Section 4.02(f) hereof. The limits of such insurance shall not limit the liability of Tenant. Tenant shall deliver to Landlord and any other additional insureds, at least 10 days prior to the Possession Date, such fully paid-for policies or certificates of insurance, in form reasonably satisfactory to Landlord issued by the insurance company or its authorized agent. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof; and Tenant shall deliver to Landlord and any other additional insureds such renewal policy or a certificate thereof at least 30 days before the expiration of any existing policy. All such policies shall be issued by companies of recognized responsibility licensed to do business in New York State and rated by Best's Insurance Reports or any successor publication of comparable standing as A-/VIII or better or the then equivalent of such rating, and all such policies shall contain a provision whereby the same cannot be canceled, allowed to lapse or modified unless Landlord and any additional insureds are given at least 30 days' prior written notice of such cancellation, lapse or modification. The proceeds of policies providing "all risk" property insurance of Tenant's Fixtures and Improvements and Betterments shall be payable to Landlord, Tenant and each Superior Lessor and Superior Mortgagee as their interests may appear. Tenant shall cooperate with Landlord in connection with the collection of any insurance monies that may be due in the event of loss and Tenant shall execute and deliver to Landlord such proofs of loss and other instruments which may be required to recover any such insurance monies. Landlord may from time to time require that the amount of the insurance to be maintained by Tenant under this Section 7.02 be increased, so that the amount thereof adequately protects Landlord's interest. 7.03 Subrogation Waiver. Landlord and Tenant shall each include in each of its insurance policies (insuring the Building in case of Landlord, and insuring Tenant's Property, Fixtures and Improvements and Betterments in the case of Tenant, against loss, damage or destruction by fire or other casualty) a waiver of the insurer's right of subrogation against the other party during the Term or, if such waiver should be unobtainable or unenforceable, (a) an express agreement that such policy shall not be invalidated if the assured waives the right of recovery against any party responsible for a casualty covered by the policy before the casualty or (b) any other form of permission for the release of the other party. Each party hereby releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage or destruction with respect to its property occurring during the Term to the extent to which it is, or is required to be, insured under a policy or policies containing a waiver of subrogation or permission to release liability. Nothing contained in this - 44 - Section 7.03 shall be deemed to relieve either party of any duty imposed elsewhere in this Lease to repair, restore or rebuild or to nullify any abatement of rents provided for elsewhere in this Lease. 7.04 Condemnation. (a) If there shall be a total taking of the Building in condemnation proceedings or by any right of eminent domain, this Lease and the term and estate hereby granted shall terminate as of the date of taking of possession by the condemning authority and all Rent shall be prorated and paid as of such termination date. If there shall be a taking of any material (in Landlord's reasonable judgment) portion of the Land or the Building (whether or not the Premises are affected by such taking), then Landlord may terminate this Lease and the term and estate granted hereby by giving notice to Tenant within 60 days after the date of taking of possession by the condemning authority. If there shall be a taking of the Premises of such scope (but in no event less than 25% thereof) that the untaken part of the Premises would in Tenant's reasonable judgment be uneconomic to operate, then Tenant may terminate this Lease and the term and estate granted hereby by giving notice to Landlord within 60 days after the date of taking of possession by the condemning authority. If either Landlord or Tenant shall give a termination notice as aforesaid, then this Lease and the term and estate granted hereby shall terminate as of the date of such notice and all Rent shall be prorated and paid as of such termination date. In the event of a taking of the Premises which does not result in the termination of this Lease (i) the term and estate hereby granted with respect to the taken part of the Premises shall terminate as of the date of taking of possession by the condemning authority and all Rent shall be appropriately abated for the period from such date to the Expiration Date and (ii) Landlord shall with reasonable diligence restore the remaining portion of the Premises (exclusive of Tenant's Property) as nearly as practicable to its condition prior to such taking. (b) In the event of any taking of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including, without limitation, any award made for the value of the estate vested by this Lease in Tenant or any value attributable to the unexpired portion of the Term, and Tenant hereby 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; provided, that nothing shall preclude Tenant from intervening in any such condemnation proceeding to claim or receive from the condemning authority any compensation to which Tenant may otherwise lawfully be entitled in such case in respect of Tenant's Property or moving expenses, provided the same does not include any value of the estate vested by this Lease in Tenant or of the unexpired portion of the Term and does not reduce the amount available to Landlord or materially delay the payment thereof. (c) If all or any part of the Premises shall be taken for a limited period, Tenant shall be entitled, except as hereinafter set forth, to that portion of the award for such taking which represents compensation for the use and occupancy of the Premises, for the taking of Tenant's Property and for moving expenses, and Landlord shall be entitled to that portion which represents reimbursement for the cost of restoration of the Premises. This Lease shall remain unaffected by such taking and Tenant shall continue responsible for all of its obligations under this Lease to the extent such obligations are not affected by such taking and shall continue to pay in full all Rent when due. If the period of temporary use or occupancy shall extend beyond - 45 - the Expiration Date, that part of the award which represents compensation for the use and occupancy of the Premises shall be apportioned between Landlord and Tenant as of the Expiration Date. Any award for temporary use and occupancy for a period beyond the date to which the Rent has been paid shall be paid to, held and applied by Landlord as a trust fund for payment of the Rent thereafter becoming due. (d) In the event of any taking which does not result in termination of this Lease, (i) Landlord, whether or not any award shall be sufficient therefor, shall proceed with reasonable diligence to repair the remaining parts of the Building and the Premises (other than those parts of the Premises which constitute Tenant's Property) to substantially their former condition to the extent that the same may be feasible (subject to reasonable changes which Landlord deems desirable) and so as to constitute a complete and rentable Building and Premises and (ii) Tenant, whether or not any award shall be sufficient therefor, shall proceed with reasonable diligence to repair the remaining parts of the Premises which constitute Tenant's Property, to substantially their former condition to the extent that the same may be feasible, subject to reasonable changes which shall be deemed Alterations. 7.05 Casualty. (a) If the Building or the Premises shall be partially or totally damaged or destroyed by fire or other casualty (each, a "Casualty") and if this Lease is not terminated as provided below, then (i) Landlord shall repair and restore the Building and the Premises (excluding Tenant's Improvements and Betterments, Fixtures and Tenant's Property) with reasonable dispatch (but Landlord shall not be required to perform the same on an overtime or premium pay basis) after notice to Landlord of the Casualty and the collection of the insurance proceeds attributable to such Casualty and (ii) Tenant shall repair and restore in accordance with Section 4.02 all Tenant's Property, Fixtures and Improvements and Betterments with reasonable dispatch after the Casualty. (b) If all or part of the Premises shall be rendered untenantable by reason of a Casualty, the Fixed Rent and the Additional Charges under Sections 2.04 and 2.05 shall be abated in the proportion that the untenantable area of the Premises bears to the total area of the Premises, for the period from the date of the Casualty to the earlier of (i) the date the Premises is made tenantable (provided, that if the Premises would have been tenantable at an earlier date but for Tenant having failed to cooperate with Landlord in effecting repairs or restoration or collecting insurance proceeds (including, without limitation, by reason of Tenant failing to pay to Landlord the amounts set forth in clauses (A) and (B) of Section 7.05(a)), then the Premises shall be deemed to have been made tenantable on such earlier date and the abatement shall cease) or (ii) the date Tenant or any subtenant reoccupies a portion of the Premises (in which case the Fixed Rent and the Additional Charges allocable to such reoccupied portion shall be payable by Tenant from the date of such occupancy). Landlord's determination of the date the Premises is tenantable shall be controlling unless Tenant disputes same by notice to Landlord within 10 days after such determination by Landlord, and pending resolution of such dispute, Tenant shall pay Rent in accordance with Landlord's determination. Notwithstanding the foregoing, (x) if by reason of any act or omission by Tenant, any subtenant or any of their respective partners, directors, officers, servants, employees, agents or Contractors, Landlord, any Superior Lessor or any Superior Mortgagee shall be unable to collect all of the insurance proceeds (including, without limitation, rent insurance proceeds) applicable to the Casualty, or, - 46 - (y) if Tenant demolishes or otherwise alters the portion of the Premises affected by any Casualty (other than as may be required by Laws, emergency conditions or as part of Tenant's efforts to prevent further damage) without Landlord's consent, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement of Rent. Nothing contained in this Section 7.05 shall relieve Tenant from any liability that may exist as a result of any Casualty. (c) If by reason of a Casualty (i) the Building shall be totally damaged or destroyed, (ii) the Building shall be so damaged or destroyed (whether or not the Premises are damaged or destroyed) that repair or restoration shall require more than 270 days or the expenditure of more than 20% percent of the full insurable value of the Building (which, for purposes of this Section 7.05(c), shall mean replacement cost less the cost of footings, foundations and other structures below the street and first floors of the Building) immediately