As filed with the Securities and Exchange Commission on December 17, 1997
Registration No. 333-36787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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SANDBOX ENTERTAINMENT CORPORATION
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C> <C>
Delaware 7372 86-0699474
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
---------------
</TABLE>
2231 E. Camelback, Suite 324
Phoenix, Arizona 85016
(602) 468-6400
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices and principal place of business)
---------------
Chad M. Little, President
SANDBOX ENTERTAINMENT CORPORATION
2231 E. Camelback, Suite 324
Phoenix, Arizona 85016
(602) 468-6400
FAX (602) 468-6401
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
---------------
Copy to:
Thomas H. Curzon, Esq. Stuart D. Freedman, Esq.
Joseph M. Udall, Esq. Stephen J. Schulte, Esq.
Christopher S. Stachowiak, Esq. Schulte Roth & Zabel LLP
Osborn Maledon, P.A. 900 Third Avenue
2929 North Central Avenue New York, NY 10022
Phoenix, Arizona 85012-2794 (212) 756-2000
(602) 207-1288 FAX (212) 593-5955
FAX (602) 235-9444
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
If this Form is filed pursuant to Rule 462(d) under the Securities Act to
request automatic effectiveness of exhibits filed post-effectively, please check
the following box. [ ]
---------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Amount of
Title of Each Class of Amount to be Aggregate Offering Registration
Securities to be Registered Registered (1) Price (1)(2) Fee
--------------------------- -------------- ------------ ---------
<S> <C> <C> <C>
Series B Convertible Preferred Stock, $.001
par value................................. 690,000 Shares $5,264,700 $1,844.37
Common Stock, $.001 par value (3) 690,000 Shares
</TABLE>
(1) Includes 35,410 shares of Series B Convertible Preferred Stock
(assuming an offering price of $7.63 per share) to be issued upon
conversion of certain convertible promissory notes in the aggregate
principal amount of $270,000, which automatically convert effective
upon consummation of this offering, provided that if the Registration
Statement is not declared effective by the Commission on or before
January 20, 1998, such notes shall not be automatically converted and
shall become convertible, at the option of the holder, into shares of
Series A Preferred Stock at a conversion price of $4.80 per share. See
"Certain Transactions."
(2) Estimated in accordance with Rule 457(i) solely for the purpose of
calculating the registration fee.
(3) The Common Stock registered hereby is reserved for issuance to the
holders of the Series B Preferred Stock upon conversion of the Series B
Preferred Stock in accordance with the Company's Certificate of
Incorporation. See "Description of Capital Stock".
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
2
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 17, 1997
690,000 Shares
[SANDBOX ENTERTAINMENT LOGO]
Series B Convertible Preferred Stock
(par value $.001 per share)
(subject to substantial restrictions on transfer)
Of the 690,000 shares of Series B Convertible Preferred Stock ("Series B
Preferred Stock") offered hereby, 654,590 are being sold by Sandbox
Entertainment Corporation ("Sandbox" or the "Company") and 35,410 shares are
being issued upon conversion of certain convertible promissory notes in the
aggregate amount of $270,000 effective upon consummation of this offering,
provided that if the Registration Statement of which this Prospectus is a part
is not declared effective by the Securities and Exchange Commission on or before
January 20, 1998, such notes shall not be automatically converted and shall
become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share. The Series B Preferred
Stock will be subject to substantial restrictions on transfer and conversion
under the Company's Certificate of Incorporation for up to two years following
completion of the offering, and are mandatorily convertible into Common Stock on
the date 180 days following the consummation of a Qualifying Public Offering.
See "Description of Capital Stock". There has been no public market for any
class or series of capital stock of the Company and it is unlikely that a public
market in the Series B Preferred Stock will develop for at least as long as such
stock is subject to restrictions on transfer. In addition, there is no assurance
that a public market will ever develop for Series B Preferred Stock, for Common
Stock into which it is convertible, or for any other class or series of capital
stock of the Company. The Company currently has no intention to list any of its
securities, including the Series B Preferred Stock and the Common Stock, on any
stock exchange or for trading in the NASDAQ stock market or over the counter. It
is currently anticipated that the offering price will be between $6.75 and $8.50
per share. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price. The minimum investment by any
single purchaser in this offering shall be the lower of 100 shares or $750.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 15.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES TO RESIDENTS
OF THE STATE OF NEW HAMPSHIRE OR ANY OTHER STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
Per Share............. $ $ $
Total(3).............. $ $ $
- ----------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, and to issue warrants to the Underwriters, exercisable
commencing one year after the date of consummation of this offering and
with a five-year term, to purchase the number of shares of Series B
Preferred Stock equal to 8% of the shares of Series B Preferred Stock
issued to the public in this offering at 110% of the price to the public
in this offering. See "Underwriting".
(2) Before deducting estimated expenses of $350,000, payable by the Company.
---------------
The shares offered hereby are offered by the Underwriters as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the Series
B Convertible Preferred Stock will be made against payment therefor at the
offices of Wit Capital Corporation in New York, New York or through the
facilities of the Depository Trust Corporation, on or about , 199_.
WIT CAPITAL CORPORATION
---------------
The date of this Prospectus is , 199_
<PAGE>
[Inside Cover]
Sandbox - The Interactive Entertainment Network
Nonfunctional, pictorial representation of www.sandbox.net, the Company's home
Web page, showing text, links to the Company's other Web sites - CNNfn FINAL
BELL and CNN/SI SPORTSIM, links to the Company's other Web pages and services,
including "Win Prizes and Sand Dollars, Free Registration and Password, Games
and Web Shows, All About Sandbox, Sandcastle Program, Talk to Us and Help", and
a link to description of the Company's Sand Dollars Smart Card.
None of the links will be functional and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
2
<PAGE>
[Pull Out Left]
Final Bell - A Real Life Stock Market Simulation.
Nonfunctional, pictorial representation of www.finalbell.com, the Company's
Final Bell Web home page, showing text, banner advertisement, a link to
MetLife's www.lifeadvice.com Web page, links to sponsors' Web pages - CNNfn and
PC Quote, links to the Company's other Web pages and services, including "PLAY
FOR FREE - Play the Market, Trade Center Portfolio, Mini Games, Prizes, Getting
Started, SHARPEN YOUR SKILLS - The Exchange, Prime Portfolio, Prizes, Getting
Started, BE PART OF THE GROUP - Group Action, ALL THE INFO YOU NEED - Trading
Tools, How to Pick Stocks, The Motley Fool, News and Quotes, Traders' Library,
TODAY ON FINAL BELL and WHAT'S NEW IN PLAY THE MARKET", and links to description
of the Grand Prize and upcoming IBM Blue Chip Challenge.
None of the links will be functional and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
3
<PAGE>
[Pull Out Right]
SportSim - The Ultimate Sports Fantasy Site for Any Fan
Nonfunctional, pictorial representation of www.sportsim.com, the Company's
SportSim Web home page, showing text, links to CNN/SI's Web pages, links to the
Company's other Web pages and services, including "PRE-GAME - Fantasy Football
and Get in the Game, PRIZES, DISPLAY ON DESKTOP, CLICK HERE TO START, PLAYER
LOGIN, SPORTSIM NEWS - The Commish Shows Off New Feature and Answers Owner
Questions, Special Prizes for Your Patience, How Do You Rate, Check the New Full
Contact Grand Prize Standings and More News Items, Scrolling News Ticker setting
forth current information regarding such items as status of the game, trivia
questions and sports information, picture of NFL Players Association Logo and a
link to the Web page for Stat's Inc., the statistical data service to SportSim
site.
None of the links will be functional and the reader will not be able to use the
links to view the sites indicated.
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
4
<PAGE>
The Underwriters anticipate imposing a suitability standard for prospective
investors to participate in this offering as follows: (1) Prospective investors
with (i) a minimum annual net income of $65,000 and a minimum liquid net worth
of $65,000 or, alternatively, (ii) a minimum liquid net worth of $150,000, will
not be restricted as to the amount of shares of Series B Preferred Stock which
may be purchased and (2) Prospective investors not meeting the above standard
would be permitted to buy shares of Series B Preferred Stock but only if such
investor's gross annual income is at least $30,000, and only in amounts not
exceeding the lesser of (i) 7 1/2% of the investor's liquid net worth, (ii) 10%
of the investor's net worth excluding principal residence, or (iii) 7 1/2% of
the investor's annual gross income. Certain jurisdictions may impose more
restrictive standards.
No person is authorized in connection with the offering made hereby to give any
information or to make any representations other than as contained in this
Prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy by any person in any jurisdiction in which it is unlawful for such
person to make such offering or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances imply that
the information herein is correct as of any date subsequent to the date hereof.
Until _________, 1998 (90 days after the effective date of the Registration
Statement), all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
----------------
INFORMATION ON THE COMPANY'S WEB SITES SHALL NOT BE DEEMED TO CONSTITUTE A PART
OF THIS PROSPECTUS.
-----------------
TABLE OF CONTENTS
Prospectus Summary................................................... 6
Recent Developments.................................................. 8
The Offering.........................................................10
Risk Factors.........................................................15
Venture Capital Investing............................................32
Use of Proceeds......................................................34
Dividend Policy......................................................35
Capitalization.......................................................35
Dilution.............................................................37
Selected Financial Data..............................................39
Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................40
Business.............................................................47
Management...........................................................65
Certain Transactions.................................................70
Principal Stockholders...............................................74
Description of Capital Stock.........................................78
Shares Eligible For Future Sale......................................83
Underwriting.........................................................84
Legal Matters........................................................86
Experts..............................................................86
Available Information................................................86
Index to Financial Statements.......................................F-1
Appendix A - Road Show Script.......................................A-1
The Company is not currently a reporting company under the Securities
Exchange Act of 1934. Following this offering, the Company intends to furnish
all reports that are required to be delivered to its Stockholders by the
Securities Exchange Act of 1934, and the rules and regulations thereunder,
including annual reports containing audited financial statements examined by an
independent accounting firm. Each purchaser of securities may revocably consent
to receive this Prospectus and all stockholder reports and communications,
including but not limited to all quarterly and annual reports and proxy
statements, by delivery of such materials to such purchaser's last known mailing
address or electronic mail address, at the Company's discretion, listed on the
Company's records, or by delivery of a notice to such mailing address or
electronic mailing address, at the Company's discretion, which directs such
purchaser to a specific Web address where such materials can be found, read and
printed.
-----------------
Sandbox(R)is a registered trademark of the Company. Final BellSM and
SportSimSM among other marks, are common law trademarks of the Company. This
Prospectus also includes trade names, trademarks and references to intellectual
property owned by other companies.
-----------------
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under the headings "Risk Factors" and "Venture Capital Investing".
Except as otherwise specified, all information in this Prospectus reflects a
one-for-six reverse split of the Company's Common Stock and Series A Convertible
Preferred Stock (the "Reverse Stock Split"), to be effective prior to
consummation of this offering. See "Description of Capital Stock" and Note 13 of
Notes to Financial Statements.
The following summary contains forward-looking statements that involve
risks and uncertainties. Such forward-looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ materially from such
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below in "Risk Factors", as well as
those discussed elsewhere in this Prospectus. See "Special Note on
Forward-Looking Statements".
This offering is intended as a public venture capital offering to be
distributed primarily over the Internet. However, this offering lacks certain of
the contractual features that commonly benefit investors in traditional venture
capital offerings. See "Venture Capital Investing". The Company seeks to raise
capital by offering small investors who desire to make an investment in an early
stage developing company the opportunity to do so without the substantial
capital commitment typical in a private placement of securities. The Company
requires additional financial resources to offset its operating losses and net
capital deficiency as it moves from early stage toward fuller scale deployment
of its technology. These conditions raise substantial doubt about the ability of
the Company to continue as a going concern. See "Report of Independent Auditors"
and Note 12 of "Notes to Financial Statements". The Company believes that the
net proceeds from this offering, together with available funds, including the
Company's bank and existing and proposed equipment lease lines of credit, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for approximately the next 15 months.
The Company
Sandbox is a software development company that intends to use its
proprietary technology to become a leading provider of games and simulations on
the World Wide Web (the "Web"). The Company's proprietary technology is designed
to enable Sandbox to create and support, in a cost effective manner, a variety
of highly interactive and informative games and simulations. Sandbox's flagship
products are Final Bell, an on-line stock market simulation, and SportSim, an
on-line fantasy sports simulation. The Company generates revenue from
advertisers interested in reaching specific target groups, such as existing or
potential on-line individual investors through Final Bell and sports enthusiasts
through SportSim. Sandbox seeks to attract a targeted audience by basing its
games and simulations on subjects, such as finance or sports, that are of great
interest to Internet users. The Company then seeks to motivate the audience to
spend extended time on and return repeatedly to the Sandbox Web sites by
providing, free of charge, the enjoyment of head-to-head competition, useful
information and a chance to win cash prizes and merchandise.
From its formation in 1992 until mid 1995 the Company's principal
business was traditional and interactive marketing on a fee-for-service basis
for client companies. The Company introduced its first Internet game, Cyberhunt,
in May 1995 in a joint venture with On Word Information Incorporated. The
Company believes that Cyberhunt was one of the first games available on the
Internet. Based on the favorable response to Cyberhunt, the Company decided to
change its business focus to the production of interactive games and simulations
for the Internet. Accordingly, the Company hired key members of its engineering
staff, including engineers who had worked on developing the core technology used
in Cyberhunt for several years while at Motorola and acquired a license to the
technology from Motorola. The Company also began acquiring equipment to support
its new business strategy, and commenced a phase-out of its fee-for-service
business.
6
<PAGE>
The Company has produced six games and simulations for the Internet
through October 31, 1997. The Company's first product, Cyberhunt, required
participants to solve puzzles and riddles. The Company introduced the game in
May 1995 principally as a proof of concept, but sold a commercial version that
first generated revenues in March 1996 and ran until February 1997. Certain
important features of the software developed for Cyberhunt have been used in the
Company's subsequent games and simulations, including dynamic page creation,
header and footer technology that provides dynamic navigation, registration
mechanisms, and the ability to display dynamic advertising. The Company produced
Road Trip to the Super Bowl XXX from October 1995 through January 1996, however
it did not produce cash revenues. This simulation introduced the Company's
"integrated advertising" concept, which offers advertisers the opportunity to
integrate their promotions within a specific game or simulation on a Web site.
Road Trip to the Super Bowl XXX allowed participants to click out of the game
site and into an advertiser's site in search for clues that eventually led
participants back to the game site. The Company next introduced Road Trip to the
College World Series, which first produced revenues in March 1996 and ran until
May 1996. Players accumulated points by solving timed puzzles and trivia
questions, and responding appropriately to certain random events. Based on
points accumulated, participants could select prizes. The Road Trip simulations
took Web participants on cross-country excursions, and allowed them to compete
for prizes while they watched actual travelers encounter famous landmarks and
fascinating cities across the United States. The Court of Last Resort was a
Web-based simulation for the resolution of disputes between ordinary people.
Participants were solicited to offer real disputes, and "jurors" could listen to
RealAudio "testimonies", review evidence and cast their vote. The Court of Last
Resort did not feature a competitive element and was designed primarily for
entertainment. The Court of Last Resort ran from the Spring of 1996 to February
1997, but did not produce cash revenues.
The Company's current games and simulations consist of Final Bell and
SportSim. Final Bell, which first produced revenues in November 1996, is a stock
market simulation in which players compete with one another to build the
highest-valued stock portfolio. By placing risk-free game dollars in actual
stocks on a daily basis, players can use Internet resources to model and track
their own personal simulated portfolios. In a July 1997 ranking, Final Bell was
ranked third among the most active investment sites on the Web by Lycos, Inc.,
an Internet navigation service that also furnishes Web site reviews, and at
December 10, 1997, there were 16,886 active portfolios in game number 7 of Final
Bell. Final Bell was the Company's first simulation to incorporate significant
input from a development partner (Charles Schwab & Co., Inc.) and use of
informal surveys to establish that participants interested in the stock market
and investing represented an attractive target market to advertisers and their
agencies. SportSim, which first generated revenues in September 1997, gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. Participants draft teams of real world
professional athletes and compete against each other to earn points based upon
the actual performances of these athletes in actual games. SportSim fully
automates the drafting and trading process to simplify league management and
provides for more sophisticated gaming. Fantasy Football, the initial SportSim
game, which was sponsored by Saturn Corporation ("Saturn"), was launched on July
15, 1997, and 108,727 teams were participating as of December 14, 1997, making
it, in the Company's estimation, the largest fantasy football game on the
Internet.
The Company generates advertising revenues from the sale of sponsorships
or "integrated advertising." By involving advertisers in the creation of a
message, Sandbox seeks to differentiate itself from the many Internet companies
competing through banner sales for limited advertising dollars. The Company also
generates advertising revenues from the sale of banners, a form of Internet
advertising similar to billboards on which users can click to visit an
advertiser's Web site to get further information about the advertiser or its
products. The Company's growth strategy is to increase advertising revenue by
the ongoing introduction of new and enhanced features to its flagship products,
SportSim and Final Bell, and by the creation of new games and simulations
targeted at different audiences. One key element in this strategy is the
Company's ability to manage its costs in creating new games and simulations by
building on technology developed in prior games and simulations. As an example,
the Company developed Fantasy Basketball, the second SportSim game, using many
of the techniques developed in Fantasy Football with no additions to its
creative staff. However, the Company recently acquired an additional $678,000 of
equipment to handle anticipated increases in traffic to its Web sites from the
launch of Fantasy Basketball and Mid-Season Football, a mini game within Fantasy
Football that is also sponsored by Saturn and offers persons who missed drafting
a team at the beginning of the season a chance to participate. Fantasy
Basketball was launched on October 21, 1997, and 54,924 teams were participating
as of December 14,
7
<PAGE>
1997, however, it has not yet produced any revenues. In response to the
popularity of Mid-Season Football, the Company intends to offer a Second-Season
Basketball game in February 1998. Because the Company anticipates that
advertising alone will not generate operating profits in the foreseeable future,
the Company also intends to seek to create additional revenue streams in the
form of product sales, such as the sale of more sophisticated CD-ROM variations
of its games and simulations, and through licensing its proprietary gaming
engines for use on non-competing third party Web sites.
As part of its strategy, the Company has entered into alliances with
media companies that already enjoy substantial brand awareness and traffic among
Internet users. In June and July 1997, Sandbox entered into Co-Branding and
Marketing Agreements with CNNfn and CNN/SI, affiliates of the Cable News
Network, Inc. ("CNN") and of the Turner Broadcasting System. CNNfn and CNN/SI
provide content, celebrity endorsements, advertising sales support, and
promotion for Internet and CD-ROM versions of Final Bell and SportSim on their
cable channels and Web Sites. Net banner advertising revenues are divided among
the parties on a 60/40 basis, with the party responsible for selling the
advertising entitled to retain the higher percentage. Regardless of which party
is responsible for the sale of sponsorships, net sponsorship revenue is divided
evenly. With respect to the CNNfn Agreement, any other merchandising or
licensing net revenues are divided on a 70/30 basis, with Sandbox entitled to
70%, and with respect to the CNN/SI Agreement, such revenues are divided evenly.
Generally, the CNN Agreements provide that where extraordinary costs are
required to integrate advertisements or sponsorships, and the parties agree to
such costs, the parties split such costs evenly. Under these agreements, Sandbox
retains all rights to its proprietary simulations as well as ownership of the
related participant databases. See "Business - Advertising and Sales -
Co-Branding and Marketing Agreements with CNN/SI and CNNfn". The Company spent
substantial time, effort and money during the first six months of 1997 putting
these co-branding relationships in place. Since July 1997, CNN has heavily
promoted the Final Bell and SportSim sites. CNN's media support for the
promotion of the SportSim site was valued by CNN at an estimated $5.5 million
for the initial 5 weeks following launch. Promotional support included
impressions on CNN Headline News, CNN and CNN/SI cable networks, print promotion
by Sports Illustrated magazine and interactive promotion on the CNN/SI Web site.
The result has been a substantial increase in traffic to the Company's Web sites
since the CNN agreements were signed. Page views delivered by the combination of
all Sandbox sites totaled over 40 million in November 1997, as compared to
3,625,000 page views in February 1997, the Company's previous busiest month
before entering into the CNN agreements.
The Company seeks to use its proprietary technology embodied in its games
and simulations to develop databases of participant demographic information
designed to be of considerable value to advertisers. This information is
obtained by registering visitors to its Web Sites, tracking their preferences,
and rewarding participants for providing information about their purchasing
preferences. Total registered participants in Sandbox's database for all sites
approximated 332,750 at December 13, 1997.
At October 31, 1997, Sandbox had 25 full-time employees and is led by a
team experienced in the fields of network technology, marketing management,
computer art, advertising and graphic design. The Company has financed its
development to date through investment capital provided by three venture capital
firms, and by private investors and by entering into strategic alliances with
other media companies such as CNN providing for the exchange of goods and
services. At October 31, 1997 the Company had total assets and stockholders'
deficit of approximately $2 million and $1.9 million, respectively.
The Company was originally incorporated in Arizona as Tracer Design, Inc.
on February 25, 1992 and, for the purpose of redomesticating under the laws of
the State of Delaware, reincorporated in Delaware on April 25, 1996 under the
name Sandbox Entertainment Corporation. The Company's offices are located at
2231 East Camelback, Suite 324, Phoenix, Arizona 85016, and its telephone number
is 602-468-6400.
RECENT DEVELOPMENTS
$558,000 of written commitments from IBM, Saturn, Metropolitan Life
Insurance Company ("MetLife") and Quicken Financial Network have been executed
with the Company for "integrated advertising" on its Web site since the
execution of the CNN agreements in June and July 1997. Of this amount, $514,000
(or average monthly cash revenues of $73,000) relates to the period from October
1, 1997 through May 4, 1998, of which $454,000 is subject to a 50% revenue split
with CNN. These commitments include an agreement with IBM providing for $180,000
to sponsor the Trade Center, an area of Final Bell where trades are initiated,
and other areas within Final Bell through March 14, 1998, an agreement with
Saturn providing for $180,000 to sponsor Full Contact and Mid-Season Football,
fantasy football games within SportSim through January 31, 1998, an agreement
with MetLife providing for $138,000 to sponsor planned simulations on Final Bell
from November 10, 1997 to May 4, 1998, and an agreement with Quicken Financial
Network providing for $60,000 to sponsor a promotional contest in Final Bell.
Except within a given sponsor's product or service category, co-branding and
sponsorships do not reduce the Company's available inventory of banner
advertising.
8
<PAGE>
On November 24, 1997 the Company entered into a written agreement with
Eastman Kodak Company which provides for the exchange of $150,000 in banner
impressions for a like amount of barter credits provided through Global
Marketing Resources. The value of these impressions is not subject to a revenue
split with CNN. The Company intends to use these credits to purchase prizes to
be awarded to game participants.
The Company has also received written commitments from Netscape and
American Express for banner advertising to be provided during the period
December 4, 1997 through February 1, 1998 in the amounts of $5,100 and $15,000,
respectively. During the five-month period ending November 30, 1997, the Company
invoiced approximately #35,850, $24,000, and $8,500 to iVillage, MetLife and
American Express, respectively, for banner advertising. All of these banner
placements are subject to a revenue split with CNN.
The Company continues to explore other opportunities to increase revenues
by leveraging its existing technology, game platforms and co-branding
relationships. The Company is currently in negotiations with a potential
development partner with expertise in CD-ROM content, production and
distribution to create a new sports and entertainment related game for the
Internet. If an agreement is reached, this partner would help finance
development costs and provide substantial brand awareness, which would in turn
assist the Company in maintaining what it believes to be a leading position in
the sports market on the Web, but there are no assurances such negotiations will
be successful.
In addition, three concepts are currently being developed for 1998 by
Sandbox and Turner Interactive Sales, the marketing group for CNN; (i) a private
label version of CNNfn Final Bell to be used as a training service for account
holders of three financial services firms, (ii) a European edition of Final
Bell, and (iii) a new licensed game to support the marketing goals of a major
satellite programming distributor. These concepts are in various stages of
development and there can be no assurance that any or all of these concepts will
be completed.
9
<PAGE>
The Offering
Issue............................. 654,590 shares of Series B Preferred Stock.
Dividends......................... Dividends and distributions equal to the
dividend and distribution, if any, declared
on the number of shares of Common Stock into
which such shares of Series B Preferred
Stock are convertible (without regard to the
Restricted Period). The Company has never
declared or paid cash dividends on its
capital stock and does not anticipate doing
so in the foreseeable future. The Company's
current bank financing contains a covenant
that the Company will not pay or declare any
dividends on the Company's stock (except for
dividends payable solely in the Company's
stock) without the bank's prior written
consent, and the Company anticipates that
any future bank or other institutional
financing will contain a substantially
similar restriction.
Conversion into Common Stock...... Convertible, at the option of the holder, at
any time following the Restricted Period,
into Common Stock at an initial conversion
rate of one share of Common Stock for each
share of Series B Preferred Stock, subject
to certain antidilution adjustments.
Automatically converts into Common Stock at
the then applicable conversion rate 180 days
following consummation of a Qualifying
Public Offering. The Restricted Period
begins on the date of the closing of this
offering and ends on the earlier of (i) 24
months following the date of the closing of
this offering, (ii) 180 days after the
consummation of a Qualifying Public
Offering, (iii) the occurrence of certain
events which result in a change in control
of the Company, or (iv) the date determined
by the Board of Directors as to all of the
outstanding Series B Preferred Stock. A
Qualifying Public Offering means a firm
commitment underwritten public offering
immediately following which the Company has
a market capitalization of at least $30
million and which results in proceeds to the
Company of at least $5 million (net of
underwriting discounts and commissions and
offering expenses), but does not include
another "public venture capital transaction"
in which the securities issued are not
freely transferable following issuance. See
"Description of Capital Stock - Series B
Preferred Stock - Conversion; Restrictions
on Transfer".
Liquidation Preference............ The offering price per share, subject to
certain antidilution adjustments. On
liquidation, proceeds are distributed to
holders of shares of Series A Preferred
Stock and Series B Preferred Stock, pro
rata, based on the original issue price of
such shares, and prior to holders of shares
of Common Stock. See "Description of Capital
Stock".
Voting Rights..................... The holders of the Series B Preferred Stock
will be entitled to vote as a class with the
holders of the Common Stock and in such
event are entitled to one vote for each
share of Common Stock into which the Series
B Preferred Stock is convertible (without
regard to the Restricted Period). In
addition, the approval of the holders of the
Series B Preferred Stock, voting separately
as a class, shall be required for certain
mergers, consolidations, sales of
10
<PAGE>
substantially all of assets, changes in
control, and substantial dispositions by
management, unless the holders of the Series
B Preferred Stock are to receive cash or
marketable securities valued at an amount at
least equal to 125% of the original issue
price of the Series B Preferred Stock
(subject to adjustment for antidilution
events).
Transfer Restrictions.............. During the Restricted Period, the Series B
Preferred Stock will not be transferable
except as follows: (1) to family members or
affiliates (as such term is defined in Rule
12b-2 promulgated under the Securities
Exchange Act of 1934, as amended), (2)
pursuant to the laws of descent and
distribution, (3) in the event of bankruptcy
or insolvency of the holder, (4) as approved
by the Board of Directors for all Series B
Preferred Stock then outstanding or (5) by
the Underwriters in connection with the
initial distribution of the Series B
Preferred Stock. As a result of the
foregoing transfer restrictions, the Series
B Preferred Stock may not be transferable
for a period of 180 days following a
Qualifying Public Offering. However, during
the Restricted Period, unless the lead
underwriter otherwise grants a waiver
pursuant to Lock-Up Agreements with the lead
underwriter, 85% of the currently
outstanding shares of Common Stock and over
99% of the currently outstanding shares of
Series A Preferred Stock will also be
subject to restrictions on transfer. The
lock-up restrictions on transfer expire on
the earlier of 30 days following expiration
or early termination of the Restricted
Period, or 180 days after a Qualifying
Public Offering. Although the lead
underwriter may use its discretion to waive
such restrictions in certain instances, the
lead underwriter does not anticipate
granting any such waivers.
Minimum Purchase; Suitability..... The minimum investment by any single
purchaser in this offering shall be the
lower of 100 shares or $750. The
Underwriters anticipate imposing a
suitability standard for prospective
investors to participate in this offering as
follows:
1. prospective investors with (i) a minimum
annual net income of $65,000 and a
minimum liquid net worth of $65,000 or,
alternatively, (ii) a minimum liquid net
worth of $150,000, will not be restricted
as to the amount of shares of Series B
Preferred Stock which may be purchased.
2. prospective investors not meeting the
above standard would be permitted to buy
shares of Series B Preferred Stock but
only if such investor's gross annual
income is at least $30,000 and only in
amounts not exceeding the lesser of (i) 7
1/2% of the investor's liquid net worth,
(ii) 10% of the investor's net worth
excluding principal residence, or (iii) 7
1/2% of the investor's annual gross
income.
Certain jurisdictions may impose more
restrictive standards.
Capital Stock to be outstanding
after the offering................. 526,397 shares of Common Stock (1)
330,211 shares of Series A Preferred Stock
(2)
690,000 shares of Series B Preferred Stock
(3)
2,232,051 shares of Common Stock on a fully
diluted basis (4)
Use of Proceeds................ Purpose Amount(5) Percentage of
------- --------- Net Proceeds
------------
Staffing Costs $1,466,000 35%
Product and
Services
Marketing and
Development 1,291,000(6) 30%
Reduction of Debt 1,421,117(7) 33%
Working Capital 66,843(6) 2%
------------- ------------
$4,244,960 100%
See "Use of Proceeds".
11
<PAGE>
(1) Based on 526,397 shares outstanding as of September 30, 1997 and excludes
(a) 100,506 shares of Common Stock issuable upon exercise of outstanding stock
options, (b) 166,268 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 187,129 shares of Common Stock reserved for future
issuance under the 1995 Equity Incentive Plan, and (d) Common Stock reserved for
issuance upon conversion of Series A Preferred Stock and Series B Preferred
Stock. See "Capitalization".
(2) Based on 330,211 shares outstanding as of September 30, 1997 and excludes
122,921 shares of Series A Preferred Stock issuable upon exercise of outstanding
warrants and 56,252 shares issuable upon conversion of certain convertible
promissory notes. See "Capitalization".
(3) Based on no shares of Series B Preferred Stock outstanding prior to this
offering and excludes 52,367 shares issuable upon exercise of warrants granted
to the Underwriters effective upon the commencement of this offering at 110% of
the public offering price and includes 35,410 shares issuable upon conversion of
certain convertible promissory notes effective upon consummation of this
offering, provided that if the Registration Statement of which this Prospectus
is a part is not declared effective by the Securities and Exchange Commission on
or before January 20, 1998, such notes shall not be automatically converted and
shall become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share. See "Capitalization"
and "Certain Transactions".
(4) Includes the shares issuable upon conversion of the Series A Preferred Stock
(including the shares excluded in note (2) to this table), the Series B
Preferred Stock (including the shares excluded in note (3) to this table) and
the shares of Common Stock excluded in note (1) to this table.
(5) Assumes an offering price of $7.63 per share.
(6) The Company has acquired an additional $678,000 of equipment in anticipation
of the commencement of its SportSim basketball season and mid-season football.
This additional equipment was financed by the vendor in October 1997, on net
45-day credit terms, which have been extended at the discretion of the vendor
pending completion of this offering . The Company intends to finance the
$678,000 under an equipment lease financing line of credit of $1,000,000, which
the Company is currently negotiating. If such lease financing is not available
on terms acceptable to the Company, the Company may need to use proceeds from
this offering to pay for some or all of such equipment, which would reduce the
funds otherwise available for working capital and marketing or development. See
"Risk Factors - Need for Additional Financing". In addition, the Company has
entered into an agreement dated November 25, 1997 to settle certain potential
claims for, among other things, contributory copyright infringement. Pursuant to
the agreement, the Company issued a promissory note in the principal amount of
$30,000 due 90 days after its issuance. The Company intends to use proceeds from
this offering to pay such note. See "Risk Factors - Potential Liability for
Internet Content".
(7) Includes $500,000 to repay a revolving bank line of credit due March 5,
1998, bearing interest at a prime rate of 1.5%, which may be reborrowed through
the term of the agreement, and bridge loans of $36,166 and
12
<PAGE>
$172,528 obtained in November and December 1997. See "Certain Transactions" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources".
13
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data: 1995 1996 1996 1997
Internet revenues ................. $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues (1) ......... 462,417 154,845 150,751 --
----------- ----------- ----------- -----------
Total revenues ......... 462,417 396,167 231,263 171,319
Production and engineering
Expenses ...................... 594,219 986,593 760,908 786,017
Sales and marketing expenses ...... 130,760 505,954 347,438 502,655
General and administrative
Expenses ...................... 223,676 304,897 222,882 358,025
----------- ----------- ----------- -----------
Total operating expenses 948,655 1,797,444 1,331,228 1,646,697
----------- ----------- ----------- -----------
Operating loss .................... (486,238) (1,401,277) (1,099,965) (1,475,378)
Other expense, net ................ 20,852 76,232 43,289 145,987
----------- ----------- ----------- -----------
Net loss .......................... $ (507,090) $(1,477,509) $(1,143,254) $(1,621,365)
=========== =========== =========== ===========
Net loss per common share (2) ..... $ (0.69) $ (1.86) $ (1.45) $ (1.96)
Shares used in computation (2) .... 732,229 794,570 787,117 827,378
</TABLE>
September 30, 1997
-----------------------------
Actual As Adjusted (3)
Balance Sheet Data:
Cash and cash equivalents................. $ 311,981 $ 3,344,519
Working capital (deficit)................. (1,315,082) 2,911,717
Total assets.............................. 1,457,440 4,368,050
Notes payable............................. 500,000 --
Long term debt, including current portion. 2,077,131 1,128,438
Total stockholders' equity (deficit)...... (1,599,258) 2,890,306
(1) Non-Internet revenues are revenues generated from the production of
traditional and interactive marketing programs and materials for client
companies.
(2) Adjusted to give effect to the Reverse Stock Split. The effect of the
conversion of each outstanding share of Series A Preferred Stock into one share
of Common Stock is not included in the adjustment because the effect would be
anti-dilutive. Includes certain common share equivalents in accordance with SAB
83 (see Note 1 of Notes to the Financial Statements).
(3) Adjusted to give effect to the sale of 654,590 shares of Series B Preferred
Stock offered by the Company hereby at an assumed public offering price of $7.63
per share, and the application of the related proceeds related thereof, and
35,410 shares of Series B Preferred Stock issuable upon the conversion of
certain convertible promissory notes effective upon consummation of this
offering, provided that if the Registration Statement of which this Prospectus
is a part is not declared effective by the Securities and Exchange Commission on
or before January 20, 1998, such notes shall not be automatically converted and
shall become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share. See "Use of Proceeds"
and "Capitalization".
14
<PAGE>
RISK FACTORS
Except for historical information contained herein, this Prospectus
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company's plans and expectations. The Company's actual
results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
below as well as those discussed elsewhere in this Prospectus. The Company
believes that the "Risk Factors" discussed below addresses all material
uncertainties known to the Company as of the date of this Prospectus.
The securities offered hereby involve a high degree of risk and should
be regarded as speculative. As a result, the purchase of Series B Preferred
Stock should be considered only by persons who can reasonably afford a loss of
their entire investment. In addition to the other information in this
Prospectus, the following risk factors, among others, should be considered
carefully in evaluating the Company and its business before purchasing the
shares of Series B Preferred Stock offered hereby.
No Public Market; No Liquidity; Continuation as a Going Concern
There is no public market for the shares of Series B Preferred Stock or
the Common Stock into which they are convertible (the "Conversion Shares"), and
none is expected to develop in the foreseeable future. In addition, such shares
are not redeemable and may not be transferred (subject to certain limited
exceptions) during the Restricted Period. The Company's transfer agent will not
transfer on the Company's books shares that are not transferred in compliance
with applicable transfer restrictions. As a result of the foregoing transfer
restrictions, the Series B Preferred Stock may not be transferable for a period
of 180 days following a Qualifying Public Offering. However, during the
Restricted Period, unless the lead underwriter otherwise grants a waiver
pursuant to Lock-Up Agreements with the lead underwriter, 85% of the currently
outstanding shares of Common Stock and over 99% of the currently outstanding
shares of Series A Preferred Stock will also be subject to restrictions on
transfer. The lock-up restrictions on transfer expire on the earlier of 30 days
following expiration or early termination of the Restricted Period, or 180 days
after a Qualifying Public Offering. Although the lead underwriter may use its
discretion to waive such restrictions in certain instances, the lead underwriter
does not anticipate granting any such waivers. See "Venture Capital Investing"
and "Description of Capital Stock - Series B Preferred Stock". Accordingly, it
is unlikely that a purchaser of Series B Preferred Stock offered hereby will be
able to transfer such shares prior to the expiration of the Restricted Period
and may have substantial difficulty transferring such shares after expiration of
the Restricted Period. The certificates evidencing the Series B Preferred Stock
and the Conversion Shares will bear a legend referring to these restrictions on
transfer. In the limited circumstances in which transfer of shares may be
effected, the lack of liquidity will have a material adverse effect on the price
that could otherwise be obtained for the shares in a public market.
The Company is incurring operating losses as it moves from early stage
towards fuller scale deployment of its technologies. The operating losses have
created a net capital deficiency of $1,599,258 at September 30, 1997, which
requires that the Company obtain additional financial resources to meet its
business objectives and such committed financing is not yet in place. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. See "Report of Independent Auditors" and Note 12 of "Notes
to Financial Statements".
Need for Additional Financing
The Company believes that the net proceeds from this offering, together
with available funds, including the Company's bank and existing and proposed
equipment lease lines of credit and revenues from contracts currently in place,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for approximately the next 15 months. Thereafter, if cash
generated by operations is insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional equity or debt
securities. The sale of additional equity or convertible debt securities could
result in substantial additional dilution to the Company's stockholders,
including the holders of the Series B Preferred Stock. There can be no assurance
that
15
<PAGE>
financing will be available to the Company in amounts or on terms acceptable to
it. In addition, the Company has acquired an additional $678,000 of equipment to
accommodate the commencement of its SportSim basketball season and mid season
football. This additional equipment was financed by the vendor in October 1997
on net 45-day credit terms, which have been extended at the discretion of the
vendor pending completion of this offering. The Company intends to finance the
$678,000 under an equipment lease financing line of credit of $1,000,000 which
the Company is currently negotiating. If such lease financing is not available
on terms acceptable to the Company, the Company may need to use proceeds from
this offering to pay for such equipment, which could have a material adverse
effect on the Company's business, prospects, financial condition or operating
results.