prior to the Casualty or (iii) more than 30% of the Premises shall be damaged or destroyed (as estimated in any such case by a reputable contractor, architect or engineer designated by Landlord), then in any such case Landlord may terminate this Lease by notice given to Tenant within 180 days after the Casualty. (d) If (i) by reason of a Casualty the Building shall be so damaged or destroyed that the Landlord's independent architect estimates that repair or restoration shall require more than 270 days from the date of such determination or (ii) if the Premises shall be rendered untenantable by reason of a Casualty during the last 18 months of the Term of this Lease, then Tenant may terminate this Lease by written notice given to Landlord within 60 days after the Casualty. (e) Landlord shall not carry any insurance on Tenant's Property, Fixtures or on Tenant's Improvements and Betterments and shall not be obligated to repair or replace Tenant's Property, Fixtures or Improvements and Betterments. Tenant shall look solely to its insurance for recovery of any damage to or loss of Tenant's Property, Fixtures or Tenant's Improvements and Betterments. Tenant shall notify Landlord promptly of any Casualty in the Premises. (f) This Section 7.05 shall be deemed an express agreement governing any damage or destruction of the Premises by fire or other casualty, and Section 227 of the New York Real Property Law providing for such a contingency in the absence of an express agreement, and any other law of like import now or hereafter in force, shall have no application. ARTICLE 8 Miscellaneous Provisions 8.01 Notice. All notices, demands, consents, approvals, advices, waivers or other communications which may or are required to be given by either party to the other under this Lease shall be in writing and shall be deemed to have been given one Business Day after - 47 - deposit in the United States mail, certified or registered, postage prepaid, return receipt requested, and addressed to the party to be notified at the address for such party specified in the first paragraph of this Lease or to such other place as the party to be notified may from time to time designate by at least 5 days' notice to the notifying party (and, in the case of each notice to Landlord, to (a) Landlord's address specified in the first paragraph of this Lease, Attention: Mr. Morton F. Silver with a copy to (b) Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, Attention: Jonathan L. Mechanic, Esq. and, in the case of each notice to Tenant, with a copy to (x) McLaughlin and Stern, LLP, 260 Madison Avenue, 18th Floor, New York, New York 10016, Attention: Henry Feuerstein. Notices from Landlord may be given by Landlord's managing agent, if any, or by Landlord's attorney. 8.02 Building Rules. Tenant shall comply with, and Tenant shall cause its licensees, employees, Contractors, agents and invitees to comply with, the rules of the Building set forth in the Rules and Regulations, as the same may be reasonably modified or supplemented by Landlord from time to time for the safety, care and cleanliness of the Premises and the Building and for preservation of good order therein. Landlord shall not be obligated to enforce the rules of the Building against Tenant or any other tenant of the Building or any other party, and Landlord shall have no liability to Tenant by reason of the violation by any tenant or other party of the rules of the Building; provided, that Landlord shall not promulgate or enforce the rules of the Building in a manner which discriminates against Tenant. If any rule of the Building shall conflict with any provision of this Lease, such provision of this Lease shall govern. 8.03 Severability. If any term or provision of this Lease, or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected, and each provision of this Lease shall be valid and shall be enforceable to the extent permitted by law. 8.04 Certain Definitions. (a) "Landlord" means only the owner, at the time in question, of the Building or that portion of the Building of which the Premises are a part, or of a lease of the Building or that portion of the Building of which the Premises are a part, so that in the event of any transfer or transfers of title to the Building or of Landlord's interest in a lease of the Building or such portion of the Building, the transferor shall be and hereby is relieved and freed of all obligations of Landlord under this Lease accruing after such transfer, and it shall be deemed, without further agreement, that such transferee has assumed all obligations of Landlord during the period it is the holder of Landlord's interest under this Lease. (b) "Landlord shall have no liability to Tenant" or words of similar import mean that Tenant is not entitled to terminate this Lease, or to claim actual or constructive eviction, partial, or total, or to receive any abatement or diminution of Rent, or to be relieved in any manner or any of its other obligations under this Lease, or to be compensated for loss or injury suffered or to enforce any other right or kind of liability whatsoever against Landlord under or with respect to this Lease or with respect to Tenant's use or occupancy of the Premises. 8.05 Quiet Enjoyment. Tenant shall and may peaceably and quietly have, hold and enjoy the Premises, subject to the other terms of this Lease and to Superior Leases and - 48 - Superior Mortgages, provided that Tenant pays the Fixed Rent and Additional Charges to be paid by Tenant and performs all of Tenant's covenants and agreements contained in this Lease. 8.06 Limitation of Landlord's Liability. (a) Tenant shall look solely to Landlord's interest in the Project for the recovery of any judgment against Landlord, and no other property or assets of Landlord or Landlord's members, partners, officers, directors, shareholders or principals, direct or indirect, disclosed or undisclosed, shall be subject to levy, execution attachment or other enforcement procedure for the satisfaction of any judgment or Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises, or any other liability of Landlord to Tenant. (b) In the event of a transfer of title to the land and Building of which the Premises is a part, or in the event of a lease of the Building of which the Premises is a part, or of the land and Building, upon notification to Tenant of such transfer or lease, the said transferor landlord named herein shall be and hereby is entirely freed and relieved of all future covenants, obligations and liabilities of Landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the transferee of title to or lessee of said land and Building, that the transferee or lessee has assumed and agreed to carry out all of the covenants and obligations of Landlord hereunder. 8.07 Counterclaims. If Landlord commences any summary proceeding or action for nonpayment of Rent or to recover possession of the Premises, Tenant shall not interpose any counterclaim of any nature or description in any such proceeding or action, unless Tenant's failure to interpose such counterclaim in such proceeding or action would result in the waiver of Tenant's right to bring such claim in a separate proceeding under applicable law. 8.08 Survival. All obligations and liabilities of Landlord or Tenant to the other which accrued before the expiration or other termination of this Lease and all such obligations and liabilities which by their nature or under the circumstances can only be, or by the provisions of this Lease may be, performed after such expiration or other termination, shall survive the expiration or other termination of this Lease. Without limiting the generality of the foregoing, the rights and obligations of the parties with respect to any indemnity under this Lease, and with respect to Tax Payments and any other amounts payable under this Lease, shall survive the expiration or other termination of this Lease. 8.09 Certain Remedies. If Tenant requests Landlord's consent and Landlord fails or refuses to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent, it being intended that Tenant's sole remedy shall be an action for specific performance or injunction, and that such remedy shall be available only in those cases where this Lease provides that Landlord shall not unreasonably withhold its consent. No dispute relating to this Lease or the relationship of Landlord and Tenant under this Lease shall be resolved by arbitration unless this Lease expressly provides for such dispute to be resolved by arbitration. 8.10 No Offer. The submission by Landlord of this Lease in draft form shall be solely for Tenant's consideration and not for acceptance and execution. Such submission shall - 49 - have no binding force or effect and shall confer no rights nor impose any obligations, including brokerage obligations, on either party unless and until both Landlord and Tenant shall have executed a lease and duplicate originals thereof shall have been delivered to the respective parties. 8.11 Captions; Construction. The table of contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. Each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. 8.12 Amendments. This Lease may not be altered, changed or amended, except by an instrument in writing signed by the party to be charged. 8.13 Broker. Each party represents to the other that such party has dealt with no broker other than Insignia/Edward S. Gordon Company, Inc. (the "Broker") in connection with this Lease or the Building, and each party shall indemnify and hold the other harmless from and against all loss, cost, liability and expense (including, without limitation, reasonable attorneys' fees and disbursements) arising out of any claim for a commission or other compensation by any broker other than Broker who alleges that it has dealt with the indemnifying party in connection with this Lease or the Building. Landlord shall enter into a separate agreement with Broker which provides that, if this Lease is executed and delivered by both Landlord and Tenant, Landlord shall pay to Broker a commission to be agreed upon between Landlord and Broker, subject to, and in accordance with, the terms and conditions of such agreement. 8.14 Merger. Tenant acknowledges that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. This Lease embodies the entire understanding between the parties with respect to the subject matter hereof, and all prior agreements, understanding and statements, oral or written, with respect thereto are merged in this Lease. 8.15 Successors. This Lease shall be binding upon and inure to the benefit of Landlord, its successors and assigns, and shall be binding upon and inure to the benefit of Tenant, its successors, and to the extent that an assignment is permitted hereunder, Tenant's assigns. 8.16 Applicable Law. This Lease shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to any principles of conflicts of laws. 8.17 No Development Rights. Tenant acknowledges that it has no rights to any development rights, air rights or comparable rights appurtenant to the Project, and Tenant consents, without further consideration, to any utilization of such rights by Landlord. Tenant shall promptly execute and deliver any instruments which may be requested by Landlord, including instruments merging zoning lots, evidencing such acknowledgment and consent. The - 50 - provisions of this Section 8.17 shall be construed as an express waiver by Tenant of any interest Tenant may have as a "party in interest" (as such term is defined in Section 12-10 Zoning Lot of the Zoning Resolution of the City of New York) in the Project. 8.18 Signage. (a) Landlord agrees that Tenant shall, subject to the consent of Landlord (which consent shall not be unreasonably withheld, conditioned or delayed), be permitted to install signage of Tenant's design (i) in the Premises, (ii) in the elevator lobby of the 19th Floor and (iii) if applicable, in the Expansion Space and in the elevator lobby of floor on which the Expansion Space is located. (b) Provided that Landlord maintains a directory in the lobby of the Building, Landlord shall make available, at no charge to Tenant, space for the listing of Tenant's name, the names of any of the officers or employees of Tenant or any alter ego name of Tenant, and any affiliate of Tenant, provided, that Tenant shall be entitled to the greater of (i) Tenant's pro-rata share of said directory or (ii) a minimum of 5 spaces in said directory. (c) With respect to the Temporary Space, Landlord agrees that Tenant shall, subject to the consent of Landlord (which consent shall not be unreasonably withheld, conditioned or delayed) be permitted to install signage of Tenant's design in the Temporary Space. Unless Tenant exercises Tenant's Expansion Option set forth in Section 1.08, Tenant agrees that on or prior to the Temporary Space Vacancy Date or any earlier termination of this Lease, if applicable, Tenant shall remove any such signage from the Temporary Space and shall repair and restore any area of the Temporary Space impacted by such signage to the condition of such area as of the date of this Lease. If Tenant exercises Tenant's Expansion Option as set forth in Section 1.08, then upon the Expiration Date or earlier termination of this Lease, Tenant shall remove any signage from the Expansion Space and shall repair and restore any area of the Expansion Space impacted by such signage to the condition of such area as of the date of this Lease. 8.19 Building Access. Tenant shall have access to the Building 24 hours a day, seven days a week, 365 days a year. ARTICLE 9 Renewal Right 9.01 Renewal Right. (a) Provided that on the date Tenant exercises the Renewal Option and at the commencement of the Renewal Term (i) this Lease shall not have been terminated, (ii) Tenant shall not be in monetary default beyond any applicable notice and grace period under this Lease and (iii) Tenant named herein (i.e., ACTV, Inc.), an Affiliate or a permitted assignee of Tenant shall occupy the entire Premises, Tenant shall have the option (the "Renewal Option") to extend the term of this Lease for an additional five (5) year period (the "Renewal Term"), to commence at the expiration of the initial Term. (b) The Renewal Option shall be exercised with respect to the entire Premises only and shall be exercisable by Tenant giving notice to Landlord (the "Renewal Notice") at least - 51 - 18 months before the last day of the initial Term. Time is of the essence with respect to the giving of the Renewal Notice. 9.02 Renewal Rent and Other Terms. (a) The Renewal Term shall be upon all of the terms and conditions set forth in this Lease, except that (i) the Fixed Rent shall be as determined pursuant to the further provisions of this Section 9.02; (ii) Tenant shall accept the Premises in its "as is" condition at the commencement of the Renewal Term, and Landlord shall not be required to perform Landlord's Initial Work or any other work, pay the Landlord's Contribution or any other amount or render any services to make the Premises ready for Tenant's use and occupancy or provide any abatement of Fixed Rent or Additional Charges, in each case with respect to the Renewal Term; (iii) Tenant shall have no option to renew this Lease beyond the expiration of the Renewal Term; and (iv) the Base Tax Amount shall be the Taxes for the Tax Year ending immediately before the commencement of the Renewal Term. (b) The annual Fixed Rent for the Premises for the Renewal Term shall be the greater of (i) the Fair Market Rent or (ii) an amount (the "Annual Rent") equal to the aggregate of (A) the Fixed Rent payable by Tenant for the 12 month period ending on the last day of the initial Term and (B) the Tax Payment payable with respect to the Tax Year ending immediately before the commencement of the Renewal Term (the greater of Fair Market Rent and Annual Rent is called the "Rental Value"). "Fair Market Rent" means the fixed annual rent that a willing lessee would pay and a willing lessor would accept for the Premises during the Renewal Term, taking into account all relevant factors, including, without limitation, market rents then being charged for comparable space in other similar office buildings in the same area and all of the following which shall be assumed: (X) the Landlord and prospective tenant are typically motivated; (Y) the Landlord and prospective tenant are well informed and well advised and each is acting in what it considers its own best interest; and (Z) in the event the Premises have been destroyed or damaged by fire or other casualty, they have been fully restored. The following shall have been presumed to have been done: (A) a reasonable time under then-existing market conditions has been allowed for exposure of the Premises on the open market; (B) the prospective tenant has been given the benefit of customary rent concessions or free rent periods than pertaining in the community for comparable space of a similar size; (C) the Premises have been newly renovated to the prospective tenant's specifications and are acceptable to the prospective tenant "as is;" (D) the Premises have been let with vacant possession and subject to the provisions of this Lease for a 5-year term; (E) the computation of the number of rentable square feet contained in the Premises has been based on the measurement standard then prevalent in the market for comparable space; and (F) a full brokerage commission shall have been paid by Landlord on then market terms. Notwithstanding that the factors enumerated above are to be assumed or presumed to have already been given in the determination of Fair Market Rent, Landlord shall not be obliged to give Tenant any of the foregoing benefits. (c) If Tenant timely exercises the Renewal Option, Landlord shall notify Tenant (the "Rent Notice") at least 120 days before the last day of the initial Term of Landlord's determination of the Fair Market Rent ("Landlord's Determination"). If Landlord's Determination exceeds the Annual Rent, then Tenant shall notify Landlord ("Tenant's Notice"), within 20 days after Tenant's receipt of the Rent Notice, whether Tenant accepts or disputes Landlord's Determination, and if Tenant disputes Landlord's Determination, Tenant's Notice shall - 52 - set forth Tenant's determination of the Fair Market Rent (which shall not be less than the Annual Rent). If Tenant fails to give Tenant's Notice within such 20 day period, Tenant shall be deemed to have accepted Landlord's Determination. (d) If Tenant timely disputes Landlord's Determination and Landlord and Tenant fail to agree as to the Fair Market Rent within 20 days after the giving of Tenant's Notice, then the Fair Market Rent shall be determined as follows: Such dispute shall be resolved by arbitration conducted in accordance with the Real Estate Valuation Arbitration Rules (Expedited Procedures) of the AAA, except that the provisions of this Section 9.02(d) shall supersede any conflicting or inconsistent provisions of said rules. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in said notice the nature of the dispute, and that said dispute shall be determined in the City of New York, by a panel of 3 arbitrators in accordance with this Section 9.02(d). Landlord and Tenant shall each appoint their own arbitrator within 7 days after the giving of notice by either party. If either Landlord or Tenant shall fail timely to appoint an arbitrator, the appointed arbitrator shall select the second arbitrator, who shall be impartial, within 7 days after such party's failure to appoint. Such two arbitrators shall have 7 days to appoint a third arbitrator who shall be impartial. If such arbitrators fail to do so, then either Landlord or Tenant may request the AAA to appoint an arbitrator who shall be impartial within 14 days of such request and both parties shall be bound by any appointment so made within such 14-day period. If no such third arbitrator shall have been appointed within such 14 days, either Landlord or Tenant may apply to any court having jurisdiction to make such appointment. The third arbitrator only shall subscribe and swear to an oath fairly and impartially to determine such dispute. Within 14 days after the third arbitrator has been appointed, each arbitrator shall render its determination of the Fair Market Rent in writing and shall submit same to each of the other arbitrators, and to Landlord and Tenant. If at least two of the three arbitrators shall concur in their determination of the Fair Market Rent, their determination shall be final and binding upon the parties. If the arbitrators fail to concur, then the Fair Market Rent shall be equal to 50% of the sum of the two determinations by the arbitrators closest in amount, and such amount shall be final and binding upon the parties. The fees and expenses of any arbitration pursuant to this Section 9.02(d) shall be borne by the parties equally, but each party shall bear the expense of its own arbitrator, attorneys and experts and the additional expenses of presenting its own proof The arbitrators shall not have the power to add to, modify or change any of the provisions of this Lease. Each arbitrator shall have at least 10 years' experience in leasing and valuation of properties which are similar in character to the Building. After a determination has been made of the Fair Market Rent, the parties shall execute and deliver an instrument setting forth the Fair Market Rent, but the failure to so execute and deliver any such instrument shall not affect the determination of Fair Market Rent. (e) If Tenant disputes Landlord's Determination and if the final determination of Fair Market Rent shall not be made on or before the first day of the Renewal Term, then, pending such final determination, Tenant shall pay, as Fixed Rent for the Renewal Term, an amount equal to the last month's Fixed Rent payable under this Lease plus ten (10%) percent. If, based upon the final determination of the Fair Market Rent, the Fixed Rent payments made by Tenant for such portion of the Renewal Term were (i) less than the Rental Value payable for the Renewal Term, Tenant shall pay to Landlord the amount of such deficiency within 10 days after demand therefor or (ii) greater than the Rental Value payable for the Renewal Term, Landlord - 53 - shall credit the amount of such excess against future installments of Fixed Rent and/or Additional Charges payable by Tenant. ARTICLE 10 Expansion Space 10.01 Expansion Space. Provided that on the date Tenant exercises the Expansion Option and on the ES Inclusion Date (as defined below) (i) this Lease shall not have been terminated, (ii) Tenant shall not be in default under this Lease and (iii) Tenant and/or an Affiliate of