Lack of Certain Venture Capital Rights
The Company is engaging in a public offering of its Series B Preferred
Stock as an alternative to another round of venture capital financing. Venture
capital investing generally requires the assumption of significantly greater
investment risks than those incurred when investing in the securities of
established public companies, including the risk of complete loss of investment.
Contractual protections often obtained by venture capital investors include,
among other things, the right to representation on the Board of Directors, veto
rights over certain corporate actions and preemptive rights to purchase a pro
rata share of new issuances of securities. As more particularly described under
"Description of Capital Stock - Series B Preferred Stock", the holders of Series
B Preferred Stock will have certain anti-dilution rights and the right to vote
separately as a class to approve any material or adverse change in the rights,
preferences or privileges of the holders of Series B Preferred Stock, any
increase in the number of shares of Series B Preferred Stock, the authorization,
creation or issuance of any shares of any class or series of stock having any
preference or priority superior to the Series B Preferred Stock, any merger,
consolidation, or corporate reorganization, and certain business transactions
resulting in a change in control. However, purchasers of Series B Preferred
Stock in this public offering will not have many of the rights typically granted
to venture capital investors in a private offering, including the right to
representation on the Board of Directors (although the Company intends to add
two independent directors following consummation of this offering), veto rights
over certain corporate actions and preemptive rights to purchase a pro rata
share of new issuances of securities.
See "Venture Capital Investing".
Limited Operating History
The Company was incorporated in 1992 and its initial business did not
involve the Internet. In 1995, the Company began transitioning from a marketing
consultancy and services firm to a developer of games and simulations designed
for the Internet. Since March 1996, the Company has focused exclusively on its
Internet business and first recognized revenues from its Internet operations at
that time. Accordingly, the Company has an extremely limited operating history
upon which an evaluation of the Company and its prospects can be based. The
Company's principal current and anticipated source of revenues is the sale of
advertising space on its Web sites. Because the Company anticipates that
advertising revenues alone will not generate operating profits in the
foreseeable future, the Company believes that its future success will depend, in
part, on its ability to generate revenues and profits from other sources, such
as pay-for-play opportunities (i.e., CD-ROM versions of its games) and the
licensing of its proprietary gaming software, which cannot be assured. The
Company's prospects must be considered in light of the risks, expenses and
difficulties being encountered by companies in the new and rapidly evolving
market for Internet products, content and services. To address these risks, the
Company must, among other things effectively develop new relationships and
maintain existing relationships with media partners like CNN, its advertising
customers, their advertising agencies and other third parties, provide original
and compelling games and simulations and products to Internet users,
continuously develop and upgrade its technology, develop additional revenue
streams to supplement its advertising revenue, respond to competitive
developments, increase the ability of its hardware and software infrastructure
to adequately handle increasing volumes of traffic without significant
interruption, and attract, retain and motivate qualified personnel. There can be
no assurance that the Company will succeed in addressing such risks and the
failure to do so would have a material adverse effect on the Company's business,
prospects, financial condition or operating results.
16
<PAGE>
Anticipation of Continuing Losses and Cash Flow Deficits; Negative Net Worth
Since inception of its Internet business, the Company has incurred
substantial costs to develop its technology, to create, introduce and enhance
its games and simulations, to build traffic on its Web sites, to establish
relationships with strategic partners and advertisers and to build an
administrative organization. The Company expects to continue to incur
substantial costs for these purposes, and in particular to incur increased
staffing costs for engineering and marketing personnel. The Company has incurred
significant losses in each of its fiscal quarters and years since the inception
of its Internet business, and expects to continue to incur significant losses on
both a quarterly and annual basis for the foreseeable future. At September 30,
1997, the Company had a working capital deficiency of $1,315,082 and a negative
net worth of approximately $1,599,000, and in September 1997 experienced
operating cash requirements (net loss plus principal repayments under capital
lease obligations and term notes) of approximately $220,000, which requirements
are projected to increase to approximately $300,000 in the immediate future as
the Company implements certain planned increases in capital and operating
expenses. The Company has earned only limited revenue to date from its Internet
activities and its ability to generate significant revenue is subject to
substantial uncertainty. There can be no assurance that the Company will ever
generate sufficient revenue to meet its operating expenses or achieve or
maintain profitability. Further, in view of the rapidly evolving nature of the
Company's business and its limited operating history, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Unpredictability of Future Revenues and Profitability; Potential Fluctuations in
Quarterly Operating Results; Seasonality
To be successful, the Company believes it will be required in the future
to derive revenue from a mix of banner and "integrated advertising" on its Web
sites, CD-ROM sales and license fees. However, as a result of the Company's
limited operating history and the emerging nature of the markets in which its
competes, the Company is unable to accurately forecast its revenues To date,
much of the advertising delivered by the Company has been in the form of barter,
in which the Company has exchanged advertising on its Web sites for advertising,
editorial and software content and prizes. The Company began marketing the
CD-ROM version of CNN Final Bell in September 1997 and less than 300 copies have
been sold to date. The Company has no license fee revenue. The Company's future
prospects are substantially dependent upon its success in generating revenues
from sources other than advertising, such as CD-ROM sales, end-user fees for
playing premium games and simulations, and fees from licenses of its gaming
engines, and its inability or failure to do so could have a material adverse
effect on its business, prospects, financial condition or operating results.
The Company's current and anticipated future expense levels are based
largely on management's assessment of the Company's prospects and its estimates
of future revenues. Expense levels are to a significant extent fixed and
operating cash requirements (net loss plus principal repayments under capital
lease obligations and term notes) are expected to significantly increase in the
immediate future. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall, and a shortfall in
actual revenue as compared to estimated revenue could have an immediate adverse
effect on the Company's business, prospects, financial condition or operating
results that would be material. In addition, the Company currently intends to
significantly increase its sales and marketing expenses, particularly for the
additional sales and marketing staff necessary to develop and maintain
relationships with advertising customers, their advertising agencies and other
third parties, and to increase its production and engineering expenses,
including to increase engineering staff levels necessary to develop and produce
new games and simulations, as well as to continuously improve its existing
technology and develop new technology. Increases in operating expenses may also
occur in response to increased hardware and software infrastructure requirements
to handle larger amounts of traffic and to competitive developments. To the
extent these expenditures do not result in a substantial increase in revenues,
the Company's business, prospects, financial condition or operating results
would be materially adversely affected.
17
<PAGE>
The Company's quarterly operating results may fluctuate significantly in
the future as a result of a variety of other factors, many of which are outside
the Company's control. Factors that may adversely affect the Company's quarterly
operating results include the level of use of the Internet, demand for Internet
advertising, seasonal trends in both Internet use and advertising placements,
including the interest level in the subject matter of the Company's specific
Internet offerings, the addition or loss of advertisers, the advertising
budgeting cycles of individual advertisers, the level of traffic on the
Company's Internet sites, the amount and timing of capital expenditures and
other costs relating to the expansion of the Company's Internet operations, the
number of participants who register to play the Company's games and simulations,
the introduction of new sites and services by the Company or its competitors,
price competition or pricing changes in the industry, technical difficulties or
system downtime, general economic conditions and economic conditions specific to
the Internet and Internet media.
The Company expects that, as it adds more games and simulations related
to major U.S. sports, its revenue will be higher leading up to and during major
U.S. sport seasons for which the Company is operating a SportSim fantasy site
and lower at other times of the year. The Company also believes that advertising
in traditional media generally is lower in the first and third calendar quarters
of each year, and that advertising expenditures fluctuate significantly with
economic cycles. Depending on the extent to which the Internet is accepted as an
advertising medium, seasonality and cyclicality in the level of Internet
advertising expenditures could become more pronounced. The foregoing factors
could have a material adverse effect on the Company's business, prospects,
financial condition or operating results.
Due to any or all of the foregoing factors, it is likely that the
Company's operating results will fall below the expectations of investors in
some future quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Emerging Market for the Company's Services
The market for Internet games and simulations is at a very early stage of
development, is rapidly evolving and is characterized by an increasing number of
entrants that are introducing or developing competing products and services. As
is typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services such as the Company's
are subject to a high level of uncertainty and risk. Because the market for the
Company's games and simulations is new and evolving, it is difficult to predict
with any assurance the market's size, growth rate or durability. In addition, it
is not known whether individuals will utilize the Internet to any significant
degree as a means of purchasing goods and services. The adoption of the Internet
for commerce, particularly by those individuals and companies which historically
have relied upon traditional means of commerce, will require a broad acceptance
of new methods of conducting business and exchanging information. There can be
no assurance that the market for the Company's games and simulations will
develop or that demand for the Company's service will increase or be
sustainable. If the market fails to develop, develops more slowly than expected
or becomes saturated with competitors, or if the Company's games and simulations
do not achieve or sustain market acceptance, the Company's business, prospects,
financial condition or operating results would be materially adversely affected.
Dependence on Advertising Revenues; Competition for Advertisers
Since March 1996, substantially all of the Company's operating revenues
have been and are currently derived from on-line advertising. The success of the
Company's business strategy will depend to a significant extent on the Company's
ability to increase its advertising revenue. See "Business - Advertising and
Sales". There can be no assurance that growth in such revenues can be
accomplished.
Each of the Company's advertising contracts can be terminated by the
advertising customer at any time on very short notice. Consequently, the
Company's advertising customers may move their advertising to competing Internet
sites, or from the Internet to traditional media, quickly and at low cost,
thereby increasing the Company's exposure to competitive pressures and
fluctuations in net revenues and operating results. In selling Internet
advertising, the Company also depends to a significant extent on advertising
agencies, which exercise substantial control over the placement of advertising
for the Company's existing and potential advertising customers.
18
<PAGE>
Furthermore, substantially all of the Company's revenues to date have been
derived from a limited number of advertising customers. The Company's success
will depend on its ability to broaden and diversify its base of advertising
customers. If the Company loses advertising customers, fails to attract new
advertisers or is forced to reduce advertising rates in order to retain or
attract advertisers, the Company's business, prospects, financial condition or
operating results will be materially adversely affected. See "Business -
Advertising and Sales".
There is intense competition for the sale of advertising on Web sites,
even those which generate a high volume of traffic. This has resulted in a wide
range of rates quoted by different vendors for a variety of advertising
services, and difficulty in projecting levels of Internet advertising revenue
that will be realized generally or by any specific company. Competition for
advertisers among Web sites, as well as competition with other traditional media
for advertising placements, has resulted in significant price competition. Most
of the Company's banner advertisements to date have been sold on the basis of
the number of "impressions", or times that an advertisement appears in page
views downloaded by participants, rather than on the number of "click-throughs",
or participant requests for additional information made by clicking on the
advertisement or other basis. There can be no assurance that the Company's
future advertising customers will continue to pay on a per-impression basis
rather than on some other basis. In addition, there can be no assurance that
advertisers will accept the internal and third-party measurements of impressions
delivered by the Company's Web sites, or that such measurements will not contain
errors.
The Company expects to decrease its reliance on impression-based
marketing in the future as its advertising strategy becomes more focused on
"integrated advertising." "Integrated advertising" involves establishing a game
or simulation Web site with a co-branding partner and then offering advertisers
the opportunity to integrate their promotions within the game or simulation
itself through sponsorships. "Integrated advertising" is generally sold on a
case by case basis at negotiated rates based on several factors, including the
number of impressions, brand identity, user marketing data retrieval, targeted
delivery, proof of use and image building. Since the execution of the CNN
agreements, the Company has entered into agreements with IBM, MetLife, Saturn
and Quicken Financial Network to act as sponsors. See "Business - Strategy".
However, there can be no assurance that advertisers in significant volume will
accept "integrated advertising" as a viable marketing strategy.
The foregoing factors and uncertainties could have a material adverse
effect on the Company's business, prospects, financial condition or operating
results. See "Risk Factors - Competition" and "Business - Advertising and
Sales".
Uncertain Acceptance of the Internet as an Entertainment and Advertising Medium
Use of the Internet by consumers is at a very early state of development,
and market acceptance of the Internet as a medium for information,
entertainment, commerce and advertising is subject to a high level of
uncertainty. The Company believes that its future success depends on its ability
to significantly increase revenues, which will require, among other things, the
development and acceptance of the Internet as an advertising medium.
The Company's advertising customers generally have only limited
experience with the Internet as an advertising medium and neither its
advertisers nor their advertising agencies have devoted a significant portion of
their advertising budgets to Internet-based advertising in the past. Some of the
largest advertisers in the United States have no experience with the Internet as
an advertising medium and are not devoting any portion of their advertising
budgets to Internet-based advertising. In order for the Company to generate
advertising revenues, advertisers and advertising agencies must direct a portion
of their budgets to the Internet and, specifically, to the Company's Internet
offerings. There can be no assurance that advertisers or advertising agencies
will be persuaded to allocate or continue to allocate portions of their budgets
to Internet-based advertising, or, if so persuaded, that they will find
Internet-based advertising to be more effective than advertising in traditional
media such as print, broadcast and cable television, or in any event decide to
advertise or continue to advertise on the Company's Internet site(s) or in its
products. Acceptance of the Internet among advertisers and advertising agencies
will also depend to a large extent on the level of use of the Internet by
consumers, which is highly uncertain, and on the acceptance of new methods of
conducting business and exchanging information. Advertisers and advertising
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agencies that have invested substantial resources in traditional methods of
advertising may be reluctant to modify their media buying behavior or their
systems and infrastructure to use Internet-based advertising. Furthermore, no
standards to measure the effectiveness of Internet-based advertising have yet
gained widespread acceptance, and there can be no assurance that such standards
will be adopted or adopted broadly enough to support widespread acceptance of
Internet-based advertising. If Internet-based advertising is not widely accepted
by advertisers and advertising agencies, the Company's business, prospects,
financial condition or operating results will be materially adversely affected.
See "Business - Advertising and Sales".
Uncertain Acceptance of the Company's Products; Recent Product Launches; Product
Development
The Company's future success depends upon its ability to deliver original
and compelling Internet games and simulations in order to attract participants
with demographic characteristics valuable to the Company's advertising
customers. In July 1997, the Company launched its most recent products,
SportSim, an interactive, on-line sports fantasy game, as a feature of the
CNN/SI Web site, and CNNfn Final Bell, an interactive, on-line stock market
simulation. While the Company has previously offered versions of Final Bell, its
fantasy sports game is new and unproven. In addition, the Company's success
depends on its ability to develop and implement its business plan by generating
revenues through product sales. The Company began marketing the CD-ROM version
of CNNfn Final Bell in September 1997 and less than 300 copies have been sold to
date. At December 14, 1997, 108,727 teams were participating in the fantasy
football game in SportSim, and at December 10, 1997 there were 16,886 active
portfolios in game number 7 of CNNfn Final Bell. Fantasy Basketball, the second
SportSim game, was launched on October 21, 1997, and 54,924 teams were
participating as of December 14, 1997. However, there are no assurances that
these games or the related CD-ROM offerings will be successful.
Sandbox seeks to differentiate its games and simulations from its
competitors by basing them on subjects of great interest to targeted groups of
Internet users and motivating such participants to both spend extended time on
and return repeatedly to the Sandbox Web sites by providing, free of charge, the
enjoyment of head-to-head competition, useful information and a chance to win
meaningful cash prizes and merchandise. However, there are no assurances that
the Company will be successful in achieving these goals.
The Company intends to exploit the adaptability of its software to cost
effectively create new products that reach additional targeted audiences on the
Internet. With the Company's products, the data needed to run a game or
simulation comes from external sources, such as sporting events or the stock
market, or will be created as a set of parameters by the players themselves, as
may be the case in some of the Company's future simulations. However, there are
no assurances that the Company will be able to access external data and licenses
required to operate new games or simulations, or that the parameters to be set
by the players themselves in future simulations will generate interest in such
new games or simulations.
Further, there can be no assurance that the Company's games and
simulations will be attractive to a sufficient number of Internet users to
generate meaningful advertising and product revenues. There also can be no
assurance that the Company will be able to anticipate, monitor and successfully
respond to rapidly changing consumer tastes and preferences through the
development of new, compelling games and simulations so as to attract a
sufficient number of participants to its sites. Internet users can freely
navigate and instantly switch among a large number of Internet sites, many of
which offer original and continuously changing content, making it difficult for
the Company to distinguish its content and attract and retain participants. In
addition, many other Internet sites offer very specific, highly targeted content
that could have greater appeal than the Company's sites to particular subsets of
the Company's target audience. If the Company is unable to develop Internet
games and simulations that allow it to attract, retain and expand a loyal
participant base possessing demographic characteristics attractive to
advertisers, and to offer such games and simulations free from system
disruptions, the Company will be unable to generate advertising revenues, and
its business, prospects, financial condition or operating results will be
materially adversely affected. See "Business - Advertising and Sales".
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Dependence on CNN and other Third Parties for Internet Operations
The Company recently entered into Co-Branding and Marketing Agreements
with CNN/SI and CNNfn. The CNN/SI agreement was entered into on June 20, 1997
and is in effect through October 31, 1998, with an option at CNN's discretion to
renew for up to two subsequent one-year terms. The CNNfn agreement was entered
into on July 11, 1997 and is in effect through July 15, 1999. The agreements
generally provide that the Company will develop, maintain, host, update and
support a CNNfn Final Bell Web site based on Sandbox's Final Bell stock market
simulation game and a CNN/SI SportSim Web site based on fantasy sports games,
initially professional football, but expanding to professional basketball,
baseball (on CNN/SI's request), golf, hockey and (if permissible from a rights
standpoint) college basketball. Before implementing new games, CNN will advise
the Company of its required input for the design of such games and the Company
will host and update each game in accordance with mutually agreed upon
specifications for such design, as the same may be modified from time to time
during the term of the agreements. The commercial launch of new games will be
determined by mutual agreement of the parties. CNNfn and CNN/SI have the right
to use the games to advertise the CNNfn Final Bell and CNN/SI SportSim Web sites
(the "Sites"), respectively, and the availability of the games. CNN/SI and CNNfn
have agreed to use reasonable efforts to promote the games and the Sites, and to
build traffic for the games and Sites in accordance with a promotional plan.
The CNN agreements provide that both parties will cooperate regarding the
sale of banner advertising (a form of Internet advertising similar to
billboards) and sponsorships (integration of an advertiser's name and promotion
into the game or simulation itself) for the Sites, but CNN retains primary
control over the sale of banner advertising and the Company retains primary
control over the sale of sponsorships. Each party is responsible for billing,
invoicing, and collection activities related to its sales activities. The
Company is responsible for all development, maintenance, hosting, updating and
support costs, as well as the costs of obtaining all third-party rights and
compliance with all sweepstakes and gaming rules and regulations and any prize
fulfillment activities. The Company is also required to implement a tracking
system to monitor traffic on the sites, page views and other relevant data, and
is required to deliver monthly reports to CNN. In addition, the Company is
responsible for proper insertion and rotation of all advertising and
sponsorships and is required to maintain accurate logs. Where extraordinary
costs are required to integrate an advertiser, and the parties agree to such
costs, the parties generally split such costs evenly. Net banner advertising
revenues are divided among the parties on a 60/40 basis, with the party
responsible for selling the advertising entitled to retain the higher
percentage. Regardless of which party is responsible for the sale of
sponsorships, net sponsorship revenue is divided evenly.