Tenant shall occupy the entire First Temporary Space, Tenant shall have the option (the "Expansion Option") to lease, as part of the Premises defined herein, the First Temporary Space (the "Expansion Space"). Landlord and Tenant confirm that the Expansion Space is conclusively deemed to contain 12,217 rentable square feet. The Expansion Option shall be exercisable by Tenant giving Landlord notice thereof (the "Expansion Notice") on or before April 1, 2000 (time being of the essence). If Tenant timely gives the Expansion Notice, on the ES Inclusion Date, the Expansion Space shall become part of the Premises, upon all of the terms and conditions set forth in this Lease, except that: (a) Fixed rent for the Expansion Space shall be (i) for the period commencing on the ES Inclusion Date and ending on the day immediately preceding the 5th anniversary of the ES Inclusion Date Three Hundred Ninety Thousand Nine Hundred Forty-Four and 00/100 ($390,944.00) Dollars, payable in equal monthly installments of Thirty-Two Thousand Five Hundred Seventy-Eight and 67/100 ($32,578.67) Dollars (an annual rate of $32.00 per rentable square foot contained in the Expansion Space), (ii) for the period commencing on the 5th anniversary of the ES Inclusion Date and ending on the day immediately preceding the 10th anniversary of the ES Inclusion Date, Four Hundred Twenty-Seven Thousand Five Hundred Ninety-Five and 00/100 ($427,595.00) Dollars per annum, payable in equal monthly installments of Thirty-Five Thousand Six Hundred Thirty-Two and 92/100 ($35,632.92) Dollars (an annual rate of $35.00 per rentable square foot contained in the Expansion Space) and (iii) for the period commencing on the 10th anniversary of the ES Inclusion Date and ending on the latter of (A) the 15th anniversary of the ES Inclusion Date or (B) the Expiration Date, Four Hundred Sixty-Four Thousand Two Hundred Forty-Six and 00/100 ($464,246.00) Dollars (an annual rate of $38.00 per rentable square foot contained in the Expansion Space). Fixed Rent shall be payable by Tenant in equal monthly installments in advance on the ES Inclusion Date and on the first day of each calendar month thereafter. From and after the ES Inclusion Date, the term "Fixed Rent" (as defined herein) shall include the fixed rent for the Expansion Space; (b) From and after Tenant's exercise of the Expansion Option until August 1, 2000 (the "ES Election Period"), and provided that Tenant delivers to Landlord written evidence reasonably satisfactory to Landlord that Tenant's Expansion Space Alterations (defined below) will cost a minimum of Fifteen ($15) Dollars per rentable square foot, Tenant shall have the right to elect to forego receipt of Landlord's Expansion Space Work Contribution pursuant to Section 10.0 1(e) hereunder and, in lieu thereof, receive a reduction in fixed rent for the Expansion Space - 54 - of $1.81 per year per rentable square feet contained in the Expansion Space (i.e., $22,112.77 per year with respect to the Expansion Space). Tenant shall give Landlord such written notice on or prior to the expiration of the ES Election Period. Time shall be of the essence with respect to the giving of such notice; (c) Each of the provisions of Section 2.04 shall apply to the Expansion Space except (i) the term "Building A" in Section 2.04(b)(i) shall be replaced by "Building B" for the purpose of calculating Taxes with respect to the Expansion Space and (ii) Tenant's Tax Share with respect to the Expansion Space shall be 8.4999% ("Expansion Space Tax Share") and any reference with respect to Tenant's Tax Share shall be deemed to refer to the Expansion Space Tax Share when calculating the Taxes for the Expansion Space. The parties hereto agree that the rentable square foot area of the Expansion Space shall be deemed to be 12,217 rentable square feet and the rentable square foot area of Building B shall be deemed to be 143,731 rentable square feet. The Expansion Space Tax Share has been determined by dividing the rentable square foot area of the Expansion Space by the rentable square foot area of Building B, (d) The Multiplication Factor shall be increased by 12,217 rentable square feet; (e) Landlord agrees to contribute Fifteen ($15) Dollars per rentable square foot of the Expansion Space for a total of $183,255 ("Expansion Space Work Contribution"), toward the cost of the Tenant's Initial Improvements with respect to the Expansion Space ("Expansion Space Alterations"). Landlord shall pay the Expansion Space Work Contribution to Tenant's Contractor(s) over the duration of the construction, no more frequently than monthly, on receipt of a notice from Tenant of the names of the Contractor(s) who performed work or supplied materials with respect to Tenant's Expansion Space Alterations, together with an Application and Certificate for Payment on AIA Document G702 and G703, or similar form, duly executed by the Contractor(s) to be paid, and Tenant's architect, who shall certify to Landlord (i) that the work performed and materials delivered under said application generally conform to Tenant's Plans, (ii) that the amount of such payment request approved by the architect is justified by the work, (iii) the percentage of Tenant's Expansion Space Alterations completed by that date, (iv) that no less than 85% of the cost of work to be paid from the Expansion Space Work Contribution (i.e., $155,766.75) has been incurred in respect of hard costs and (v) that in said architect's opinion adequate funds remain to complete Tenant's Expansion Space Alterations. Landlord may retain ten (10%) percent of each requested amount until ten (10) days after (w) substantial completion of Tenant's Expansion Space Alterations, (x) delivery to Landlord of waivers of mechanic's/materialmen's liens from all of Tenant's Contractor(s) for amounts paid to date, and statements from the Contractor(s) stating the balance owed, (y) receipt of invoices, requisitions, canceled checks or other documentary evidence showing payment of the cost of Tenant's Expansion Space Alterations, and (z) receipt of two (2) sets of as-built drawings, or drawings marked "Final", of the improved Expansion Space. For each request for payment made by Tenant, the amount of Expansion Space Work Contribution to be paid to Tenant's Contractor(s) shall be determined by multiplying the amount due to Tenant's Contractors by the Pro Rata Share. "Pro Rata Share" shall mean the ratio of the Expansion Space Work Contribution to the total estimated cost of Tenant's Expansion Space Alterations. Tenant shall comply with all provisions of Section 4.01 in performing Tenant's Expansion Space Alterations; - 55 - (f) (i) In connection with the delivery of the Expansion Notice by Tenant to Landlord, Tenant shall, simultaneously, deliver to Landlord, as security for the performance of Tenant's obligations under this Lease, either (a) the additional sum of $871,198.00, in certified or official bank check (the "Expansion Space Security Deposit"), or (b) an unconditional, irrevocable letter of credit in the amount of $871,198.00 in a form and issued by a bank reasonably satisfactory to Landlord (the "Expansion Space Letter of Credit"). The Expansion Space Letter of Credit shall provide that it is assignable by Landlord without charge and shall either (x) expire on the LC Date (as defined herein) or (y) be automatically self-renewing until the LC Date. If the Expansion Space Letter of Credit is not renewed at least 30 days prior to the expiration thereof or if Tenant holds over in the Premises without the consent of Landlord after the expiration or termination of this Lease, Landlord may draw upon the Expansion Space Letter of Credit and hold the proceeds thereof as security for the performance of Tenant's obligations under this Lease. Landlord may draw on the Expansion Space Security Deposit or Expansion Space Letter of Credit (or the proceeds thereof) solely to remedy defaults by Tenant, which are beyond any applicable notice and grace period, in the payment or performance of any of Tenant's obligations under this Lease. If Landlord shall have so drawn upon the Expansion Space Security Deposit or the Expansion Space Letter of Credit (or the proceeds thereof), Tenant shall upon demand deposit with Landlord a sum equal to the amount so drawn by Landlord. Landlord hereby agrees that a letter of credit issued (i) in the form set forth in Exhibit I attached hereto and made a part hereof and (ii) by Amalgamated Bank shall be deemed to be reasonably satisfactory to Landlord. If Tenant delivers the Expansion Space Security Deposit to Landlord in cash, then such Expansion Space Security Deposit shall be kept in an interest-bearing account until applied in accordance with the terms of this Lease (it being understood that Landlord shall not be liable for failure to obtain any specific level of interest). Landlord shall pay such interest to Tenant, less a one (1%) percent administrative fee, no more frequently than annually, upon request of Tenant. (ii) In the event that Tenant shall have, prior to the expiration of the ES Election Period, elected to forego receipt of the Expansion Space Work Contribution pursuant to Section 10.01(b) above, the amount of the Expansion Space Security Deposit required hereunder shall be reduced by one hundred eighty-three thousand two hundred fifty-five and 00/100 ($183,255.00) dollars. (iii) If, at any time, Tenant (1) completes a secondary public offering of the Minimum Equity Amount or (2) otherwise receives an equity infusion of the Minimum Equity Amount, which Minimum Equity Amount, by the terms of the documents governing the same, can be used by Tenant as working capital, then the Expansion Space Security Deposit required hereunder shall be reduced to four hundred eighty-four thousand and 00/100 ($484,000.00) dollars; (iv) If, prior to the expiration of the ES Election Period, Tenant has elected to forego receipt of the Expansion Space Work Contribution pursuant to Section 10.08(b) above, and if Tenant meets the requirements of Section 10.08(f)(iii) above, then the Security Deposit shall be reduced to three hundred nine thousand eight hundred seventy-two and 00/100 ($309,872.00) dollars (the "ES Minimum Security Amount"). -56- (v) If, from and after the ES Inclusion Date, (1) there is not a monetary default beyond any applicable notice and grace period under this Lease and (2) Tenant delivers to Landlord evidence that it has a NOI of at least four million ($4,000,000.00) dollars and that the Tenant has maintained a NAV of at least twenty million ($20,000,000.00) dollars during the preceding twenty-four (24) month period, then the Expansion Space Security Deposit shall be reduced to three hundred nine thousand eight hundred seventy-two and 00/100 ($309,872.00) dollars; (vi) If the Expansion Space Security Deposit has not otherwise been reduced to the ES Minimum Security Amount, then: (a) if, during the first five (5) years of the Term, there have not occurred more than three (3) monetary defaults beyond any applicable notice and grace period under this Lease, then upon the sixth (6th) anniversary of the ES Inclusion Date, the Security Deposit shall be reduced by two hundred forty-seven thousand eight hundred ninety-seven and 00/100 ($247,897.00) dollars; and (b) if during the first ten (10) years of the Term, there have not occurred