The Company is required to create a CD-ROM enhancement for each game, as
agreed by the parties, that includes CNN/SI and CNNfn elements and features
heavier use of graphics and animation and an enhanced non-cash prize structure.
The Company retains ownership of such CD-ROM products (except to the CNN
elements therein), while net revenues from the sale of CD-ROM products through
mutually agreed channels are generally divided evenly among the parties. During
the term of the agreements, the parties may discuss merchandising and/or
licensing opportunities, which may be exploited only pursuant to mutual
agreement of the parties. Any other merchandising or licensing net revenues
relating to the games, Sites or the CD-ROM products are divided evenly among the
parties with respect to the CNN/SI Agreement and on a 70/30 basis with respect
to the CNNfn Agreement, with the Company entitled to 70%. The Company retains
all rights to its games and simulations as well as ownership of participant
databases.
The Company's strategy contemplates that the CNN agreements, and the
Company's relationship with CNN, will result, over time, in the generation of
significant cash revenues for the Company, although there can be no assurance
that such revenues will be realized. Although the Company believes that the
production and marketing costs associated with CD-ROM game enhancements are
relatively low, the Company's initial marketing of the CNNfn Final Bell CD-ROM
has not been successful in producing significant revenues. The costs to the
Company of complying with its obligations under the agreements are substantial,
and there are no assurances that the costs to develop, maintain, host, update
and support the Sites and games will be offset by additional revenues. The
failure to produce significant revenues pursuant to the CNN agreements would
have a material adverse effect on the Company's business, prospects, financial
condition or operating results. In addition, as CNN/SI and CNNfn are primarily
responsible for the marketing and sale of banner advertising for the Sites,
their failure to market and sell
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sufficient banner advertising on such sites at attractive terms could have a
material adverse effect on the Company's business, prospects, financial
condition or operating results. Furthermore, CNN/SI and CNNfn have substantial
discretion in the substance and quantity of promotional services they provide in
connection with the games and Sites, and there can be no assurance that the
promotional services they provide will enable the games and Sites to attract
sufficient advertising and sponsorship avenues to generate profits for the
Company. The termination or expiration without renewal of either of these
agreements and/or the deterioration of the Company's relationship with CNN could
have a material adverse effect on the Company's business, prospects, financial
condition or operating results. See "Business - Advertising and Sales".
In addition to the CNN Co-Branding and Marketing Agreements, the Company
has used barter arrangements to significantly increase brand recognition and
traffic to its Web sites rather than incurring cash expense for this purpose.
Barter arrangements involve the Company's exchange of advertising space on its
Web site for reciprocal space in other media publications or other Web sites or
receipt of tangible goods used as game prizes or access to editorial or software
content. The Company remains dependent on these third party barter arrangements
and without such arrangements would experience significant cash flow
difficulties.
The Company's most significant barter transactions to date have been with
USA Today Information Network (the original sponsor of Final Bell), PC Quote,
Inc., The Motley Fool, TheStreet.com and Neural Applications Corporation. In the
USA Today arrangement, the media company's logos and other identifying marks
appeared throughout the Final Bell site. In turn, Final Bell appeared on all of
USA Today's Money Line Web pages, as well as elsewhere on their financial Web
site. In the arrangement with PC Quote, which expired on November 13, 1997 but
continues on a month to month basis, text links to PC Quote appear on all Final
Bell pages, and PC Quote receives 200,000 banners each month. In exchange, the
Company receives 200,000 banners and promotion of Final Bell through links on
the PC Quote home page, Micro Watch page and Quote Watch page. The Company also
receives charting and graphing tools which are utilized in its Trade Center area
within Final Bell. The Company also receives promotion from the Motley Fool,
another leading financial information source, through links appearing on the
Motley Fool home page, and from appropriate points on America OnLine, and
editorial content from The Fools School. In turn, the Company provides links to
the Motley Fool from the Exchange area within Final Bell and banner promotion.
The Company is also currently involved in an exchange relationship with Neural,
which involves the trade of banner advertising for a nightly data feed of stock
prices and, until July 1997, had an arrangement with TheStreet.com for the
exchange of promotion on the Company's Exchange pages for daily editorial
content. The Company believes that the services and tools provided in barter
transactions to date are readily available from other sources, although there
are no assurances that the Company would be able to replace such services and
tools on terms acceptable to the Company.
Other Internet sites, particularly search engines, directories and other
navigational tools managed by Internet service providers and Web browser
companies, may significantly affect traffic to the Company's Internet sites. The
Company's ability to develop original and compelling Internet games and
simulations is also dependent on maintaining relationships with and using
products provided by third party vendors of Internet development tools and
technologies. Developing and maintaining satisfactory relationships with third
parties could become more difficult and more expensive as competition increases
among Internet content providers. If the Company is unable to develop and
maintain satisfactory relationships with such third parties on acceptable
commercial terms, or if the Company's competitors are better able to leverage
such relationships, the Company's business, prospects, financial condition or
operating results will be materially adversely affected. In addition, the
occurrence of a players' strike or other work stoppage, to the extent that the
Company is dependent on sports statistics, could have a material adverse effect
on the Company's business, prospects, financial condition or operating results.
Potential Liability for Internet Content
To the extent that the Company publishes and distributes content over the
Internet, the Company faces potential liability for defamation, negligence,
copyright, patent or trademark infringement and other claims based on the nature
and content of the materials that it publishes or distributes. Such claims have
been brought, and sometimes successfully pressed, against on-line services.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the
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Company for all liability that may be imposed. Any imposition of liability that
is not covered by insurance or is in excess of insurance coverage would have a
material adverse effect on the Company's business, prospects, financial
condition or operating results. Further, regardless of the merits of any
asserted claim(s) against the Company, the defense of such claim(s) would be
disruptive to the Company's operations, require the time and attention of the
Company's senior management and would likely be costly.
On July 1, 1997, counsel for the Company received written notification
from plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc., et al., Case
No. CIV-95-1861-PHX-RCB, U.S. District Court for the District of Arizona (the
"Litigation"), that plaintiffs intend to add the Company as a defendant in the
lawsuit, in which a preliminary injunction against defendants has been granted
regarding, among other things, claims for contributory copyright infringement in
connection with products marketed by Humanagement, a start-up company in the
personality testing business. The Company entered into an agreement dated
November 25, 1997 to settle this matter, the terms of which provide that the
Company will issue a promissory note to plaintiffs in the principal amount of
$30,000 due 90 days after its issuance, and that each party will agree to
release any and all claims it may have against the other upon payment of the
note in full by the Company. The preliminary injunction granted against the
defendants has not had any material adverse effect on the Company.
Competition
The market for Internet services and products is relatively new,
intensely competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of Web sites on the Internet
competing for consumers' attention and spending has proliferated with relatively
few barriers to entry, and the Company expects that competition will continue to
intensify. The Company presently competes, or will compete, as the scope of its
games and simulations expands, directly and indirectly, for advertisers,
viewers, players and licenses and other sponsorship events with the following
categories of companies: (i) on-line services offering interactive games to
targeted participants in association with existing and new brands (such as
Starwave Corporation, Interactive Imaginations, Inc. (Riddler), Sony Station and
YoYodyne Entertainment); (ii) on-line services or Web sites targeted to sports
enthusiasts generally (such as ESPNet SportsZone and CBS SportsLine) or to
enthusiasts of particular sports (such as Web sites maintained by Major League
Baseball, the NFL, the NBA and the NHL); (iii) on-line services or Web sites
targeted to existing or potential investors, such as E-TRADE, SMG2000, NASDAQ,
the New York Stock Exchange and the American Stock Exchange; (iv) publishers and
distributors of traditional off-line media (such as television, radio and
print), including those targeted to specific audiences, many of which have
established or may establish Web sites; (v) general purpose consumer on-line
services such as America OnLine, CompuServe and Microsoft Network; (vi) vendors
of information, merchandise, products and services distributed through other
means, including retail stores, mail, facsimile and private bulletin board
services; and (vii) Web search and retrieval services, such as Excite, InfoSeek,
Lycos and Yahoo!, and other high-traffic Web sites, such as those operated by
C|NET and Netscape. The Company anticipates that the number of its direct and
indirect competitors will increase significantly in the future.
Management believes that the Company's most significant competitors for
its fantasy football game and future sports-related games and simulations are
ESPNet SportsZone and CBS SportsLine, which are Web sites offering a variety of
sports content. The Company views its most significant competitors with regard
to its stock market simulation as MSNBC's Investment Challenge Fantasy Game,
E-TRADE Group, Inc., an on-line investment services provider that operates a
similar on-line stock market trading game, SMG2000, an electronic educational
simulation program sponsored by the Securities Industry Foundation for Economic
Education and certain corporate sponsors, and, to a lesser extent, other on-line
brokerage services such as Quote.Com and PC Quote, which offer the ability to
build portfolios but generally do not provide for simulated trading activity.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical and marketing
resources, significantly greater name recognition, substantially larger
participant or membership bases and broader product and service offerings than
the Company. Therefore, such competitors have a significantly greater ability to
attract advertisers and participants. In addition, many of these competitors may
be able to respond more quickly than the Company to new or emerging technologies
and changes
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in Internet user requirements and to devote greater resources than the Company
to the development, promotion and sale of their services. There can be no
assurance that the Company's current or potential competitors will not develop
products and services comparable or superior to those developed by the Company
or adapt more quickly than the Company to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, reduced margins or loss of market share, any of which could
materially and adversely affect the Company's business, prospects, financial
condition or operating results. In addition, as the Company expands
internationally it may face new competition. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company would not have a
material adverse effect on its business, prospects, financial condition or
operating results. See "Business-Competition".
Managing Potential Growth
The Company has rapidly and significantly expanded its Internet
operations and anticipates that significant expansion of its Internet operations
will continue to be required in order to exploit potential market opportunities
and generate sufficient revenues to achieve profitability. This rapid growth has
placed, and is expected to continue to place, a significant strain on the
Company's management, operational, technical and financial resources. In order
to manage the expected growth of its operations, the Company will be required to
implement and improve its operational and financial systems, procedures and
controls, including the improvement of its accounting and other internal
management systems, on a timely basis, and to train, manage and expand its
employee base. The Company will also be required to more than treble its full
time staff and currently anticipates that over the next two years it will hire
approximately 58 full time employees: 23 in production, 17 in engineering; 16 in
sales and marketing and 2 in general and administrative. Although the resulting
increase in staffing costs will be substantial, the Company intends to manage,
to the extent possible, its personnel costs by filling projected positions only
when they can be justified by corresponding increases in revenue, although there
can be no assurance that it will be able to do so. Further, the Company's
management will be required to successfully maintain relationships with various
advertising customers, advertising agencies, other Internet sites and services,
Internet service providers and other third parties and to maintain control over
the strategic direction of the Company in a rapidly changing environment. There
can be no assurance that the Company's current personnel, systems, procedures
and controls will be adequate to support the Company's future operations, that
management will be able to identify, hire, train, motivate or manage required
personnel or that management will be able to successfully identify and exploit
existing and potential market opportunities. If the Company is unable to manage
growth effectively, the Company's business, prospects, financial condition or
operating results will be materially adversely affected.
Dependence on Key Personnel
The Company's performance is substantially dependent on the continued
services of Chad M. Little, James A. Layne, Lonnie A. Whittington, Matthew
Stanton, Michael Turico, Mark Gorchoff and the other members of its senior
management team, as well as on the Company's ability to retain and motivate its
other officers and key employees. Except for Messrs. Layne and Whittington, the
Company has entered into employment agreements or engagement letter agreements
with the individuals named above that generally provide the employee's title,
starting salary, bonus and benefits, moving allowance (if applicable) and
incentive stock options (if any). All of the employment agreements are "at-will"
and none of the agreements provide for material payments to the employee on
termination. The Company and its executive officers, including Messrs. Layne and
Whittington, have also entered into Proprietary Rights and Non-Compete
Agreements that generally prohibit disclosure of Confidential Information (as
defined therein), assign to the Company all rights in Inventions (as defined
therein), and include certain non-compete and non-solicitation covenants. A
state court may not enforce or may only partially enforce such covenants, and
the costs to the Company of seeking to enforce such covenants may be
substantial. The Company has applied for a "key person" life insurance policy on
Chad M. Little, the Company's Chief Executive Officer, in the amount of $5
million, but there can be no assurance that such a policy can be obtained on
terms satisfactory to the Company. The loss of Mr. Little or one of the
executives named above, for whatever reason, could have a material adverse
effect on the Company's business, prospects, financial condition or operating
results.
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The Company's future success depends on its continuing ability to attract
and retain highly qualified personnel. Competition for such personnel among
companies with operations involving computer technology and the Internet is
intense, and there can be no assurance that the Company will be able to retain
its existing employees or that it will be able to attract, assimilate or retain
sufficiently qualified personnel in the future. The Company intends to hire
approximately 58 full time employees over the next two years. The inability to
attract and retain the necessary technical, managerial, editorial and sales
personnel could have a material adverse effect on the Company's business,
prospects, financial condition or operating results. See "Business - Employees".
Risks of Technological Change
The market for Internet products and services is characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging character of these products and services and
their rapid evolution will require that the Company continually improve the
performance, features and reliability of its Internet games and simulations,
particularly in response to competitive offerings. There can be no assurance
that the Company will be successful in responding quickly, cost effectively and
sufficiently to these developments. In addition, the widespread adoption of new
Internet technologies or standards could require substantial expenditures by the
Company to modify or adapt its Internet sites and services and could
fundamentally affect the character, viability and frequency of Internet-based
advertising, either of which could have a material adverse effect on the
Company's business, prospects, financial condition or operating results. In
addition, new Internet services or enhancements offered by the Company may
contain design flaws or other defects that could require costly modifications or
result in a loss of consumer confidence, either of which could have a material
adverse effect on the Company's business, prospects, financial condition or
operating results. See "Business - Intellectual Property".
Dependence on Continued Growth in Use of the Internet
Rapid growth in the use of the Internet is a recent phenomenon, and there
can be no assurance that acceptance and use of the Internet will continue to
develop or that a sufficient base of participants will emerge to support the
Company's business. Revenues from the Company's Internet operations will depend
largely on the widespread acceptance and use of the Internet as a source of
information and entertainment and as a vehicle for commerce in goods and
services. The Internet may not be accepted as a viable commercial medium for a
number of reasons, including potentially inadequate development of the necessary
network infrastructure, or lack of timely development of enabling technologies
or commercial support for Internet-based advertising. To the extent that the
Internet continues to experience an increase in participants, an increase in
frequency of use or an increase in the bandwidth requirements of participants,
there can be no assurance that the Internet infrastructure will be able to
support the demands placed upon it. In addition, the Internet could lose its
viability as a commercial medium due to delays in the development or adoption of
new standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Use of the Internet as a
source of information retrieval or entertainment could be inhibited by
employers' use of "firewalls" to block employees' access to sites on the Web.
Changes in or insufficient availability of telecommunications services to
support the Internet also could result in slower response times and could
adversely affect use of the Internet generally and of the Company's Internet
site(s) in particular. If use of the Internet does not continue to grow or grows
more slowly than expected, or if the Internet infrastructure does not
effectively support growth that may occur, the Company's business, prospects,
financial condition or operating results would be materially adversely affected.
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Capacity Constraints and System Disruptions; Dependence on Third-Party Providers
The satisfactory performance, reliability and availability of the
Internet site(s) on which the Company's games and simulations are offered
("Games Sites") and the Company's network infrastructure are critical to
attracting Internet users and maintaining relationships with advertising
customers. Success of a product is dependent, in part, upon the Company
maintaining participant access to product sales without significant disruption
or delay, which requires, among other things, that the Company estimate and
provide hardware and software systems adequate to handle anticipated traffic.
The Company's advertising revenues are directly related to the number of
advertisements delivered by the Company to participants. System interruptions
that result in the unavailability of the Game Sites or slower response times for
participants would reduce the number of advertisements delivered and reduce the
attractiveness of the Game Sites to participants and advertisers. In August and
September 1997, the Company underestimated the amount of traffic that Final Bell
and SportSim would generate, and experienced system disruptions and delays,
which required the Company to acquire additional hardware and software and which
caused some participant dissatisfaction. These upgrades to its server and
database capacity, which were made over a three-week period and totaled
approximately $443,000, more than doubled the Company's capacity to handle
traffic to its Web sites. In addition, the Company has acquired an additional
$678,000 of equipment in anticipation of the commencement of its SportSim
basketball season and mid-season football. The Company intends to finance the
$678,000 under an equipment lease financing line of credit of $1,000,000 which
the Company is currently negotiating. If such lease financing is not available
on terms acceptable to the Company, the Company may need to use proceeds from
this offering to pay for some or all of such equipment, which would reduce the
funds otherwise available for working capital and marketing or development. See
"Risk Factors - Need for Additional Financing". Furthermore, as additional games
and simulations are brought on-line, including those contemplated under the CNN
agreements, additional upgrades will be required. While the Company believes
that the steps it has taken to increase its ability to handle larger amounts of
traffic, and to communicate with and address the concerns of its participants
have been effective, there can be no assurance that such system disruptions will
not adversely affect the Company's business, prospects, financial condition or
operating results. Similarly, although the Company is increasing its systems
infrastructure acquisition plans in light of the most current information and
estimates available to it, there can be no assurance that it will accurately
foresee traffic levels, system requirements or other factors that might result
in system interruptions, or that such system interruptions will not occur.
In August and September 1997, also in response to the surge in traffic to
its Web sites, the Company was required to make arrangements with Teleport
Communications Group, Inc. a third party telecommunications service provider
("TSP") to house its Web sites and obtain a more direct link between the Company
and Genuity, Inc., the Company's Internet service provider ("ISP"). The Company
believes that its TSP and ISP are capable of handling its anticipated traffic
growth in the foreseeable future and can provide expanded bandwidth for
communications as Internet technology improves in this area. However, any
failure of the TSP or ISP to perform as anticipated or any unforeseeable
increase in traffic on its Web sites will require the Company to make other
third party arrangements or expand and adapt its network infrastructure. The
Company's inability or failure to make such arrangements or add additional
software and hardware to accommodate increased traffic on its Web sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will make such arrangements or expand
its network infrastructure on a timely basis to meet increased demand. Any
increase in system interruptions or slower response times resulting from the
foregoing factors could have a material adverse effect on the Company's
business, prospects, financial condition or operating results.
The Company's Web site operations housed at the TSP's facility are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's or the TSP's control. The TSP
provides certain safeguards against such events. The Company's contract with its
TSP provides that the switch room is maintained at a temperature of
approximately 70 degrees and a 50% humidity level and the AC power is backed up
by a generator. In addition, the Company's procedures require that software be
backed up daily, and stored off-site so that it could be used to restore the
Company's Web site operations in the event of catastrophe. However, there can be
no assurance that in the event of a catastrophe, the Company would be able to
locate sufficient equipment to run its Web site operations on a timely basis. If
the TSP or ISP fails for any reason,
26
<PAGE>
the Company would have to make other third party arrangements. The Company
carries business interruption insurance, but there is no assurance that such
insurance would be sufficient to compensate the Company for lost revenues that
might occur from a substantial system failure, and any losses or damages
incurred by the Company could have a material adverse effect on its business,
prospects, financial condition or operating results. See "Business -
Facilities."
Importance of Proprietary Rights
The Company regards its databases, products and gaming engines as
proprietary and attempts to protect them under a combination of patent,
copyright, trade secret and trademark laws and contractual restrictions on
employees and third parties. Despite these precautions, it may be possible for
unauthorized parties to copy the Company's software or to reverse engineer or
obtain and use information the Company regards as proprietary. Existing trade
secret and copyright laws provide only limited protection. Certain provisions of
the license and distribution agreements to be used by the Company, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions and the
Company may be required to negotiate limits on these provisions from time to
time. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the protections put in place by the
Company will be adequate. The Company has two U.S. patent applications pending
with respect to certain of its technologies. There can be no assurance that
patents will issue as a result of these applications, or as to the extent of the
protection any such patent(s) might afford, or whether the rights granted
thereunder will provide a competitive advantage to the Company. See "Business -
Intellectual Property".
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement. The
Company is not currently involved in any litigation with respect to intellectual
property rights and, with the exception of the Kolbe/Humanagement Litigation, is
not aware of any threatened claims. There can be no assurance that third-party
claims, with or without merit, alleging infringement will not be asserted
against the Company in the future. Such assertions can be time consuming and
expensive to defend and could require the Company to discontinue the use of
certain software or processes, to discontinue certain product lines, to incur
significant litigation costs and expenses and to develop or acquire
non-infringing technology or obtain licenses to the alleged infringing
technology. There can be no assurance that the Company would be able to develop
or acquire alternative technologies or to obtain such licenses or, if licenses
were obtainable, that the terms would be commercially acceptable to the Company.
Government Regulation and Legal Uncertainties
The Company is subject to various laws and governmental regulations
applicable to businesses generally. The Company believes it is currently in
compliance with such laws and that such laws do not have a material impact on
its operations. In addition, although there are currently few laws or
regulations directly applicable to access to or commerce on the Internet, due to
the increasing popularity and use of the Internet, it is possible that more
stringent consumer protection laws and regulations may be adopted with respect
to the Internet, covering issues such as participant privacy and expression,
pricing, intellectual property, information security, anti-competitive
practices, the convergence of traditional channels with Internet commerce,
characteristics and quality of products and services and the taxation of
subscription fees or gross receipts of Internet service providers. The enactment
or enforcement of such federal or state laws or regulations in the future may
increase the Company's cost of doing business or decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's costs, or otherwise have an adverse effect on
the Company's business, prospects, financial condition or operating results.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, libel and personal
privacy is uncertain, may take years to resolve and could expose the Company to
substantial liability for which the Company might not be indemnified by content
providers or other third parties. Any such new legislation or regulation or the
application of existing laws and regulations to the Internet could have a
material adverse effect on the Company's
27
<PAGE>
business, prospects, financial condition or operating results. See "Risk Factors
- - Potential Liability for Internet Content".
During the year ending December 31, 1996, the Company paid out
approximately $6,953 in cash prizes, and during the nine-month period ending
September 30, 1997, the Company paid out approximately $16,325 in cash prizes.
In addition to cash prizes, the Company also awards non-cash prizes to
participants. Non-cash prizes are provided by sponsors or purchased by the
Company in exchange for cash or advertising. The cost to the Company for
non-cash prizes during the year ending December 31, 1996 and the nine-month
period ending September 30, 1997 was $46,694 and $37,053, respectively. The
Company's use of prizes in its games and simulations may be subject to state and
federal laws governing lotteries and gambling. Such laws vary from jurisdiction
to jurisdiction and are complex and uncertain. The Company seeks to design its
prizing structure to fall within exemptions from such laws, but there can be no
assurance that the Company's prizing structure will be exempt from all
applicable laws. Failure to comply with applicable laws could have a material
adverse effect on the Company's business, prospects, financial condition or
operating results.
Tax authorities in a number of states are currently reviewing the
appropriate tax treatment of companies engaged in Internet commerce. New state
tax regulations may subject the Company to additional state sales and income
taxes. As the Company's games and simulations are available over the Internet in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state and foreign country. The failure by the Company to qualify as a
foreign corporation in a jurisdiction where it is required to do so could
subject the Company to taxes and penalties for the failure to qualify. It is
possible that the governments of other states and foreign countries also might
attempt to regulate the Company's transmissions of content on its Web sites or
prosecute the Company for violations of their laws. There can be no assurance
that violations of local laws will not be alleged or charged by state or foreign
governments, that the Company might not unintentionally violate such law or that
such laws will not be modified, or new laws enacted, in the future.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
For example, America's Carriers Telecommunications Association has filed a
petition with the FCC for this purpose. In addition, because the growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure and many areas with high Internet use have begun to experience
interruptions in phone service, local telephone carriers, such as Pacific Bell,
have petitioned the FCC to regulate Internet service providers in a manner
similar to long distance telephone carriers and to impose access fees on the
Internet service providers. If either of these petitions are granted, or the
relief sought therein is otherwise granted, the costs of communicating on the
Internet could increase substantially, potentially slowing the growth in use of
the Internet. Any such new legislation, regulation or application or
interpretation of existing laws could have a material adverse effect on the
Company's business, prospects, financial condition or operating results. See
"Business - Government Regulation".
28
<PAGE>
Forward Looking Statements
Except for historical information contained herein, this Prospectus
contains forward-looking statements. Such forward-looking statements involve
risks and uncertainties and include, but are not limited to, statements
regarding future events and the Company's plans and expectations. The Company's
actual results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
in this "Risk Factors" section, as well as those discussed elsewhere in this
Prospectus. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in such forward-looking statements will be realized. In addition,
as disclosed in these "Risk Factors", the business and operations of the Company
are subject to substantial risks which increase the uncertainties inherent in
the forward-looking statements included in this Prospectus. The inclusion of
such forward-looking information should not be regarded as a representation by
the Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. See "Special Note on
Forward-Looking Statements".
Allocation of Proceeds to Debt Reduction; Management's Discretion as to Use of
Net Proceeds
The Company intends to use the net proceeds of this offering primarily
for product and services marketing and development, additional staffing costs
and repayment of debt. In addition, the Company could also use proceeds for
potential acquisitions of products and technologies complementary to the
Company's business and for working capital and other general corporate purposes.
Specifically, the Company intends to allocate $748,589 of the proceeds for
repayment of debt that will benefit officers, directors and other affiliated
parties. In addition, the Company intends to finance $678,000 of equipment under
an equipment lease line of credit of $1,000,000, which the Company is currently
negotiating. If such lease financing is not available on terms acceptable to the
Company, the Company may need to use a portion of the proceeds from this
offering to pay for such equipment. See "Use of Proceeds". Pending such uses,
the Company intends to invest the net proceeds from this offering in short-term,
investment-grade, interest-bearing securities. The Board of Directors and
management of the Company will have significant flexibility in applying the net
proceeds of this offering allocated to working capital. The failure of
management to apply such funds effectively could have a material adverse effect
on the Company's business, prospects, financial condition or operating results.
See "Use of Proceeds".
Determination of the Offering Price
The offering price for the Series B Preferred Stock has been determined
by the Underwriters after negotiations with the Company, and should not be
regarded as an indication of any future market price of the Series B Preferred
Stock or the Conversion Shares. Among the factors that were considered in
determining the offering price were prevailing market conditions, the history
and prospects of the Company and its industry in general, the valuation of
competitors of the Company, the Company's current operations and earnings
potential, the Company's management, the lack of liquidity for the Series B
Preferred Stock and risks associated with an investment in the Company.
Control by Existing Stockholders
Upon completion of this offering, holders of Series A Preferred Stock and
members of the Company's senior management will have the ability to vote in the
aggregate 47% of the outstanding voting stock of the Company on an as-converted,
fully diluted basis. As a result, these stockholders, if they act as a group,
may be able to control all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions, except
for certain limited matters as to which the holders of Series B Preferred Stock
vote as a separate class. Such control, if exercised, may have the effect of
delaying or preventing a change in control of the Company. See "Management",
"Principal Stockholders" and "Description of Capital Stock".
29
<PAGE>
Anti-Takeover Effect of Certain Charter Provisions
Excluding shares of Series B Preferred Stock issuable upon exercise of
warrants granted to the Underwriters effective upon commencement of this
offering at 110% of the public offering price, under the Certificate of
Incorporation there will be as of the closing of this offering 7,920,862
unissued and unreserved shares of Common Stock, 90,616 unissued and unreserved
shares of Series A Preferred Stock, 310,000 unissued and unreserved shares of
Series B Preferred Stock, and 1,400,000 shares of Preferred Stock for which the
Board of Directors has authority to issue in series junior to the Series A and
Series B Preferred Stock, but otherwise with such rights, preferences and
restrictions as it deems appropriate in its discretion, including voting rights,
as may be determined by the Board of Directors without any further vote or
action by the holders. Stockholder approval is required to increase the amounts
of authorized shares of capital stock. The rights of the stockholders may be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying or preventing a change of control of the
Company without further action by the stockholders and may adversely affect the
voting and other rights of the stockholders. The Company has no present plans to
issue any shares of Preferred Stock, other than the Series B Preferred Stock
offered hereby and in connection with the conversion of certain convertible
promissory notes, effective upon consummation of this offering. See "Certain
Transactions".
Lack of Independent Directors
At present, the Board of Directors of the Company is comprised of four
members of management and three individuals representing the Company's venture
capital investors. Representatives of venture capital investors may not qualify
as "independent directors", where such venture capital investors stand to
benefit from transactions to be approved by the Board of Directors. Following
consummation of this offering, the Company intends to add two independent
directors to its Board of Directors to replace two directors who are members of
management.
Limitation on Directors' Liability
The Company's Certificate of Incorporation, as amended in connection with
this offering, provides that no director of the Corporation shall be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. The Certificate of Incorporation does not,
however, eliminate or limit the liability of a director of the Company to the
extent provided by applicable laws (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of law,
(iii) for authorizing the payment of an unlawful dividend or the unlawful
repurchase of stock, or (iv) for any transaction from which the director derived
an improper personal benefit. The limitation of liability provided therein shall
continue after a director has ceased to occupy such position as to acts or
omissions occurring during such director's term or terms of office.
Dividends; Series A Preferred Stock Preference
Holders of Series A Preferred Stock are entitled to a dividend preference
over the Series B Preferred Stock and Common Stock at the rate of 9% per annum;
provided however, that in no event may any dividend be declared or paid with
respect to the Series A Preferred Stock until the second anniversary of the date
the Company's Restated Certificate of Incorporation is filed with the Delaware
Secretary of State in connection with the consummation of this offering. Holders
of shares of Series B Preferred Stock will have no dividend preference over the
Common Stock and will only be entitled to receive, when, as and if declared by
the Board of Directors, a dividend or distribution equal to the dividend or
distribution, if any, declared on the number of shares of Common Stock into
which such shares of Series B Preferred Stock are convertible. The Company's
current bank financing contains a covenant that the Company will not pay or
declare any dividends on the Company's stock (except for dividends payable
solely in the Company's stock) without the bank's prior written consent. The
Company does not anticipate paying any cash dividends in the foreseeable future,
and the Company anticipates that any future bank financing will contain a
substantially similar restriction. See "Dividend Policy".
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<PAGE>
Limited Experience of the Underwriters
To date, Wit Capital Corporation has been a syndicate member in three
public equity offerings. These offerings occurred from October 1997 through
December 1997, and did not involve preferred stock. Wit Capital Corporation has
never served as a managing underwriter in a public equity offering. The limited
experience of Wit Capital Corporation may adversely affect the proposed offering
of the Series B Preferred Stock offered hereby.
Dilution
Investors participating in this offering will incur an immediate and
substantial dilution of $5.67 (74%) in the net tangible book value per share of
the Series B Preferred Stock from the offering price. To the extent that
outstanding options and warrants to purchase the Company's capital stock are
exercised, there will be further dilution. See "Dilution".
31
<PAGE>
VENTURE CAPITAL INVESTING
The Company is engaging in a public offering of its Series B Preferred
Stock as an alternative to another round of venture capital financing.
In venture capital investing, investors seek to achieve superior returns
through the capital appreciation of their equity investments realized in
companies in which they invest ("portfolio companies"), through subsequent
public offerings and/or sales of the portfolio companies. In seeking superior
returns, venture capital investors assume significantly greater investment risks
than those incurred when investing in the securities of established public
companies, including the risk of loss of their entire investment and the risk
arising from lack of liquidity of their investment. Portfolio companies may have
few tangible assets, limited financial resources, and a limited operating
history that in some instances may be characterized by limited revenues and
continuing operating losses. Venture capitalists traditionally seek to address
these risks by carefully evaluating specific portfolio investments, by
attempting to build a portfolio of venture capital investments to diversify risk
and increase the likelihood that returns, on an aggregate basis, will be
attractive, and by negotiating for and obtaining a variety of contractual
protections from the portfolio companies in which they invest.
Contractual protections often obtained by venture capitalists include
representation on or control over the Board of Directors of the portfolio
company, and contractual veto rights governing such issues as the incurrence of
indebtedness, changes in the business plan, the execution and termination of
material contracts, including the employment agreements of senior executives,
and mergers, acquisitions and sales of assets other than in the ordinary course
of business. The holders of the Series A Preferred Stock obtained a number of
these contractual protections in connection with their investments in the
Company, and currently have three representatives on the Company's Board of
Directors. See "Certain Transactions" and "Description of Capital Stock - Series
A Preferred Stock". However, in light of the broad distribution of the Series B
Preferred Stock anticipated in connection with the offering, the Company and the
Underwriters have determined that it is not practicable for the holders of the
Series B Preferred Stock to have and to exercise many of these rights.
Accordingly, the holders of the Series B Preferred Stock do not have a right, as
a separate class, to designate members to the Company's Board of Directors, nor
do such holders have contractual or other veto rights regarding the incurrence
of indebtedness, changes in the Company's business plan, execution or
termination of material contracts, or, except as specifically described under
"Description of Capital Stock", mergers, acquisitions or sales of assets of the
Company. Following the offering, the Company intends to add two independent
directors to its Board of Directors.
As portfolio companies anticipate that they will require additional
rounds of private equity financing in order to implement their business plans,
venture capitalists often obtain contractual pre-emptive or right of first
refusal rights to purchase equity securities issued by portfolio companies for
cash in subsequent financings. These rights are obtained to protect the
investors against the potential for dilution that may occur in subsequent
private issuances of equity securities. The holders of the Series A Preferred
Stock have, but the holders of the Series B Preferred Stock will not have, such
rights with respect to subsequent issuances of equity securities by the Company.
However, in addition to the benefit of the antidilution provisions described
under "Description of Capital Stock - Series B Preferred Stock", in the event
that the Company issues additional Common Stock or securities convertible or
exchangeable for Common Stock for an aggregate consideration of $1,000,000 or
more within one year of consummation of the offering of the Series B Preferred
Stock at a consideration per share less than the conversion price of the Series
B Preferred Stock, the conversion price of the Series B Preferred Stock will be
reduced to such lower conversion price.
The holders of the Series B Preferred Stock will be subject to
restrictions on transfer substantially similar to those that would be imposed if
investors were affiliates of the Company and had purchased shares of Series B
Preferred Stock in a private placement as opposed to a public offering.
Accordingly, during the Restricted Period (as defined below), the Series B
Preferred Stock will neither be convertible into Common Stock nor be
transferable except as follows: (1) to family members or affiliates (as such
term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of
1934, as amended), (2) pursuant to the laws of descent and distribution, (3) in
the event of bankruptcy or insolvency of the holder, (4) as approved by the
Board of Directors in its sole and absolute discretion, or (5) by the
Underwriters in connection with the initial distribution of the Series B
Preferred Stock.
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<PAGE>
After expiration of the Restricted Period, there will continue to be no public
market for the Series B Preferred Stock or the Common Stock into which it is
convertible. Except for the registration rights of certain holders of the Series
A Preferred Stock, the Company is under no obligation to register the Series B
Preferred Stock, Common Stock or any other capital stock of the Company. See
"Certain Transactions - Registration Rights".
The "Restricted Period" shall begin on the date of the closing of the
offering of the Series B Preferred Stock (the "Closing Date") and end on the
earlier of (i) 24 months following the Closing Date, (ii) 180 days after the
consummation of a Qualifying Public Offering, (iii) the occurrence of any of the
following: (1) any merger, consolidation, or other corporate reorganization in
which the stockholders of the Company do not own a majority of the outstanding
shares of the surviving corporation, (2) prior to the consummation by the
Company of a Qualifying Public Offering, any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred or in which all or substantially all of the assets of the Company
are sold, or (3) subsequent to the consummation by the Company of a Qualifying
Public Offering, the acquisition, directly or indirectly, by any individual or
entity or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act, except that such individual or entity shall be deemed to have beneficial
ownership of all shares that any such individual or entity has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of more than 25% of the aggregate outstanding voting power of capital
stock of the Company, or (iv) the date determined by the Board of Directors as
to all of the outstanding Series B Preferred Stock.
Unlike the holders of the Series A Preferred Stock, holders of the Series
B Preferred Stock do not have tag-along rights, which are the rights to
participate on a pro rata basis in sales to third parties by the controlling
stockholders of the Company, but will have, as a class, approval rights with
respect to such sales by certain controlling stockholders of 50% or more of
their beneficial ownership in the Company if the holders of the Series B
Preferred Stock do not receive, in connection with such transaction, cash or
marketable securities at least equal to 125% of the original issue price of the
Series B Preferred Stock, subject to antidilution adjustments. See "Description
of Capital Stock".
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<PAGE>
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Prospectus
contains forward-looking statements. Such forward-looking statements involve
risks and uncertainties and include, but are not limited to, statements
regarding future events and the Company's plans and expectations. The Company's
actual results may differ materially from such statements. Factors that cause or
contribute to such differences include, but are not limited to, those discussed
above in "Risk Factors", as well as those discussed elsewhere in this
Prospectus. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the results
contemplated in such forward-looking statements will be realized. In addition,
as disclosed above under "Risk Factors", the business and operations of the
Company are subject to substantial risks which increase the uncertainties
inherent in the forward-looking statements included in this Prospectus. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans
or expectations contemplated by the Company will be achieved.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 654,590 shares of
Series B Preferred Stock offered by the Company hereby are estimated to be
approximately $4,244,960, based on an assumed offering price of $7.63 per share,
after deducting estimated underwriting discounts and offering expenses. The
following table, which does not take into account the receipt of revenues from
operations, sets forth the anticipated use of proceeds:
Percentage
Purpose Amount of Net Proceeds
------- ------ ---------------
Staffing Costs (1) $1,466,000 35%
Product and Services Marketing
and Development (2)(4) 1,291,000 30%
Reduction of Debt (3) 1,421,117 33%
Working Capital(4) 66,843 2%
------- ---
$4,244,960 100%
(1) Through December 1998, the Company estimates it will hire 32
additional employees, 12 in production, 10 in engineering, 9 in sales and
marketing and 1 in general and administrative.
(2) Includes estimated allocation of $560,000 for prizes and $700,000 for
advertising and promotional costs through December 1998.