more than six (6) monetary defaults beyond any applicable notice and grace period, then upon the eleventh (11th) anniversary of the ES Inclusion Date, the Security Deposit shall be reduced by two hundred forty-seven thousand eight hundred ninety-seven and 00/100 ($247,897.00) dollars; (vii) If the Security Deposit is reduced pursuant to Section 1.08(a)(v)(D)(1) or (2) above, and after the date of such reduction there occurs more than three (3) monetary defaults, beyond any applicable notice and grace period, within any five (5) year period, the Security Deposit required shall be increased to the amount of such Security Deposit immediately prior to such reduction and Tenant shall be required to deliver to Landlord as further security for the performance of Tenant's obligations under this Lease, within ten (10) days notice from Landlord and in accordance with the provisions of Section 1.08(a)(v)(A) above, two hundred forty-seven thousand eight hundred ninety-seven ($247,897.00) dollars; (viii) Notwithstanding anything to the contrary contained in this Section 1.08(a)(vi), in no event shall the Expansion Space Security Deposit be reduced to less than the ES Minimum Security Amount; (ix) In the event that Tenant is entitled to a reduction in the amount of the Expansion Space Security Deposit under Sections 1.08(a)(v)(B), (C), or (D) above, Landlord shall (1) if the Expansion Space Security Deposit was paid in cash, return the amount of such reduction to Tenant by check or (2) if the Expansion Space Security Deposit was given in the form of a letter of credit, exchange the existing Expansion Space Letter of Credit for a letter of credit in the amount of the reduced Expansion Space Security Deposit. If, within thirty (30) days after receiving notice from Tenant that Tenant is entitled to a reduction in the Expansion Space Security Deposit, unless Landlord is disputing the same, Landlord does not return the amount of the reduction to Tenant or, if applicable, cooperate with Tenant in obtaining a new letter of credit for the reduced amount of the Expansion Space Security Deposit, then Tenant shall be entitled to -57- interest, at the Interest Rate, on the amount of the reduction of the Expansion Space Security Deposit. "Interest Rate" means the lesser of (i) the prime rate from time to time announced by Citibank, N.A. (or, if Citibank, N.A. shall not exist, such other bank in New York, New York, as shall be designated by Landlord in a notice to Tenant) to be in effect at its principal office in New York, New York plus 2% or (ii) the maximum rate permitted by law; and 10.02 ES Inclusion Date. (a) The "ES Inclusion Date" shall be the Possession Date and, if the Possession Date shall not have occurred as a result of the termination of this Lease with respect to the Original Premises in accordance with Section 1.06(e) herein, then the ES Inclusion Date shall be the date of the Termination Notice. (b) Promptly after the occurrence of the ES Inclusion Date, Landlord and Tenant shall confirm the occurrence thereof and the inclusion of the Expansion Space in the Premises by executing an instrument reasonably satisfactory to Landlord and Tenant; provided, that failure by Landlord or Tenant to execute such instrument shall not affect the inclusion of the Expansion Space in the Premises in accordance with this Article 10. 10.03 Services. If Tenant exercises the Expansion Option set forth in this Article 10, Landlord shall provide the Expansion Space with the services described in Section 3.01(b) herein throughout the Term of this Lease. 10.04 Alternate Space. Notwithstanding anything to the contrary contained herein, if Tenant gives to Landlord an Expansion Notice on or before April 1, 2000 (time being of the essence), Landlord may notify Tenant within ten (10) days of receiving Tenant's Expansion Notice that Landlord, at Landlord's cost and expense, intends to move Tenant to alternate space, of at least an equal number of rentable square feet as the First Temporary Space, in the Building (the "Alternate Space"); provided, that Landlord has signed a lease for two or more floors, one of which is the First Temporary Space. If, at the time the Expansion Notice is given, Landlord is actively negotiating a lease for two or more floors which lease shall encompass the First Temporary Space, Landlord shall provide notice to Tenant that Landlord is actively negotiating such a lease. Landlord shall within three (3) months from the date of the Expansion Notice notify Tenant that Landlord intends to move Tenant to Alternate Space. If Landlord so notifies Tenant that it intends to move Tenant from the Expansion Space to Alternate Space, Tenant may withdraw its Expansion Notice if Tenant determines not to accept the Alternate Space offered by Landlord. Tenant shall so advise Landlord by written notice given to Landlord within ten (10) Business Days of the date of Landlord's Notice. If Tenant accepts the Alternate Space offered by Landlord, (i) Landlord shall, at Landlord's cost, move Tenant to the Alternate Space and shall pay, in connection therewith, for the cost of installing telecommunications equipment in the Alternate Space in an amount not to exceed $10,000 and (ii) the term "Expansion Space" as used in this Article 10 shall for all purposes hereunder mean the Alternate Space. Landlord shall coordinate any move to the Alternate Space with Tenant, but the timing of such move shall be determined in Landlord's sole discretion. -58- IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first written above. Landlord: 225 FOURTH LLC By: ORDA MANAGEMENT CORPORATION By: /s/ Morton F. Silver ---------------------------- Morton F. Silver, President Tenant: ACTV, INC By: /s/ Christopher Cline ------------------------------- Name: Christopher Cline Title: Senior Vice President Tenant's Federal Tax ID. No.: 94-2907258 -59- EXHIBIT A DESCRIPTION OF LAND All those lots or parcels of land, situate, lying and being in the Borough of Manhattan, in the City, County and State of New York, bounded and described as follows: AS TO LOT 4 BEGINNING at the corner formed by the intersection of the easterly side of Park Avenue South (formerly known as Fourth Avenue) with the southerly side of Nineteenth Street; RUNNING THENCE southerly along the easterly side of Park Avenue South (formerly known as Fourth Avenue) eighty two feet; THENCE easterly parallel with Nineteenth Street one hundred and fifty feet; THENCE northerly parallel with Park Avenue South (formerly known as Fourth Avenue) eighty two feet to the southerly side of Nineteenth Street; THENCE westerly along the said southerly side of Nineteenth Street one hundred and fifty feet to the corner aforesaid the point or place of BEGINNING. AS TO LOT 1 BEGINNING at the corner formed by the intersection of the easterly side of Park Avenue South (formerly known as Fourth Avenue) with the northerly side of Eighteenth Street; RUNNING THENCE northerly along said easterly side of Park Avenue South (formerly known as Fourth Avenue) one hundred and two feet; THENCE easterly parallel with Eighteenth Street one hundred and fifty feet; THENCE northerly and parallel with Park Avenue South (formerly known as Fourth Avenue) eighty two feet to the southerly side of Nineteenth Street; THENCE easterly along the said southerly side of Nineteenth Street fifty feet; THENCE southerly and parallel with Park Avenue South (formerly known as Fourth Avenue) ninety two feet to the center line of the block; THENCE easterly along the said center line of the block eighteen feet; THENCE southerly and again parallel with Park Avenue South (formerly known as Fourth Avenue) ninety two feet to the said northerly side of Eighteenth Street; -1- THENCE westerly along the said northerly side of Eighteenth Street two hundred and eighteen feet to the corner aforesaid, the point or place of BEGINNING. -2- EXHIBIT B [FLOOR PLAN OMITTED] 225 PARK AVENUE SOUTH 19TH FLOOR EXHIBIT B Page 2 [FLOOR PLAN OMITTED] 225 PARK AVENUE SOUTH 20TH FLOOR EXHIBIT B-1 [FLOOR PLAN OMITTED] 233 PARK AVENUE SOUTH 10TH FLOOR Exhibit B-2 Additional 19th Floor Space is shown by shading [FLOOR PLAN OMITTED] 225 PARK AVENUE SOUTH 19TH FLOOR EXHIBIT C RULES AND REGULATIONS 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in the public hall of the building, either by Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building, and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the building by reason of noise, odors, and/or vibrations, or interfere in any way with other Tenants or those having business therein, nor shall any animals or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators or elsewhere in the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of the Landlord. 5. Except as otherwise provided in this Lease, no sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same is visible from the outside of the demised premises without the prior written consent of Landlord, except that the name and/or logo of Tenant may appear on the entrance door, and in the event of a full floor tenant, in the elevator lobby of the demised premises. In the event of the violation of the foregoing by any Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and the directory in the lobby shall be inscribed, painted or affixed for each Tenant by Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to Landlord and consistent -1- with the standard for the building. Tenant may place signs on the inside of the demised premises, including in the lobby of the demised premises. 6. No Tenant shall mark, paint, drill into, or in any way deface any masonry wall of the demised premises or the building of which they form a part, except that Tenant may paint interior masonry walls. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct, except for the installation of telecommunication and electric wires. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any Tenant, nor shall any changes be made in existing locks or mechanism thereof. Each Tenant must, upon the termination of this Lease, restore to Landlord all keys of offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys so furnished, such Tenant shall pay to Landlord the cost thereof. Tenant may place a lock or locks on any "secure area" closet that Tenant shall designate, and Landlord shall not have access thereto except in an emergency. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the demised premises only on the freight elevators and through the service entrances and corridors, and only between 8:00 AM and 5:00 PM, Monday through Friday, and in a manner approved by Landlord. Tenant shall have the right to use the freight elevator after 5:00 PM upon reasonable notice to Landlord, and upon payment of a commercially reasonable charge set by Landlord for all tenants. Landlord reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease or which these Rules and Regulations are a part. 9. Canvassing, soliciting, hawking and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Landlord shall have the right to prohibit any advertising by any Tenant which in Owner's opinion, tends to impair 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. 11. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any vending machines dispensing food or beverage, inflammable, combustible or explosive or hazardous fluid, material, chemical or substance, or any other hazardous material, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. Tenant may have copying equipment that uses ammonia. -2- 12. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky matter, or fixtures into or out of the building without Landlord's prior written consent, which Landlord agrees not to unreasonably withhold or delay. If such safe, machinery, equipment, bulky matter or fixtures requires special handling, all work in connection therewith shall comply with the Administration Code of the City of New York and all other laws and regulations applicable thereto and shall be done during such hours as Landlord may designate. 13. Refuse and trash: (1) Compliance by Tenant. Tenant covenants and agrees, at its sole cost and expense, to comply with all present and future laws, orders, and regulations of all state, federal, municipal, and local governments, departments, commissions and boards regarding the collection, sorting, separation and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Landlord. Such separate receptacles may, at Landlord's option, be removed from the demised premises in accordance with a collection schedule prescribed by law. Tenant shall remove, or cause to be removed by a contractor acceptable to Landlord, at Landlord's sole discretion, such items as Landlord may expressly designate. (2) Owner's Rights in Event of Noncompliance. Owner has the option to refuse to collect or accept from Tenant waste products, garbage, refuse or trash (a) that is not separated and sorted as required by law or (b) which consists of such items as Landlord may expressly designate for Tenant's removal, and to require Tenant to arrange for such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Landlord. Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant's failure to comply with the provisions of this Rule 15, and, at Tenant's sole cost and expense, shall indemnify, defend and hold Landlord harmless (including reasonable legal fees and expenses) from and against any actions, claims and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord. 14. No equipment or large boxes containing personal or office items are allowed to enter or exit through the building lobbies. Such items must be brought in or removed through the freight elevators. When leaving the building, a pass for these items must be given to the freight elevator operator. 15. No pets are allowed in the building at any time. Guide Dogs are the only exception to this rule. 16. No bicycles are allowed in the building. 17. Anyone entering the building from 6:00 PM to 7:00 AM (Monday - Friday), and anytime Saturday or Sunday, must be on an authorized list supplied by Tenant's office manager from time to time. In addition, anyone entering the building during the times listed in the preceding sentence must sign in and out, and if asked, must show identification. Updates -3- should list all employees with permission to enter the demised premises after hours, not just newly authorized employees. -4- EXHIBIT D [INTENTIONALLY OMITTED] -1- EXHIBIT E GENERAL TENANT CLEANING SERVICES The following services will be performed five nights per week (Monday through Friday), except on union holidays. Empty waste paper baskets and other rubbish containers, including containers in bathrooms. Bags of rubbish will be properly tied and left a place to be designated by Orda Management, which will arrange for their removal. Under NYC law, it is the responsibility of the tenant to have all recyclable materials placed in one large central container. Clean water fountains and water coolers. Sweep and damp mop composition like floors. Dust all furniture such as desk, tables, chairs, files, cabinets and lockers. Dust window sills, moldings, and radiator covers; once a week. Vacuum carpeting once per week, carpet sweep rest of week, including steps. Dust telephones. Lavatories: Clean and disinfect bowls, seats, basins and urinals. Clean mirrors. Clean all metal fixtures. Clean metal partitions and tile walls. Wall floors. * Refill containers of hand towels and toilet tissues. Turn off all lights as required. All exterior windows will be cleaned inside and outside; once every four months. High dust every three months. Damp wipe venetian blinds every three months. Machine scrub lavatory floors as necessary. - ---------- * On single tenant floors Management will not furnish paper and soap supplies. -1- EXHIBIT F LANDLORD'S WORK The following work shall constitute "Landlord's Initial Work": 1. Demolish the existing concrete block kitchen, including any duct work, exhaust hoods and/or fans, and cafeteria facility walls. 2. Close any roof openings caused by the demolition described above, subject to Tenant's demolition plan (to be provided to Landlord). 3. Remove and dispose of existing glass and metal in fill partitions at cafeteria and kitchen facility. 4. Patch and paint any and all columns affected by demolition of the existing concrete block kitchen and cafeteria facility walls. 5. Cut back and cap gas and water lines to their point or origin. 6. Remove any and all ductwork within the kitchen and cafeteria. 7. Blank abandoned openings at main duct. 8. Remove any and all grease traps and grease disposal systems. 9. Cap any and all waste lines. 10. Remove any and all existing electrical receptacles and lighting subject to Tenant's demolition plan (to be provided to Landlord). 11. Cut back any and all wiring and conduits to the point of origin at the circuit panel subject to Tenant's demolition plan (to be provided to Landlord). 12. Level the floor area of the Additional 19th Floor Space. 13. Remove the refrigerator, remote phone system and phone cabinet from the 19th Floor Mezzanine. 14. Provide to Tenant an ACP-5 for the 19th Floor and 19th Floor Mezzanine. -1- EXHIBIT G LANDLORD'S TEMPORARY SPACE WORK The following work shall constitute "Landlord's Temporary Space Work": 1. Shampoo carpet in the First Temporary Space. 2. Paint the First Temporary Space. -1- EXHIBIT H FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ("Agreement") is made and entered into to be effective as of the ____ day of ____ 199_, by and between AETNA LIFE INSURANCE COMPANY, a Connecticut corporation having an office and place of business c/o Aetna Investment Group, 151 Farmington Avenue, Hartford, Connecticut 06156 ("Lender") and __________________,a __________ corporation having an office and place of business at _______________________ ("Tenant"). WITNESSETH: WHEREAS, 225 FOURTH LLC, a Delaware limited liability company ("Landlord") and Tenant are parties to that certain Lease dated as of ____________, 1999 (the "Lease"), covering the ______________ floor(s) in that certain building known as and located at 225 Park Avenue South, New York, New York 10003, as more particularly described in the Lease (the "Demised Premises"); and WHEREAS, Lender has made a loan to Landlord (the "Loan") which is secured by inter alia, a mortgage upon certain property including the Demised Premises (as the same may be amended from time to time, the "Mortgage"); and WHEREAS, Lender and Tenant desire to set forth their agreement concerning their respective interests in the Demised Premises. NOW THEREFORE, in consideration of the foregoing recitals, the leasing of the Demised Premises, and of the sum of One Dollar ($1.00) and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. The Lease is and shall be subject and subordinate to the Mortgage insofar as it affects the real property of which the Demised Premises form a part, and to all renewals, modifications, consolidations, replacements and extensions thereof, to the full extent of amounts secured thereby and interest thereon. 2. Tenant agrees that it will attorn to and recognize any purchaser at a foreclosure sale under the Mortgage, any transferee who acquires the Demised Premises by deed in lieu of foreclosure, and the successors and assigns of such purchaser or transferee, as its landlord for the unexpired balance (and any extensions, if exercised) of the term of the Lease upon the same terms and conditions as are set forth in the Lease. 3. Lender covenants and agrees that so long as Tenant is not then in default under the Lease beyond any applicable cure period, in the event Lender forecloses, the Mortgage Lender shall not terminate the Lease nor join Tenant in summary or foreclosure proceedings and -1- will recognize Tenant and its rights under the Lease and will not disturb Tenant in its possession pursuant to the Lease of the Demised Premises. 4. Tenant covenants and agrees with Lender that if Lender succeeds to the interest of Landlord under the Lease, Lender shall not be: a. liable for any act or omission of any prior landlord (including Landlord); or b. liable for the return of any security deposit, unless and only to the extent that Lender actually receives such security deposit; or c. subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord), other than as specifically provided for in the Lease, provided the foregoing shall not relieve Lender from any obligation of the Landlord under the Lease accruing or arising after Lender's succeeding to the interest of Landlord under the Lease; or d. bound by any rent or additional rent which Tenant might have paid in advance for more than the current month to any prior landlord (including Landlord); or e. bound by any amendment or modification of the Lease made without Lender's written approval or consent not to be unreasonably withheld; or f. bound by any representation or warranty made by any prior landlord (including Landlord). 5. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 6. Tenant agrees to give Lender, by certified mail, return receipt requested, sent to Lender's address set forth above a copy of any notice of default served upon Landlord. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in the Lease and Tenant would have the right to terminate the Lease based on such default then the Lender shall have an additional thirty (30) days within which to cure such default before Tenant may terminate the Lease, or if such default cannot be cured within that time, then such additional time as may be necessary to cure such default shall be granted if within thirty (30) days Lender has commenced and is diligently pursuing to cure such default, in which event the Lease shall not be terminated while such remedies are being so diligently pursued. 