(3) Consists of: (i) $500,000 outstanding under a $500,000 revolving bank
line of credit due March 5, 1998, bearing interest at a prime rate plus 1.5%,
which may be reborrowed through the term of the agreement; (ii) $109,058
outstanding pursuant to a note payable to Glenn Gomez in fifteen equal quarterly
installments beginning September 30, 1997 at a prime interest rate; (iii)
$40,000 outstanding pursuant to notes payable to certain investors, including
Douglas and Susan Greenwood and the Pickwick Group, LLP which is controlled by
them, due October 28, 1997 bearing interest at 10%; (iv) $490,000 outstanding
pursuant to bridge loans payable to various investors payable on the
consummation of this offering bearing interest at 10%; (v) $73,365 plus accrued
interest currently due to Chad Little, James Layne, and Lonnie and Michele
Whittington under various loans and obligations all of which were incurred prior
to November 1995, and bearing interest at rates from 0% to 10%; (vi) $36,166
plus accrued interest due to Lonnie Whittington pursuant to a Subordinated
Promissory Note dated November 26, 1997; and (vii) $172,528 due to Andrew Todd
pursuant to a Subordinated Promissory Note issued December 12, 1997.
(4) The Company has acquired an additional $678,000 of equipment in
anticipation of the commencement of its SportSim basketball season and
mid-season football. This additional equipment was financed by the vendor in
October 1997, on net 45-day credit terms. The Company intends to finance the
$678,000 under an equipment lease financing line of credit of $1,000,000 which
the Company is currently negotiating. If such lease financing is not available
on terms acceptable to the Company, the Company may need to use proceeds from
this offering to pay
34
<PAGE>
for some or all of such equipment, which would reduce the funds otherwise
available for working capital and marketing or development. See "Risk Factors -
Need for Additional Financing". In addition, the Company has entered into an
agreement dated November 25, 1997 to settle certain potential claims for, among
other things, contributory copyright infringement. Pursuant to the agreement,
the Company issued a promissory note in the principal amount of $30,000 due 90
days after its issuance. See "Risk Factors - Potential Liability for Internet
Content".
Depending on the availability of proceeds after the uses described above,
the Company may also use proceeds for potential acquisitions of products and
technologies complementary to the Company's business, although the Company has
no present plans, understandings or commitments, nor is it currently engaged in
any negotiations, with respect to any such acquisition or investment. The
Company expects to continue to incur operating losses in the foreseeable future,
and, to the extent of such losses, the net proceeds will be applied to pay the
Company's cost of operations. The amounts actually expended by the Company to
cover operating losses and for working capital purposes will vary significantly
depending on a number of factors, including future revenue growth, if any, and
the amount of cash used or generated by the Company's operations. See "Risk
Factors - Anticipation of Continuing Cash Losses; Negative Net Worth" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Pending use of the net proceeds for the purposes described above,
the Company intends to invest such funds in short-term, interest-bearing
investment-grade obligations.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital
stock. The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future. The Loan and Security
Agreement dated September 5, 1996, between the Company and Silicon Valley Bank,
as amended, contains a covenant that the Company will not pay or declare any
dividends on the Company's stock (except for dividends payable solely in the
Company's stock) without Silicon Valley Bank's prior written consent, and the
Company anticipates that any future bank financing will contain a substantially
similar restriction. Holders of shares of Series A Preferred Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor prior and in preference to any dividends
paid to the holders of Series B Preferred Stock and Common Stock at the rate of
9% per annum. The Certificate of Incorporation will prohibit the payment of any
such dividends until the second anniversary of the date of the consummation of
this offering.
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the
capitalization of the Company giving effect to the Reverse Stock Split: (a) on
an actual basis; (b) on a pro forma basis giving effect to the conversion of
$270,000 aggregate principal amount of convertible promissory notes issued in
July 1997 into 35,410 shares of Series B Preferred Stock effective upon
consummation of this offering(1); and (c) on a pro forma as-adjusted basis to
reflect the sale of the 654,590 shares of Series B Preferred Stock offered by
the Company hereby (at an assumed offering price of $7.63 per share and after
deduction of underwriting discounts and commissions and estimated offering
expenses) and the application of the net proceeds therefrom. This information is
qualified in its entirety by the more detailed information and financial
statements contained elsewhere in this Prospectus.
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<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
------------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Notes payable:.....................................................................$ 500,000 $ 500,000 $ -
============ ============== ===============
Long-Term Debt, including current portion:.........................................$ 2,077,131 $ 1,832,444 $ 1,128,438
Stockholders' Equity (Deficit):
Common Stock, 10,000,000 authorized, 526,397 issued and outstanding actual,
pro forma and pro forma as adjusted (2)............................................ 526 526 526
Series A Preferred Stock, 600,000 authorized, 330,211 shares issued and
outstanding actual, pro forma and pro forma as adjusted (3)........................ 1,585,000 1,585,000 1,585,000
Series B Preferred Stock, 1,000,000 authorized, no shares issued and
outstanding actual, 35,410 shares issued and outstanding pro forma and 690,000
shares issued and outstanding pro forma as adjusted (4)............................ - 270,000 4,514,960
Paid-in capital................................................................ 381,108 355,795 355,795
Accumulated deficit............................................................ (3,565,892) (3,565,892) (3,565,975)
----------- ------------- ---------------
Total stockholders' equity................................................ (1,599,258) (1,354,571) 2,890,306
----------- ------------- ---------------
Total capitalization......................................................$ 477,873 $ 477,873 $ 4,018,744
============ ============== ===============
</TABLE>
- ----------
(1) If the Registration Statement of which this Prospectus is a part is not
declared effective by the Securities and Exchange Commission on or before
January 20, 1998, such notes shall not be automatically converted and shall
become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share.
(2) Based on 526,397 shares outstanding as of September 30, 1997 and excludes
(a) 100,506 shares of Common Stock issuable upon exercise of outstanding stock
options, (b) 166,268 shares of Common Stock issuable upon exercise of
outstanding warrants, (c) 187,129 shares of Common Stock reserved for future
issuance under the 1995 Equity Incentive Plan, and (d) Common Stock issuable
upon conversion of Series A Preferred Stock and Series B Preferred Stock.
(3) Based on 330,211 shares outstanding as of September 1, 1997 and excludes
122,921 shares of Series A Preferred Stock issuable upon exercise of outstanding
warrants and 56,252 shares issuable upon conversion of certain promissory notes.
(4) Based on no shares of Series B Preferred Stock outstanding prior to this
offering and excludes shares issuable upon exercise of warrants granted to the
Underwriters effective upon commencement of this offering at 110% of the public
offering price and includes 35,410 shares issuable upon conversion of certain
convertible promissory notes effective upon consummation of this offering,
provided that if the Registration Statement of which this Prospectus is a part
is not declared effective by the Securities and Exchange Commission on or before
January 20, 1998, such notes shall not be automatically converted and shall
become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share.
36
<PAGE>
DILUTION
Pro forma net tangible book value (deficit) per share represents the
amount of the Company's tangible assets less liabilities divided by the number
of shares of Common Stock outstanding on a pro forma basis after giving effect
to (i) the Reverse Stock Split, (ii) the conversion of each share of Series A
Preferred Stock outstanding as of September 30, 1997 into one share of Common
Stock, (iii) the conversion of $270,000 aggregate principal amount of
convertible promissory notes into 35,410 shares of Series B Preferred Stock at a
conversion price equal to an assumed offering price of $7.63 per share, (iv) the
conversion of the 35,410 shares of Series B Preferred Stock into Common Stock,
(v) the conversion of $270,000 aggregate principal amount of convertible
promissory notes into 56,252 shares of Series A Preferred Stock at a conversion
price of $4.80 per share, and (vi) the conversion of the 56,252 shares of Series
A Preferred Stock into Common Stock. The pro forma net tangible book value
(deficit) of the Company as of September 30, 1997, was approximately
$(1,104,341) or $(1.16) per share. Pro forma net tangible book value per share
as adjusted represents the amount of the Company's tangible assets less
liabilities divided by the number of shares of Common Stock outstanding on a pro
forma basis after giving effect to (i) the sale of 654,590 shares of Series B
Preferred Stock offered hereby by the Company at an assumed offering price of
$7.63 per share after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company and (ii) the conversion
of each of the 654,590 shares of Series B Preferred Stock into one share of
Common Stock. On this basis, the Company's pro forma net tangible book value as
adjusted at September 30, 1997 would have been $3,137,608 or $1.96 per share.
This represents an immediate dilution of $5.67 per share (74%) to new investors
purchasing shares of Series B Preferred Stock in this offering. The following
table illustrates this dilution:
Assumed offering price per share ................................$7.63
Pro forma net tangible book value (deficit) per share at
September 30, 1997..........................................(1.16)
Pro forma increase per share attributable to new investors... 3.12
-----
Pro forma net tangible book value per share as adjusted.......... 1.96
-----
Pro forma net tangible book value dilution per share to new
investors.......................................................$5.67
=====
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors, after giving effect to (i) the Reverse Stock Split,
(ii) the conversion of each share of Series A Preferred Stock outstanding as of
September 30, 1997 into one share of Common Stock, (iii) the sale of 654,590
shares of Series B Preferred Stock offered hereby by the Company at an assumed
offering price of $7.63 per share after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company, (iv) the conversion of $270,000 aggregate principal amount of
convertible promissory notes into 35,410 shares of Series B Preferred at a
conversion price equal to an assumed offering price of $7.63 per share,
effective upon consummation of this offering, (v) the conversion of each share
of Series B Preferred Stock into one share of Common Stock, (vi) the conversion
of $270,000 aggregate principal amount of convertible promissory notes into
56,252 shares of Series A Preferred Stock at a conversion price of $4.80 per
share, and (vii) the conversion of the 56,252 shares of Series A Preferred Stock
into Common Stock.
Shares Purchased Total Consideration Average
----------------------------------------- Price
Number Percent Amount Percent Per Share
----------------------------------------------------
Existing Stockholders....... 948,270 59% $1,921,551 28% $2.03
New Investors............... 654,590 41% 4,994,522 72% 7.63
--------- ----- ---------- -----
1,602,860 100% $6,916,073 100%
========= ==== ========== ====
The foregoing information assumes no exercise of outstanding options or
warrants. As of September 30, 1997 there were 100,506 shares of Common Stock
reserved for issuance upon exercise of outstanding options at a weighted average
exercise price of $0.88, of which 26,799 shares were then exercisable, 166,268
shares of Common Stock reserved for issuance upon exercise of outstanding
warrants at a weighted average exercise price of
37
<PAGE>
$7.76, all of which are currently exercisable, and 122,921 shares of Series A
Preferred Stock reserved for issuance upon exercise of outstanding warrants at a
weighted average exercise price of $3.52, all of which are currently
exercisable. To the extent such options and warrants are exercised, existing
shareholders could experience additional dilution. See "Management - Stock
Plans", "Certain Transactions" and Note 7 and 8 to Financial Statements.
38
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The Selected Statement of Operations Data
presented below for the years ended December 31, 1995 and 1996, and the Balance
Sheet Data at December 31, 1996 presented below, are derived from the Company's
financial statements which have been audited by Ernst & Young LLP, independent
auditors, included elsewhere herein. The Statement of Operations Data presented
below for the nine months ended September 30, 1996 and 1997, and the Balance
Sheet Data at September 30, 1997 presented below, are derived from unaudited
financial statements included elsewhere in this Prospectus that have been
prepared by the Company on the same basis as the audited financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations for these periods. Historical results are not
necessarily indicative of the results of operations to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Internet revenues ........................................... $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues ....................................... 462,417 154,845 150,751 --
----------- ----------- ----------- -----------
Total revenues ............................ 462,417 396,167 231,263 171,319
Costs and operating expenses:
Production and engineering ............................ 594,219 986,593 760,908 786,017
Sales and marketing ................................... 130,760 505,954 347,438 502,655
General and administrative ............................ 223,676 304,897 222,882 358,025
----------- ----------- ----------- -----------
Total costs and operating expenses ........ 948,655 1,797,444 1,331,228 1,646,697
----------- ----------- ----------- -----------
Operating loss .............................................. (486,238) (1,401,277) (1,099,965) (1,475,378)
Other income (expense):
Interest expense ...................................... (25,759) (76,760) (43,383) (147,621)
Other ................................................. 4,907 528 94 1,634
----------- ----------- ----------- -----------
Total other income (expense) .............. (20,852) (76,232) (43,289) (145,987)
----------- ----------- ----------- -----------
Net loss .................................................... $ (507,090) $(1,477,509) $(1,143,254) $(1,621,365)
=========== =========== =========== ===========
Net loss per common share (1) ............................... $ (0.69) $ (1.86) $ (1.45) $ (1.96)
Shares used in computation (1) .............................. 732,229 794,570 787,117 827,378
</TABLE>
December 31, September 30,
1996 1997
------------ -------------
Balance Sheet Data:
Cash and cash equivalents................. $ 20,519 $ 311,981
Working capital (deficit)................. 200,150 (1,315,082)
Total assets.............................. 750,155 1,457,440
Notes payable............................. -- 500,000
Long term debt, including current portion. 648,645 2,077,131
Total stockholders' equity (deficit)...... (63,734) (1,599,258)
(1) Adjusted to give effect to the Reverse Stock Split. The effect of
the conversion of each outstanding share of Series A Preferred Stock
into one share of Common Stock is not included in the adjustment
because the effect would be anti-dilutive. Includes certain common
share equivalents in accordance with SAB 83 (see Note 1 of Notes to the
Financial Statements).
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed above in "Risk Factors", as well as those discussed
elsewhere in this Prospectus. See "Special Note on Forward-Looking Statements".
Overview
From its formation in 1992 through mid 1995, the Company's primary
business was the production of traditional and interactive marketing programs
and materials for client companies. In May 1995, the Company produced its first
Web-based game, Cyberhunt. In August 1995, as a result of the decision to change
the Company's principal business focus to the Internet and the ongoing
production of interactive Web-based games and simulations, the Company hired
certain key members of its engineering staff, began acquiring equipment to
support its product development and Web site related activities, and commenced a
phase-out of its fee-for-service business. The Company's principal current and
anticipated source of revenues is the sale of banner advertising and "integrated
advertising" on its Web sites. The Company generated its first such revenues in
March 1996, and since June 30, 1996, advertising revenues have accounted for
substantially all of the Company's revenues. Accordingly, the Company has an
extremely limited operating history upon which an evaluation of the prospects
for its interactive games and simulations and the related sale of advertising
may be based. Because the Company anticipates that advertising revenues alone
will not generate operating profits in the foreseeable future, the Company
intends to seek to create additional revenue streams from other sources, such as
pay-for-play opportunities (i.e., CD-ROM variations of its games and
simulations), and through licensing its proprietary gaming engines for use on
non-competing third party Web sites. To date, the marketing and sale of CNNfn
Final Bell CD-ROMS have only been via the Internet, to registered Final Bell
participants, and less than 300 copies have been sold. The Company is still
evaluating the value of this product and may elect to market CD-ROM products
through a third party. These efforts to increase revenues are projected to
require significantly increased costs and expenses in future periods.
The Company's operating costs and expenses have grown substantially
since the August 1995 change in its business model. Added expenses result from
increased personnel costs, principally in engineering staff, advertising and
promotional costs related to efforts directed at increasing traffic to its Web
sites, increased facilities costs, principally rent and depreciation on
equipment, and interest costs associated with the acquisition of equipment. The
Company currently intends to continue to increase its operating expenses in
order to develop new, and enhance existing, interactive games or simulations, to
fund increased sales and marketing activities, and to develop new Internet
related products. However, to the extent possible, the Company intends to incur
expenses only as related opportunities for additional revenues become available,
and in so doing manage the extent of its operating losses. In addition, to the
extent that additional revenue streams can be derived from products based on
existing games and simulations, the Company believes the cost of developing such
products should be relatively low.
As part of its strategy, the Company has entered into partnerships with
media companies such as CNN and other Internet publishers and service providers
whose brands already enjoy substantial awareness among Internet users. These
arrangements generally provide for the exchange on Sandbox's Web site of
advertising space for reciprocal space in the partner's media publications or
for the receipt of tangible goods used as game prizes or access to editorial or
software content. The Company has devoted substantial time, effort and money to
developing these relationships, particularly those with CNN and with USA Today,
the previous title sponsor of Final Bell, as a strategy for leveraging its cash
resources. By providing significant advertising impressions to these partners,
the Company in turn has received valuable promotion, editorial content, software
and services. See "Business - Strategy - Barter Relationships to Conserve Cash".
CNN's media support for the promotion of the SportSim site
40
<PAGE>
was valued at an estimated $5.5 million by CNN for the initial 5 weeks following
launch. The Company believes that these exchange transactions have resulted in
its achieving traffic levels which would have otherwise been unattainable
without increasing its expenditures in advertising and promotion, and in so
doing it has been able to limit its operating expenses.
The Company has incurred significant operating losses in each of its
fiscal quarters and years since the inception of its Internet business, and
expects to continue to incur significant operating losses on both a quarterly
and annual basis for at least the next two years. At September 30, 1997 the
Company had a working capital deficiency of $1,315,082 and a negative net worth
of approximately $1,599,000, and during the nine months ended September 30, 1997
experienced operating cash requirements (net loss plus principal repayments
under capital lease obligations and term notes) of approximately $192,000, which
requirements are projected to significantly increase in the immediate future as
the Company implements its planned increases in operating expenses. There can be
no assurance that the Company will be able to generate sufficient advertising
revenues or product sales revenues in the future to cover its costs and
expenses, and to the extent that such expenses precede or are not subsequently
followed by increased revenue, the Company's business, prospects, financial
condition or operating results could be materially and adversely affected.
The Company believes that its advertising revenues could be higher
leading up to and during major U.S. sports seasons for which the Company is
operating a SportSim fantasy site, and lower at other times of the year. The
Company believes that advertising in traditional media are generally lower in
the first and third calendar quarters of each year, and that advertising
expenditures fluctuate significantly with economic cycles. Depending on the
extent to which the Internet is accepted as an advertising medium, seasonality
and cyclicality in the level of Internet advertising expenditures could become
more pronounced. The foregoing factors could have a material adverse effect on
the Company's business, prospects, financial condition or operating results. See
"Risk Factors - Unpredictability of Future Revenues and Profitability; Potential
Fluctuations in Quarterly Operating Results; Seasonality".
Results of Operations
Revenues
Total Revenues. Total revenues for the nine months ended September 30,
1996 were $231,263 and for the year ended December 31, 1996 were $396,167. Total
revenues for the first nine months of 1997 were $171,319.
Internet Revenues. Revenues attributable to the Company's Internet
operations, which commenced in March 1996, were $80,512 for the nine months
ended September 30, 1996, $241,322 for the year ended December 31, 1996, and
$171,319 for the nine months ended September 30, 1997. To date, Internet
revenues have consisted solely of income derived from the sale of banners and
sponsorships. Advertising revenues are recognized in the period in which
advertisements are delivered. The Company's ability to increase revenues for
Internet advertising will depend on numerous factors, which include, but are not
limited to, demand for advertising on the Internet, the Company's ability to
increase the number of page views or impressions it can deliver by enhancing
existing games and adding new games, and by its ability to maintain or increase
its advertising rates. Certain of these factors are not within the control of
the Company. See "Risk Factors - Unpredictability of Future Revenues" and "Risk
Factors - Dependence on Advertising Revenue".