7. The liability of Lender for the performance of any obligation of Landlord under the Lease shall be limited to Lender's interest in the Demised Premises and the income and proceeds therefrom, and Tenant hereby agrees that any judgment it may obtain against Lender as a result of Lender's failure, as Landlord, to perform any of Landlord's obligations under the Lease shall be enforceable solely against Lender's interest in the Demised Premises. -2- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TENANT: ------------------------------ By: ____________________________ Name: Title: LENDER: AETNA LIFE INSURANCE COMPANY By: ____________________________ Name: Title: -3- EXHIBIT I FORM OF LETTER OF CREDIT LETTER OF CREDIT BENEFICIARY: ________________________, as Escrow Agent NEW YORK, NEW YORK _____ IRREVOCABLE STANDBY LETTER OF CREDIT ____________, 199_ Gentlemen: We hereby establish our Irrevocable Standby Letter of Credit Number __________ in favor of _________________ its successors and assigns ("Escrow Agent"), as escrow agent for the parties pursuant to Article 29 of that certain Lease dated as of _____________, 1999 between 225 FOURTH, LLC, as Landlord, and ______________________, as Tenant by order and for [account of ________________] [INSERT NAME OF TENANT] for a sum or sums not exceeding in all _____________ 00/100 U.S. Dollars (USD ___________) available by your sight draft(s) drawn on us. Partial Drawing(s) permitted. The term "Beneficiary" includes any successor by operation of law of the named beneficiary, including without limitation, any liquidator, rehabilitator, receiver, or conservator. Drafts drawn hereunder must be marked "DRAWN UNDER [____________ BANK] CREDIT NO. __________ DATED _________, 199_." The Letter of Credit shall be deemed to be automatically renewed, without amendment, for consecutive periods of one year each unless we send written notice to you and to the Landlord under the Lease by certified or registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of this Letter of Credit, that we elect not to have this Letter of Credit renewed. This Letter of Credit sets forth in full the terms of our undertaking and such undertaking shall not in any way be modified, amended or amplified by reference to any document or instrument referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit relates, and any such reference shall not be deemed to incorporate herein by reference any documents or instrument. We engage with you that your draft(s) drawn hereunder and in compliance with the terms of this credit will be duly honored by us, if presented at _______________ __________________________________________________________________, on or before -1- Except as otherwise expressly stated herein, this credit is subject to the uniform customs and practice for documentary credits, [1993 revision, ICC Publication No. 500] [UPDATE IF NECESSARY]. Very truly yours, - ------------------------------- Authorized Signature -2- EXHIBIT J [INTENTIONALLY OMITTED] -1- EXHIBIT K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 ------------------ ACTV, Inc. (Exact name of registrant as specified in its charter) Delaware 94-2907258 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1270 Avenue of the Americas New York, New York 10020 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 217-1600 (Registrant's telephone number, including area code) - -------------- Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of exchange on which registered - ------------------- ------------------------------------ Common Stock, Par Value $0.10 Boston Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: Common Stock, par value $0.10 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |x| No |_| As of November 15, 1999, there were 41,971,330 shares of the registrant's common stock outstanding. 1 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Nine Month Periods Three Month Periods Ended September 30, Ended September 30, 1998 1999 1998 1999 ------------ ------------ ------------ ------------ Revenues: Sales revenues ................. $ 1,058,560 $ 1,328,961 $ 301,900 $ 474,454 ------------ ------------ ------------ ------------ Total revenues .............. 1,058,560 1,328,961 301,900 474,454 Costs and expenses: Cost of sales .................. 168,934 161,754 45,545 81,240 Operating expenses ............. 1,718,627 1,418,087 738,000 615,588 Selling and administrative ..... 6,462,024 11,874,979 2,558,176 5,252,404 Depreciation and amortization .. 810,984 1,038,449 296,721 368,275 Amortization of goodwill ....... 319,779 319,779 106,593 106,593 Stock appreciation rights ...... 455,251 1,950,330 58,972 (2,605,319) ------------ ------------ ------------ ------------ Total costs and expenses ...... 9,935,599 16,763,378 3,804,007 3,818,781 ------------ ------------ ------------ ------------ Loss from operations .............. (8,877,039) (15,434,417) (3,502,107) (3,344,327) ------------ ------------ ------------ ------------ Interest (income) .............. (105,398) (304,679) (40,077) (180,830) Interest expense ............... 718,220 782,922 254,243 261,305 ------------ ------------ ------------ ------------ Interest expense (income) - net 612,822 478,243 214,166 80,475 Minority interest - subsidiary preferred stock dividends ...... 379,161 -- 117,211 -- ------------ ------------ ------------ ------------ Net loss .......................... (9,869,022) (15,912,660) (3,833,484) (3,424,802) Preferred stock dividends ...... -- 494,431 -- -- ------------ ------------ ------------ ------------ Net loss applicable to common shareholders ...................... $ (9,869,022) $(16,407,091) $ (3,833,484) $ (3,424,802) ============ ============ ============ ============ Basic and diluted loss per common share ............................. $(.51) $(.47) $(.16) $(.08) Weighted average number of common shares outstanding ......... 19,309,832 35,154,248 23,422,018 41,430,091
See Notes to Consolidated Financial Statements 3 ACTV, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock Preferred Series A Preferred Series B Additional paid- Shares Amount Shares Amount Shares Amount in-capital Deficit - ------------------------------------------------------------------------------------------------------------------------------------ Balances January 1, 1999 29,759,459 $2,975,946 56,300 $5,630 5,018 $2,805,961 $71,068,230 $(71,892,519) - ------------------------------------------------------------------------------------------------------------------------------------ Issuance of common shares 4,059,783 405,978 18,593,996 Issuance of shares for services provided 556,294 55,629 4,023,107 Issuance of shares in connection with exchange of preferred stock 1,061,690 106,169 (56,300) (5,630) Issuance of shares in connection with exercise of stock options, stock appreciation rights & warrants 6,109,770 610,978 12,284,173 Preferred stock redemption (5,018) (2,805,961) (2,392,379) Net loss (15,912,660) Preferred stock dividends & accretions (494,431) -------------------------------------------------------------------------------------------------------------- Balances September 30, 1999 41,546,996 $4,154,700 -- $ -- -- $ -- $103,487,127 $(88,299,610) ==============================================================================================================
See Notes to Consolidated Financial Statements 5 In connection with the purchase of such notes, the investors received on January 14, 1998 a warrant that allowed them, among other rights, to exchange the warrant for such number of shares of our common stock, at the time of and giving effect to such exchange, equal to 5.5% of the fully diluted number of shares of common stock outstanding, after giving effect to the exercise or conversion of all then outstanding options, warrants and other rights to purchase or acquire shares of common stock. For accounting purposes, we allocated approximately $1.4 million to the value of the warrant, based on a valuation by an investment banker. The warrant was included outside of Consolidated Shareholders' Equity, due to its cash put feature and the notes were recorded at a value of proceeds received less the value attributed to the warrant. The difference between the recorded value of the notes and the principal is being amortized as additional interest expense over the life of the notes. The warrant was exchanged and exercised for our common stock during the first quarter of 1999. 5. Our balance sheet at December 31, 1998 also reflects a contra shareholders' equity amount of $199,900, related to a loan made by us in August 1995 to a shareholder. The loan was repaid during the first quarter of 1999. 6. We made no cash payments of interest or income taxes during the nine months ended September 30, 1998. However, we made cash interest payments in July 1999 of $369,632, related to the $5 million original fair value notes. 7. For the three and nine months ended September 30, 1999, we incurred executive compensation expense of $2.1 million and $3.6 million, respectively. Approximately $1.3 million of both the three and nine month totals was non-cash compensation attributable to the exchange of stock options for stock appreciation rights, as described above. An additional component of total compensation expense was approximately $780,000 and $2.3 million for the three and nine month periods, respectively, related to an incentive compensation provision that is based on changes in the market value of our common stock during the twelve-month period ended March 31,1999. We are accruing the total value of the award in four equal quarterly amounts, beginning March 31, 1999, since it is payable in quarterly installments that are contingent on continued employment by us of the executive receiving this compensation. We have paid approximately $1.7 million, or 75% of the award in the form of our unregistered common stock. 8. We have developed proprietary and patented software technologies for two principal business segments, Individualized Television and HyperTV. Individualized Television software provides the tools needed to create live or pre-recorded television programming that individualizes what the viewer sees and hears. We have not yet recorded revenues related to Individualized Television, applications of which we expect to distribute both nationally and regionally in the U.S. HyperTV software enables the simultaneous delivery of television video and complementary web content. HyperTV is targeted at both the entertainment and education markets. Our presentation of the operating segments, Individualized Television and HyperTV, is based on the way we manage our business. Information concerning our business segments for the nine and three-month periods ending September 30, 1998 and 1999 are as follows: 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Since our inception, the primary focus of our operating activities has been to develop patented, proprietary technologies that enable programmers and advertisers to create individualized programming and programming enhancements - --first for television and later also for the emerging area of television/Internet convergence. We call our technologies for the television and television/Internet convergence markets Individualized Television and HyperTV(TM), respectively. We derived all of our revenues for 1998 and for the nine months ended September 30, 1999 from HyperTV, which is targeted at the entertainment and education markets. We anticipate that the most significant portion of future HyperTV revenues will be derived from the entertainment market, for which we introduced a HyperTV application earlier this year. We subsequently entered into HyperTV programming alliances for this market with The Box Music Network, Showtime, and New Line Television. We expect the sources of revenue from the entertainment market to be software licensing and program hosting fees, Internet advertising and commerce, content creation fees, and data management services. With respect to Individualized Television, our business plan is to generate future revenues from subscription fees, advertising and fees related to advertising services. For national distribution of Individualized Television, we have formed a joint venture, LMC IATV Events, LLC, with Liberty Digital, a subsidiary of Liberty Media Corporation. LMC expects to license the rights to produce individualized telecasts of marquee sports and other events. In November 1999, LMC IATV Events entered into an agreement with Viewer's Choice, LLC to distribute individualized event programming on a pay-per-view basis to a national audience. Viewers Choice is the premier distributor of pay-per-view programming in the United States. For regional applications of Individualized Television, we intend to launch a series of sports television networks in different regions of the United States. Programming for our networks will be provided by FOX Sports Net, which reaches 72 million homes through 19 regional networks across the country. FOX Sports Net will supply us with its professional and college sports programming, to which we will add Individualized Television enhancements produced by us. Our license agreement with FOX Sports Net provides that we pay FOX a portion of the net subscriber revenue we receive from cable operators. In addition, we must bear the production costs of additional elements to produce an individualized telecast. Having performed tests of Individualized Television during 1998 and 1999 through the Dallas cable system of AT&T Broadband & Internet Services (formerly TCI Cable), we intend to launch our first network in the region served by FOX Sports Net Southwest. FOX Sports Net Southwest programming reaches over 6 million subscriber homes in Texas, Arkansas, Louisiana, Oklahoma and parts of New Mexico. We have an agreement with AT&T Broadband to distribute our southwest regional network and to share subscription fee revenues with us. Since individualized programming relies on software incorporated into digital cable set-top terminals, AT&T Broadband will offer our network to those subscribers who receive its digital cable service. We intend to enter into similar distribution agreements with other cable operators who are deploying digital service in their systems. We have had minimal revenues to date and have incurred significant operating losses, net 9 preferred stock issued by a subsidiary of ours, which was accounted for as minority interest. In addition, we paid $312,137 in preferred dividends during the nine-month period ending September 30, 1998 in the form of our common stock. The subsidiary preferred stock was retired in November 1998 in exchange for a combination of our new preferred stock, common stock and warrants. Preferred Stock Dividends. For the nine-month period ended September 30, 1999, we paid $494,431 in preferred stock dividends, related to our Series B preferred stock, compared to no such preferred dividend payments during the comparable 1998 period. The Series B preferred stock, which was issued in November 1998, was redeemed in full in May 1999. Net Loss Applicable to Common Shareholders. For the nine months ended September 30, 1999, our net loss applicable to common shareholders was $16,407,091 or $.47 per basic and diluted share, an increase of 66% over the net loss of $9,869,022, or $.51 per basic and diluted share, incurred in the prior year's comparable period. The increase during the more recent nine-month period was the result of higher overall expenses, led by higher selling and administrative and stock appreciation rights expenses, as described above. Comparison of Nine-Month Periods Ended September 30, 1998 and September 30, 1997 Revenues. During the nine-month period ended September 30, 1998, our revenues decreased 31% to $1,058,560, from $1,534,295 in the nine-month period ended September 30, 1997. Nearly all of our revenues in the more recent nine-month period were derived from educational sales of HyperTV software, computer servers, and related services, compared to the comparable 1997 nine-month period, when the majority of revenues were related to television-based education hardware and content. Total Costs and Expenses. Cost of sales in the nine months ended September 30, 1998, was $168,934, a decrease of 61% over cost of sales of $434,287 in the nine months ended September 30, 1997. The decrease was the result of the change in the composition of products sold during the nine months ended September 30, 1998, as noted above, in favor of Internet products and services, which carry a higher profit margin than our television-based education revenue sources. Total costs and expenses, excluding cost of sales, in the nine months ended September 30, 1998, increased 63%, to $9,766,665, from $6,000,435 in the comparable period in 1997. The increase was due to higher operating and selling and administrative expenses associated with our regional network testing in Dallas; higher depreciation and amortization expenses; and higher stock appreciation rights expenses, the result of an increase in the market price of our common stock. Depreciation and amortization expense for the nine months ended September 30, 1998, increased 440% to $810,984, from $150,210 for the nine months ended September 30, 1997. This increase was due principally to higher depreciation expenses related to our regional network's master control production facility and to the amortization of software development costs in the more recent period. Interest Expense (Income) - Net. Interest income in the nine months ended September 30, 1998, was $105,398, compared with $103,239 in the nine months ended September 30, 1997. We incurred interest expense and accretions of $718,220 in the nine months ended September 30, 1998, compared to no interest expense during the comparable 1997 period. Interest expense is related to the $5 million principal value notes issued in January 1998 by a subsidiary of ours. We chose to pay the interest due September 30, 1998 in kind rather than in cash. 11 outstanding preferred stock issued by our subsidiary, which was accounted for as minority interest. The subsidiary preferred stock was retired in November 1998 in exchange for a combination of new ACTV, Inc. preferred stock, common stock, and warrants. Net Loss Applicable to Common Shareholders. Our net loss applicable to common shareholders for the three months ended September 30, 1999 decreased approximately 11%, to $3,424,802, or $.08 per share, from $3,833,484, or $.16 per share, in the comparable 1998 period, principally due to higher sales, SARs income and interest income that more than offset an increase in selling and administrative expenses. Comparison of Three-Month Periods Ended September 30, 1998 and September 30, 1997 Revenues. During the three-month period ended September 30, 1998, our revenues increased approximately 58%, to $301,900, from $191,400 in the three-month period ended September 30, 1997. In the 1998 quarter, all of our revenues derived from HyperTV sales, compared to the 1997 quarter, in which we recorded revenues from both HyperTV sales and from television-based education hardware and content. Total Costs and Expenses. Cost of sales in the three months ended September 30, 1998 was $45,545, compared to corresponding 1997 quarter's cost of sales of $78,847. The difference was due to the relatively higher gross margins of our HyperTV products. Total costs and expenses, excluding cost of sales, increased approximately 124% for the three months ended September 30, 1998, to $3,758,462, from $1,681,306 for the three months ended September 30, 1997. The increase was due principally to higher operating, selling and administrative expenses and depreciation and amortization expense in the more recent period. The increases were principally related to our Southwest regional network. Depreciation and amortization expense increased 474% for the three months ended September 30, 1998 to $296,721, from $51,722 in the comparable 1997 quarter. This increase was due principally to higher depreciation expenses related to the regional network's master control production facility. Interest Expense (Income) -- Net. Interest income for the three months ended September 30, 1998 was $40,077, compared with $11,156 for the three months ended September 30, 1997. The increase was due to higher average cash balances during the more recent period. We incurred interest expense and accretions of $254,243 in the 1998 quarterly period, compared to no interest expense during the comparable 1997 period. Interest expense is related to the Notes issued in January 1998 by a subsidiary of ours. We chose to pay the interest due September 30, 1998 in kind rather than in cash. Minority Interest -- Subsidiary Preferred Stock Dividends. For the three months ended September 30, 1998 and the three months ended September 30, 1997, respectively, we accrued $117,211 for dividends and $746,041 for dividends and accretions, respectively, related to outstanding preferred stock issued by our subsidiary, which was accounted for as minority interest. We paid $117,211 and $746,041 in preferred dividends during the three-month periods ending September 30, 1998 and September 30, 1997, respectively, by issuing shares of our common stock. Net Loss. Our net loss for the three months ended September 30, 1998 increased approximately 66%, to $3,833,484, or $.16 per share, from $2,303,598, or $.17 per share, in the comparable 1997 period, principally due to higher expenses associated with our regional network, as noted above. 13 Year 2000 compliance The year 2000 issue is the result of computer software that was written with only two digits rather than four digits to represent the year in a date field. Computer hardware and software applications that are date-sensitive may interpret a date represented as "00" to be the year 1900 rather than the year 2000. The result could be system failure or miscalculations causing the disruption of operations. We believe that our internal systems, relating to both computer hardware and software, will function properly with respect to dates in the year 2000 and beyond. In addition, we believe that our proprietary software either sold directly to third parties or incorporated in products sold to third parties is year 2000 compliant. Having performed an assessment of the potential year 2000 problem, we do not expect to incur significant costs related to year 2000 issues. However, there is general uncertainty regarding the year 2000 problem and its effect on the overall business environment. We cannot determine at this time whether the year 2000 problem will have a material impact on our operations or financial condition as the result of significant disruptions to the U.S. economy and/or business infrastructure. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACTV, Inc. Registrant Date: November 15, 1999 /s/ William C. Samuels -------------------------------------- William C. Samuels Chairman, Chief Executive Officer and Director Date: November 15, 1999 /s/ Christopher C. Cline -------------------------------------- Christopher C. Cline Senior Vice President (principal financial and accounting officer) 17 EX-27 19 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN THE REGISTRANTS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 8,816,368 0 1,160,036 0 0 11,565,834 5,920,898 2,528,679 28,152,058 1,708,611 4,803,342 0 0 4,216,800 15,422,712 28,152,058 2,117,938 2,117,938 174,032 24,231,028 0 0 595,470 (23,377,611) 0 (23,377,611) 0 0 0 (23,377,611) (0.61) (0.61)
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