The Company's Internet revenues for the most recent four quarters are as
set forth below:
4th Quarter 1996 1st Quarter 1997 2nd Quarter 1997 3rd Quarter 1997
- ---------------- ---------------- ---------------- ----------------
$160,810 $46,440 $31,317 $93,562
The Company's Internet revenues of $171,319 for the nine months ended
September 30, 1997 represented an increase from the $80,512 recorded for the
comparable period in 1996. However, revenues for each of the first three
quarters of 1997 remained below that recorded in the fourth quarter of 1996,
when the Company sold advertising tied to the initial launch of Final Bell to
several clients. The Company believes that the decline in
41
<PAGE>
revenues in 1997 is attributable to several factors. In the spring of 1997, the
Company determined that CNN would likely be a stronger strategic partner for
Final Bell than USA Today, and was therefore required to devote its limited
sales and marketing resources to planning for and negotiating the CNN alliances.
In addition, the market for Internet advertising was generally weaker in the
first few months of 1997 than during the last three months of 1996, and this
resulted in lower demand for the Company's banner and sponsorship advertising.
Revenues from advertising also declined as a result of the Company's decision to
terminate its outside sales representation firm and begin building an in-house
sales staff to provide for the substantial ongoing support necessary to generate
demand for sponsorships and "integrated advertising." Because sponsorships and
"integrated advertising" require a higher level of commitment from advertisers,
both financially and in terms of input into the marketing process, the Company
anticipates that revenues from sponsorships and "integrated advertising" will
generally require greater lead times and more specialized selling efforts than
banner advertising sales.
$558,000 of written commitments from IBM, Saturn, MetLife and Quicken
Financial Network have been executed with the Company for "integrated
advertising" on its Web site since the execution of the CNN agreements in June
and July 1997. Of this amount, $514,000 (or average monthly cash revenues of
$73,000) relates to the period from October 1, 1997 through May 4, 1998, of
which $454,000 is subject to a 50% revenue split with CNN. These commitments
include an agreement with IBM providing for $180,000 to sponsor the Trade
Center, an area of Final Bell where trades are initiated, and other areas within
Final Bell through March 14, 1998, an agreement with Saturn providing for
$180,000 to sponsor Full Contact and Mid-Season Football, fantasy football games
within SportSim through January 31, 1998, an agreement with MetLife providing
for $138,000 to sponsor planned simulations on Final Bell from November 10, 1997
to May 4, 1998, and an agreement with Quicken Financial Network providing for
$60,000 to sponsor a promotional contest in Final Bell. Except within a given
sponsor's product or service category, co-branding and sponsorships do not
reduce the Company's available inventory of banner advertising.
On November 24, 1997 the Company entered into a written agreement with
Eastman Kodak Company which provides for the exchange of $150,000 in banner
impressions for a like amount of barter credits provided through Global
Marketing Resources. The value of these impressions is not subject to a revenue
split with CNN. The Company intends to use these credits to purchase prizes to
be awarded to game participants.
The Company has also received written commitments from Netscape and
American Express for banner advertising to be provided during the period
December 4, 1997 through February 1, 1998 in the amounts of $5,100 and $15,000,
respectively. During the five-month period ending November 30, 1997, the Company
invoiced approximately #35,850, $24,000, and $8,500 to iVillage, MetLife and
American Express, respectively, for banner advertising. All of these banner
placements are subject to a revenue split with CNN.
Costs and Expenses
Total Costs and Expenses. The Company's total costs and expenses for the
nine month period ended September 30, 1996 and for the year ended December 31,
1996, were $1,331,228 and $1,797,444, respectively. Total costs and expenses for
the nine month period ended September 30, 1997 were $1,646,697. The principal
components of expense have been sales and marketing expenses, payroll and
facilities and related expenses for production and engineering, and general and
administrative costs. Detail of each of these categories and their respective
percentages of revenue for the most recent four quarters is as follows:
<TABLE>
<CAPTION>
For the quarter ended
December 31, 1996 March 31, 1997 June 30, 1997 September 30, 1997
----------------- -------------- ------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and
marketing $158,516 99% $134,319 289% $ 152,107 486% $ 216,229 231%
Production and
engineering 225,685 140% 211,438 455% 240,416 768% 334,163 357%
General and administrative 82,015 51% 101,463 218% 110,634 353% 145,928 156%
Operating
loss (301,312) (187%) (400,780) (863%) (471,840) (1,507%) (602,758) (644%)
Net loss $(334,255) (208%) $(419,055) (902%) $(516,568) (1,649%) $(685,742) (733%)
</TABLE>
Sales and Marketing Expenses. Sales and marketing expenses consist of
advertising, promotional costs, payroll for the Company's sales and marketing
staff, commissions, public relations, prize expense, and travel and
42
<PAGE>
entertainment expenses. Sales and marketing expenses were $158,516, $134,319,
$152,107 and $216,229 for the quarters ended December 31, 1996, March 31, 1997,
June 30, 1997 and September 30, 1997, respectively.
The Company intends to significantly increase its sales and advertising
expenses with the planned addition of 16 employees, including sales
representatives in New York, San Francisco and Chicago, a significant increase
in commission expense for those sales persons and CNN, and additional
expenditures for advertising, promotion and prizes. See "Business - Advertising
and Sales" and "Use of Proceeds". The Company believes that additions to sales
and marketing expenses are essential to increasing its revenues and Web site
traffic, as well as the general recognition in the Internet advertising and
participant communities of the Sandbox "brand" of interactive games and
simulations. The Company intends to incur these expenses only as related
opportunities for additional revenues become available, and in so doing manage
the size of its fixed sales and marketing expenses. Nevertheless, there can be
no assurance that planned expenditures will have the desired effects, or that
the Company will be able to effectively limit its fixed expenses as it plans.
See "Risk Factors - Dependence on Advertising Revenues; Competition for
Advertisers".
As part of a strategy to leverage its cash resources, the Company has
entered into partnerships with media companies such as CNN and other Internet
publishers and service providers whose brands already enjoy substantial
awareness among Internet users. These arrangements generally provide for the
exchange on Sandbox's Web site of advertising space for reciprocal space in the
partner's media publications or for the receipt of tangible goods used as game
prizes or access to editorial or software content. Since the inception of its
Internet business, the Company has provided significant advertising impressions
to these partners, and in turn received valuable promotion, editorial content,
software and services. See "Business - Strategy - Barter Relationships to
Conserve Cash".
The Company's partners in these exchange arrangements were USA Today
Information Network, PC Quote, Inc., The Motley Fool, TheStreet.com, and Neural
Applications Corporation. USA Today was the original sponsor of Final Bell, and
the Company estimates that during the first five months of 1997 it received
approximately 6,000,000 impressions per month from USA Today. Impressions are
the number of times that an advertisement appears in page views downloaded by
participants. In the USA Today arrangement, the Company received promotion on
USA Today's Money section home page, and rotated through USA Today's home page.
In exchange, USA Today's logos and other identifying marks appeared throughout
the Final Bell site. Under the PC Quote contract, which expired in November 1997
but continues on a month to month basis, the Company receives promotion of Final
Bell through graphic links on the PC Quote home page, Micro Watch page and Quote
Watch page, 200,000 banners and charting and graphing tools accessed from the
Trade Center area of the game. Based upon PC Quote's estimates of traffic to its
home page, the Company's links on the PC Quote home page received approximately
4,500,000 impressions per month during the nine months ended September 1997. In
exchange, the Company provides text links to PC Quote's sites on all Final Bell
pages and delivers 200,000 banner advertisements each month. In the Motley Fool
arrangement, the Company receives promotion through links appearing on the
Motley Fool home page, from various points on America OnLine, and editorial
content from The Fools School, while the Company provides links to Motley Fool
from the Exchange area within Final Bell and banner promotion. Based upon Motley
Fool's 1997 Media Kit, the Company estimates that it received approximately
7,800,000 impressions through Motley Fool's Web site between March 15 and
September 30, 1997. Under the Company's contract with TheStreet.com, which ended
in July 1997, the Company received impressions and The Street's Daily Wake-up
Call and one equity story every weekday morning. Based upon information provided
to the Company by TheStreet, which is a subscription site, the Company received
approximately 200,000 impressions between March and May 1997. The Company
delivered approximately 400,000 impressions to TheStreet during the comparable
period. Under its contract with Neural Applications Corporation, Sandbox
receives reciprocal banners from Neural, but more importantly receives the
nightly closing price data feed which it uses to drive its Final Bell
simulation. In exchange, the Company provides a total of 550,000 impressions per
month on Final Bell to promote Neural's NetProphet and Investors Edge products.
Production and Engineering Expenses. Production and engineering
expenses are expenses incurred to develop and maintain the Company's Internet
sites and its games, simulations and other interactive products. Production and
engineering expenses include payroll as well as an allocated share of total
costs for facilities and
43
<PAGE>
equipment. The increase in these costs resulted primarily from expenditures to
develop new games and simulations, and development of proprietary technologies
and costs incurred to enhance the quality of existing Web sites. Production and
engineering expenses were $225,685, $211,438, $240,416 and $334,163 for the
quarters ending December 31, 1996, March 31, 1997, June 30, 1997, and September
30, 1997 respectively. The Company anticipates that production and engineering
expenses will continue to increase for the immediately foreseeable future.
Anticipated increases relate to additional personnel costs, including those for
software engineers, customer service and product management staff, for equipment
and facilities costs necessary for new product development, and for expenditures
to enhance existing game and site performance. The Company intends to add
approximately 40 production and engineering employees over the course of the
next two years, but only as specific new product development commences. See "Use
of Proceeds". Costs related to the development of new products are expensed in
the period incurred.
General and Administrative Expenses. General and administrative
expenses consist of payroll and related expenses for executive, finance and
administrative personnel, professional fees and other general corporate
expenses. For the quarters ending December 31, 1996, March 31, 1997, June 30,
1997 and, September 30, 1997 these expenses were $82,015, $101,463, $110,634 and
$145,928, respectively. The increase in these costs in 1997 is primarily
attributable to legal and accounting costs, including those incurred in
connection with negotiation of financing transactions in mid-1997, and to
additional personnel costs, principally in the finance area. The Company
anticipates that increases in general and administrative costs for staff
additions in the near future will not be significant, but that costs will
increase in the future due to increased professional and other services related
to its anticipated growth, and to costs associated with its status as a publicly
owned company. See "Risk Factors - Managing Potential Growth".
Other Income (Expense). Other income (expense) consists primarily of
interest income and interest expense. Interest expense for the quarters ending
December 31, 1996, March 31, 1997, June 30, 1997 and September 30, 1997 was
$33,377, $19,911 and $44,726 and $82,984 respectively. The increase in these
expenses relates to the costs of leases obtained to finance equipment
acquisitions and to interest associated with the Company's revolving bank line
of credit and its subordinated debt financings. The Company expects to use a
portion of the offering proceeds to repay certain outstanding indebtedness,
which will reduce its interest costs. See "Use of Proceeds".
Income Taxes. The Company had net losses in 1995 and 1996 and has net
operating loss carryforwards of approximately $1,950,000 for federal and state
income tax purposes at December 31, 1996, which expire in years 2000 through
2010. Utilization of these carryforwards is dependent on the Company's future
profitability, and will be subject to limitation (see Note 10 of Notes to
Financial Statements).
Liquidity and Capital Resources
The Company has financed its operations and operating losses from January
1, 1995 through September 30, 1997 primarily through private sales of Common
Stock and Series A Preferred Stock, which through September 30, 1997 totaled
approximately $1,879,515 in net proceeds, $500,000 of bank financing, borrowings
from stockholders and others of approximately $1,180,323, and capital lease
financings of approximately $978,538.
Net cash used by operating activities was $348,603, $1,495,500 and
$1,222,478 for 1995, 1996 and the first nine months of 1997, respectively. The
principal uses of cash for all periods were to fund the Company's operating
losses. Recent monthly recurring cash requirements (based on the Company's
September 1997 net loss adjusted for non-cash expenditures and debt service)
approximated $220,000 and is expected to increase to approximately $300,000 as a
result of debt service requirements for the fourth quarter 1997. The Company's
cash requirements will expand further as it begins to implement its growth
strategy through increased expenditures for product and services marketing and
staff increases in the sales and marketing and production and engineering areas.
Net cash used by investing activities was negligible. Net cash used by
investing activities excludes acquisition of equipment under capital lease
obligations of $139,618, $115,365 and $723,555 for 1995, 1996 and the first nine
months of 1997, respectively.
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Net cash provided by financing activities was $405,870, $1,442,697 and
$1,513,940 for 1995, 1996 and the first nine months of 1997, respectively, and
consisted primarily of proceeds from the issuance of Series A Preferred Stock
and debt. The Company expects to use approximately $1.2 million of the net
proceeds of this offering to repay certain indebtedness. As of September 30,
1997 the Company was indebted to certain stockholders, warrant holders, their
affiliates and others in the principal amount of $1,179,058 pursuant to
promissory notes issued with various due dates, $270,000 of which converts into
shares of Series B Preferred Stock upon the consummation of this offering at the
public offering price, provided that if the Registration Statement of which this
Prospectus is a part is not declared effective on or before January 20, 1998,
such notes shall not be automatically converted and shall become convertible, at
the option of the holder, into shares of Series A Preferred Stock at a
conversion price of $4.80 per share. The Company intends to repay the remaining
amount in full from the proceeds of this offering. At September 30, 1997, the
Company was indebted to Chad Little, James Layne, and Lonnie and Michelle
Whittington under various loans and obligations totaling $107,981, which amount
represents sums due for equipment and client lists contributed to the Company,
bonuses accrued but unpaid, and for premises rent, all of which was incurred
prior to November 1995, and which bear interest at rates from 0% to 10%. The
Company intends to pay approximately $73,365 of these amounts, which sum is
included above, from the proceeds of this offering. On November 26, 1997, the
Company obtained a bridge loan from Lonnie Whittington in the amount of $36,166
pursuant to an unsecured Subordinated Promissory Note bearing interest at 12%
through December 10, 1997, 18% from December 10, 1997 to January 1, 1998 and 25%
thereafter until paid within 30 days after written demand from the holder. On
December 12, 1997, the Company received $150,000 in proceeds from a $172,528
bridge loan from Andrew Todd pursuant to an unsecured Subordinated Promissory
Note without interest payable on or before March 12, 1998. The Company intends
to repay these bridge loans out of the proceeds from this offering. See "Certain
Transactions".
As of September 30, 1997, the Company had borrowed $500,000 under a
$500,000 revolving bank line of credit due March 5, 1998. The borrowings under
this line bear interest at a prime rate plus 1.5% and are secured by
substantially all of the Company's assets. The Company intends to repay the
borrowings in full from the proceeds of this offering (subject to the right to
reborrow). As of September 30, 1997, the Company was also indebted under a
separate equipment lease line of credit in the principal amount of $604,396. The
lease line provides for advances up to $650,000 through April, 1998, and draws
of $100,000 or more are payable in equal monthly installments over 36 months.
Borrowings under this lease line bear interest at variable rates between 10% and
14%. The average rate at September 30, 1997 was approximately 12%. The Company
was also indebted at September 30, 1997 under 23 other equipment leases totaling
approximately $239,000. These leases had original terms ranging from 24 to 60
months.
Generally, as new games and simulations are brought on-line, additional
equipment upgrades will be required to handle the increased traffic. The Company
acquired $678,000 of equipment to support the commencement of its SportSim
basketball season and mid-season football under 45-day terms. The capital
expenditures of the Company are substantially dependent on traffic volume and
the rate of introduction of new games and simulations, and are therefore
difficult to forecast. The Company intends to provide for its capital equipment
needs, including the financing of this newly purchased equipment, by arranging
for equipment lease or loan financing following the completion of this offering,
but there can be no assurances that such financing will be available on terms
acceptable to the Company.
As of September 30, 1997 the Company's principal source of liquidity was
approximately $312,000 in cash. At September 30, 1997, the Company had a working
capital deficiency of $1,315,082, and was continuing to sustain cash operating
losses. The Company is incurring operating losses as it moves from early stage
to the fuller scale deployment of its technologies. The operating losses have
created a net capital deficiency which requires that the Company obtain
additional financial resources to meet its business objectives, and such
committed financing is not yet in place. These conditions raise substantial
doubt about the ability of the Company to continue as a going concern. See
"Report of Independent Auditors" and Note 12 to "Notes to Financial Statements".
The Company believes that the net proceeds from this offering of approximately
$2,833,843 after commissions, expenses and debt repayment, together with
available funds, including the Company's revolving bank line of credit and
equipment
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lease lines of credit being negotiated, will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
for approximately the next 15 months.
The Company has no material commitments to any employees pursuant to its
employment agreements.
If cash generated by operations is insufficient to satisfy the Company's
liquidity requirements, the Company may be required to sell additional equity or
debt securities. The sale of additional equity or convertible debt securities
would result in additional dilution to the Company's stockholders. There can be
no assurance that financing will be available to the Company in amounts or on
terms acceptable to it. See "Risk Factors - Need for Additional Financing;
Continuing as Going Concern".
New Accounting Pronouncements. In October 1995, SFAS No. 123, Accounting
for Stock-Based Compensation, was issued. SFAS No. 123 allows either adoption of
a fair value based method of accounting for employee stock options and similar
equity instruments for employee awards or continuation of the measurement of
compensation cost relating to such plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued To Employees". The Company has elected to continue
to use the intrinsic value based method for employee awards. Accordingly, pro
forma disclosures required to be presented by SFAS No. 123 for companies
continuing to utilize the intrinsic value based method are presented in Note 8
of Notes to Financial Statements and have been determined as if the Company had
accounted for its stock-based compensation plans under the fair value method.
In February 1997, SFAS No. 128, Earnings Per Share, was issued. SFAS No.
128 simplifies the methodology of computing earnings per share, and requires the
presentation of basic and diluted earnings per share in certain cases. SFAS No.
128 must be adopted for the year ending December 31, 1997 and be retroactively
reflected in the financial statements. Adoption of SFAS No. 128 is not expected
to have a material impact on the Company's results of operations.
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BUSINESS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed above in "Risk Factors", as well as those discussed
elsewhere in this Prospectus. See also "Special Note on Forward-Looking
Statements".
Sandbox is a software development company that intends to use its
proprietary technology to become a leading provider of games and simulations on
the World Wide Web (the "Web"). The Company's proprietary technology is designed
to enable Sandbox to create and support, in a cost effective manner, a variety
of highly interactive and informative games and simulations. Sandbox's flagship
products are Final Bell, an on-line stock market simulation, and SportSim, an
on-line fantasy sports simulation. The Company generates revenue from
advertisers interested in reaching specific target groups, such as existing or
potential on-line individual investors through Final Bell and sports enthusiasts
through SportSim. Sandbox seeks to attract a targeted audience by basing its
games and simulations on subjects, such as finance or sports, that are of great
interest to Internet users. The Company then seeks to motivate the audience to
spend extended time on and return repeatedly to the Sandbox Web sites by
providing, free of charge, the enjoyment of head-to-head competition, useful
information and a chance to win cash prizes and merchandise.
From its formation in 1992 until mid 1995 the Company's principal
business was traditional and interactive marketing on a fee-for-service basis
for client companies. The Company introduced its first Internet game, Cyberhunt,
in May 1995 in a joint venture with On Word Information Incorporated. The
Company believes that Cyberhunt was one of the first games available on the
Internet. Based on the favorable response to Cyberhunt, the Company decided to
change its business focus to the production of interactive games and simulations
for the Internet. Accordingly, the Company hired key members of its engineering
staff, including engineers who had worked on developing the core technology used
in Cyberhunt for several years while at Motorola and acquired a license to the
technology from Motorola. The Company also began acquiring equipment to support
its new business strategy, and commenced a phase-out of its fee-for-service
business.
Product History
The Company has produced six games and simulations for the Internet
through October 31, 1997. The Company's first product, Cyberhunt, required
participants to solve puzzles and riddles. The Company introduced the game
principally as a proof of concept, but sold a commercial version that first
generated revenues in March 1996 and ran until February 1997. Certain important
features of the software developed for Cyberhunt have been used in the Company's
subsequent games and simulations, including dynamic page creation, header and
footer technology that provides dynamic navigation, registration mechanisms, and
the ability to display dynamic advertising. The Company produced Road Trip to
the Super Bowl XXX from October 1995 through January 1996, however it did not
produce cash revenues. This simulation introduced the Company's "integrated
advertising" concept, which offers advertisers the opportunity to integrate
their promotions within a specific game or simulation on a Web site. Road Trip
to the Super Bowl XXX allowed participants to click out of the game site and
into an advertiser's Web site in search for clues that eventually led
participants back to the game site. The Company next introduced Road Trip to the
College World Series, which first produced revenues in March 1996 and ran until
May 1996. Players accumulated points by solving timed puzzles and trivia
questions, and responding appropriately to certain random events. Based on
points accumulated, participants could select prizes. The Road Trips simulations
took Web participants on cross-country excursions, and allowed them to compete
for prizes while they watched actual travelers encounter famous landmarks and
fascinating cities across the United States. The Court of Last Resort was a
Web-based simulation for the resolution of disputes between ordinary people.
Participants were solicited to offer real disputes, and "jurors" could listen to
RealAudio "testimonies", review evidence and cast their vote. The Court of Last
Resort did not feature a competitive element and was designed primarily for
entertainment. The Court of Last Resort ran from the Spring of 1996 to February
1997, but did not produce cash revenues.
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The Company's current games and simulations consist of Final Bell and
SportSim. Final Bell, which first produced revenues in November 1996, is a stock
market simulation in which players compete with one another to build the
highest-valued stock portfolio. By placing risk-free game dollars in actual
stocks on a daily basis, players can use Internet resources to model and track
their own personal simulated portfolios. In a July 1997 ranking, Final Bell was
ranked third among the most active investment sites on the Web by Lycos, Inc.,
an Internet navigation service that also furnishes Web site reviews, and at
December 10, 1997, there were 16,886 active portfolios in game number 7 of Final
Bell. Final Bell was the Company's first simulation to incorporate significant
input from a development partner (Charles Schwab & Co., Inc.) and use of
informal surveys to establish that participants interested in the stock market
and investing represented an attractive target market to advertisers and their
agencies. SportSim, which first generated revenues in September 1997, gives
participants the ability to play sports fantasy leagues on-line by building and
competing with their own fantasy teams. Participants draft teams of real world
professional athletes and compete against each other to earn points based upon
the actual performances of these athletes in actual games. SportSim fully
automates the drafting and trading process to simplify league management and all
for more sophisticated gaming. Fantasy Football, the initial SportSim game,
which was sponsored by Saturn, was launched on July 15, 1997, and 108,727 teams
were participating as of December 14, 1997, making it, in the Company's
estimation, the largest fantasy football game on the Internet. Fantasy
Basketball, the second SportSim game, was launched on October 21, 1997, and
54,924 teams were participating as of December 14, 1997.
The Company generates advertising revenues from the sale of sponsorships
or "integrated advertising." By involving advertisers in the creation of a
message, Sandbox seeks to differentiate itself from the many Internet companies
competing through banner sales for limited advertising dollars. The Company also
generates advertising revenues from the sale of banners, a form of Internet
advertising similar to billboards on which users can click to visit an
advertiser's Web site to get further information about the advertiser or its
products. The Company's growth strategy is to increase advertising revenue by
the ongoing introduction of new and enhanced features to its flagship products,
SportSim and Final Bell, and by the creation of new games and simulations
targeted at different audiences. One key element in this strategy is the
Company's ability to manage its costs in creating new games and simulations by
building on technology developed in prior games and simulations. As an example,
the Company developed Fantasy Basketball, the second SportSim game, using many
of the techniques developed in Fantasy Football, and with no additions to its
creative staff. However, the Company recently acquired an additional $678,000 of
equipment to handle anticipated increases in traffic to its Web sites from the
launch of Fantasy Basketball and Mid-Season Football, a mini-game within Fantasy
Football that is also sponsored by Saturn and offers persons who missed drafting
a team at the beginning of the season a chance to participate. Fantasy
Basketball was launched on October 21, 1997, and 48,040 teams were participating
as of November 6, 1997, however, it has not yet produced cash revenues. In
response to the popularity of Mid-Season Football, the Company intends to offer
a Second-Season Basketball game in February 1998. Because the Company
anticipates that advertising alone will not generate operating profits in the
foreseeable future, the Company also intends to seek to create additional
revenue streams in the form of product sales, such as the sale of more
sophisticated CD-ROM variations of its games and simulations, and through
licensing its proprietary gaming engines for use on non-competing third party
Web sites.
The Company typically offers prizes for winning a game, placing in the
top three or improving one's position during certain games. In Final Bell, grand
prize winners for each two month simulation win prizes valued at between $2,500
and $3,000, such as a Bose Home Theater System, and second or third prize
winners are awarded merchandise valued at $400 to $600. Participants in Final
Bell "mini games" have opportunities to win Sand Dollars, which are exchangeable
in the Company's Toy Store for products ranging from T-shirts and caps to a Sony
Play Station. In SportSim, the grand prize winner for the 1997-98 football
season will receive a 51" television and satellite dish valued at $3,000. Weekly
grand prizes valued at $1,000, and daily awards valued at up to $500, include
televisions and other electronic merchandise. There is also a separate prize
structure for players joining the games at mid-season, and for the playoffs. The
Company also utilizes its Sand Dollar technology to incentivize participants to
take certain actions, such as answering marketing questionnaires, providing
psychographic data (the psychology of why people buy), clicking on certain
advertisements, or visiting a sponsor's Web site, by awarding Sand Dollars
totaling approximately $3,000 every four months.
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Internet Sites and Related Products
The Company's flagship products are available at www.finalbell.com and
www.sportsim.com. In addition, the Company's home site, www.sandbox.net contains
information regarding the Company, its products, prizes and prize mechanisms,
registration, help and participant input.
The Company's programs generally permit a participant to play as
frequently or infrequently as he or she desires, seeking to win a grand prize at
the end of a game or other pre-defined period or one of several smaller prizes
offered during and at the end of each game. Players can also compete in
individual secondary games, called "mini games". "Mini games" allow participants
to compete in less time intensive games, or to try out programs with minimal
effort.
Final Bell
Final Bell (www.finalbell.com): Final Bell, a co-branded product with
CNNfn, is an on-line stock market simulation that challenges and educates
investors and potential investors. Participants can click on CNN's site at
www.cnnfn.com, on Sandbox's site at www.sandbox.net and directly on the Final
Bell site. In the simulation, players compete with one another as they attempt
to build the highest-valued stock portfolio. By placing risk-free game dollars
in actual stocks on a daily basis, investors can model and track their own
personal portfolios on the Internet. The CNNfn Final Bell simulation consists of
two games, Play The Market and Prime Portfolio, which together generated
approximately 5% of CNNfn's traffic in August, 1997.
Play The Market: This simulation enables a player to increase the value
of his or her portfolio through a variety of "mini-games" and to supplement
earnings from the basic stock trading activities. For example, players earn
rewards for successfully answering trivia questions. These rewards are then
added to the value of the player's portfolios, with the player achieving the
greatest portfolio value earning the grand prize.
Prime Portfolio. This simulation is a "purist" version of the Final Bell
game. Prime Portfolio does not include any "mini-games", creating a more
realistic simulation and appealing to a different target audience. Players can
only increase the value of their portfolios by traditional trading activities.
SportSim
SportSim (www.sportsim.com): SportSim, a component of CNN/SI's sports
site, is the Company's most comprehensive simulation to date. Similar to Final
Bell, SportSim can also be found by direct links from the Sandbox or CNN/SI site
or by going directly to the SportSim site. Fantasy Football, the site's
inaugural set of sports games launched in July 1997, generated approximately 30%
of CNN/SI's traffic in August 1997, and 108,736 teams were participating as of
November 10, 1997. Fantasy Basketball, the second SportSim game, was launched on
October 21, 1997, and 48,040 teams were participating as of November 6, 1997.
The Company is contractually obligated with CNN/SI to provide fantasy games for
professional football, basketball, baseball (at CNN/SI's request), golf and
hockey, and (if permissible from a rights standpoint) the NCAA basketball
tournament. SportSim gives participants the ability to play sports fantasy
leagues on-line. Participants have the opportunity to build their own fantasy
teams and choose players or trade with other team owners. Traditional off-line
leagues ("rotisserie leagues") are offered nationwide by hundreds of newspapers,
magazines, mail services and private individuals. The rotisserie leagues are
especially labor intensive as league managers must manually process trades,
drafts and other interactions among players. By fully automating the drafting
and trading process, Sandbox has dramatically simplified league management and
allowed for more sophisticated gaming. Typically, Internet fantasy sports have
been offered on a pay-for-play basis and are not advertising supported. SportSim
does not rely on pay-for-play revenues. The Company believes SportSim has become
the largest fantasy football site on the Internet, in part by offering free
participation in Fantasy Football (there is a charge if a participant fields
more than one team).
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Like Final Bell, SportSim's Fantasy Football and Fantasy Basketball
provide a variety of games requiring a different level of time commitment from
the participant. Fantasy Football games include:
Full Contact - Designed for the true football fanatic, this game will
last the full NFL season. A participant drafts his or her fantasy team at the
beginning of the season and "manages" that team throughout the season, including
trading players, dealing with injuries and keeping up with the most current NFL
data. Full Contact requires the highest level of player commitment and
knowledge. It also provides a significant opportunity for the Company to utilize
its "integrated advertising" approach as the player returns to the site
repeatedly over a five month period.
Coach's Clipboard - This game is designed for a more moderate level of
involvement. Participants assemble teams on a weekly basis from a pre-selected
group of players. Prizes are awarded weekly and statistics do not carry over to
the next week. Participants may participate at various points throughout the
season without being committed to regular weekly participation.
Game Breakers - Aimed at the casual sports fan, this game focuses on
individual game match-ups. The object of the game is to select the professional
player in each key position that the participant believes will excel in the
designated game of the week.
Overtime - A collection of "mini-games" designed to be fun for
participants of all skill and interest levels. These mini-games include a daily
trivia game and contests to select the best overall professional player and team
defense for a given week in the season. Participants may return at a variety of
intervals ranging from daily to monthly.
Fantasy Basketball games include Full Court Press and three additional
games that are in various stages of development:
Full Court Press - Designed for dedicated basketball fans. The
participant drafts a team of professional basketball stars and manages them
through the course of a five-month season. The participant can trade with other
participants, or change his team by choosing from a list of undrafted pros. This
game demands a high level of participant involvement and knowledge. The
participant's fantasy lineup could change on a daily basis, and the participant
must stay abreast of the latest injuries and real-world trades. This game
enhances the Company's ability to use its "integrated advertising" approach
because of the almost daily interaction the participant has with the site.
Starting Five - This game targets the moderate fan and is based on weekly
participation. Participants assemble a five-man starting lineup from a list of
available professional basketball players. The participant's roster is limited
by a fictional "salary cap" and the value of the pre-selected pros, which
fluctuates from week to week. Prizes are awarded on both a season-long and
weekly basis, so participants may choose the frequency with which they want to
play.
Double Team - Designed for the more casual fan primarily interested in
watching basketball on television. This game concentrates on team match-ups. The
participant attempts to pick which team will outperform the other in seven key
statistics for three pre-selected games. Prizes will be awarded on a weekly and
end-of-season basis.
Fifth Quarter Quiz - A basketball trivia game that can be enjoyed by both
the veteran fan and the novice interested in learning more. Each week four
trivia questions are asked, and the participant has until the end of the week to
correctly answer all four. Prizes are awarded weekly and at the end of the
season. Participants have the option of playing on any given week or playing
every week to compete for a Grand Prize.
Planned Internet Games and Simulations
The Company intends to broaden its product offerings by identifying
target audiences for new games and simulations, by modifying its game engines to
produce new games and simulations targeted at such audiences, and
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by including advertisers interested in those audiences in the actual creative
process as development partners. In accordance with the Company's development
and production process, new games and simulations are generally not developed
and brought to market until the Company has obtained a commitment from a
development partner to co-brand or license the finished product and a minimum
amount of pre-paid advertising has been sold. The Company has not yet received
such commitments for these games and simulations and accordingly there can be no
assurance that they will be produced by the Company.
Final Bell Real-Time. In addition to Final Bell versions targeted at
students, children ages 11 - 16 and people unfamiliar with the stock market, the
Company intends to develop an enhanced version of the existing product called
Final Bell Real-Time. Final Bell Real-Time will allow participants to trade
stocks throughout the day, creating a more realistic simulation for the avid
player.
Simulations Based on Participant Content. In order to reach a variety of
totally new market segments, the Company intends to place major emphasis on
developing a variety of simulations that are based on participant-created,
rather than externally generated, data. Code named "Bots", these programs would
allow participants to establish an on-line "cyber-representative", or avatar, in
a variety of participant created "virtual realities". Avatars of different
participants then compete or otherwise interact in real-time for prizes. For
instance, in a political simulation participants would be challenged to create
the ultimate politician in the hopes of winning or managing elected office.
Participants would be allotted a limited number of units to be allocated among
several criteria which would determine the characteristics of their candidates.
The Company is evaluating Bot-like simulations based on a variety of topics. The
Company believes that there could be significant market interest in simulations
that are based on participant created data, although the Company has not
conducted any market surveys.
Other Potential Products and Services
Because the Company anticipates that advertising revenues alone will not
generate operating profits in the foreseeable future, the Company believes that
its future success will depend, in part, on its ability to generate revenues and
profits from other sources.
The Company continues to explore other opportunities to increase revenues
by leveraging its existing technology, game platforms and co-branding
relationships. The Company is currently in negotiations with a potential
development partner with expertise in CD-ROM content, production and
distribution to create a new sports and entertainment related game for the
Internet. If an agreement is reached, this partner would help finance
development costs and provide substantial brand awareness, which would in turn
assist the Company in maintaining what it believes to be a leading position in
the sports market on the Web, but there are no assurances such negotiations will
be successful.
In addition, the following three concepts are currently being developed
for 1998 by Sandbox and Turner Interactive Sales, the marketing group for CNN:
(i) a private label version of CNNfn Final Bell to be used as a training service
for account holders of three financial services firms, (ii) a European edition
of Final Bell, and (iii) a new licensed game to support the marketing goals of a
major satellite programming distributor. These concepts are in various stages of
development, and there can be no assurance that any or all of these concepts
will be completed.
In September 1997, the Company began marketing the CD-ROM version of
CNNfn Final Bell. The CD version of the game, which was produced in conjunction
with CNNfn, allows individuals to play Final Bell in the same manner as they
currently do; however, their browsers will draw game components requiring high
band-width from a CD-ROM. This solves a critical problem with Internet load
times. The participant plays the game on the Internet, but the pages are built
as a hybrid from the CD-ROM and on-line, thus providing a richer experience with
high-resolution graphics, video and animation. To date, the marketing and sale
of the CNNfn Final Bell CD-ROMs have been via the Internet, to registered Final
Bell participants, and less than 300 copies have been sold. The Company is still
evaluating the value of this product and may elect to market CD-ROM products
through third parties.
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The Market
The Company believes that its target markets are the individuals who seek
entertainment and education on the Internet and advertisers who seek to reach
those individuals.
A January 1997 estimate by Matrix Information and Directory Services
placed current world-wide Internet use at 57 million persons. According to
Jupiter Communications' 1996 Online Advertising Report, Web advertising revenues
totaled over $300 million in 1996, and are projected to reach $5 billion by the
year 2000. According to a Forrester Research study dated April 1, 1997, Internet
game play is forecasted to generate more than $1.6 billion in yearly revenues by
the turn of the century. Of this total, more than $1.3 billion is expected to
come from advertising and sponsorships, while CD-ROM sales are expected to
account for $200 million and pay-for-play revenue provides the remaining $100
million.
As the Internet has become more accessible, functional and widely used by
consumers and businesses, its commercial potential has grown. The Company
believes that the Internet is emerging as a medium through which businesses can
interactively inform, educate, entertain and conduct business with millions of
individuals. The Company also believes that the emergence of the Internet as a
mainstream medium is creating opportunities for companies that can provide
compelling content to large numbers of consumers.
Through the Web, Internet content providers are able to deliver timely,
personalized content in a manner not possible through other media. This content
can be continuously updated, distributed to a large number of participants on a
real-time basis and accessed by participants at any time. The interactive nature
of the Web allows content providers to present information tailored to the
individual participant's preferences or demographic characteristics, and
facilitates person to person or group to group interaction on an unprecedented
level.
The Company has aimed its initial co-branded products at the popular
sports and finance markets. Participatory and spectator sports are among the
leading pastimes for Americans as demonstrated by the popularity of sports media
and by the time and money consumers spend on sports events, products and
services. The U.S. sports business has become the country's 11th biggest
industry, according to a study released by the Georgia Institute of Technology,
generating total output of $152 billion in 1995, or just over 2 per cent of
gross domestic product. Nielsen Media Research reports that the total amount
spent on sports television advertising in the U.S. in 1996 was over $4.6
billion. According to International Events Group, which tracks sponsorship
spending, of the $5.4 billion spent on advertising sponsorships in North
America, more than $3 billion goes to sports. Total sponsorship spending for
1997 is projected at $5.9 billion, a record high in the category. The publishing
industry benefits from the popularity of sports, and includes SPORTS ILLUSTRATED
magazine, which had weekly circulation of 3.2 million and generated $522 million
in advertising revenue in 1996. Due to the popularity of sports among males
between the ages of 18 and 49, advertisers consider sports events and media as
attractive venues to reach this audience.
Although interest in the U.S. financial markets and related financial
news is not as broad as in the U.S. sports market, it has traditionally been
strong among persons in higher income brackets who are a highly sought after
consumer class by advertisers. According to SRI Consulting, a subsidiary of SRI
International (formerly Stanford Research Institute), some 16.5 million
households currently have the motivation or capability to use on-line financial
services. A Forrester Research study dated August 1997 projects that the number
of on-line brokerage accounts will accelerate from nearly 1.5 million in 1996 to
14.4 million by 2001, and a study by Piper Jaffray estimates that on-line
trading commissions will reach $2.2 billion in the year 2001, more than eight
times the amount collected in 1996. Feeding this growing interest is the
availability of financial information in all media, including on the Internet,
which is rapidly changing the way securities are traded.
The Company intends to add additional products by creating, with
prospective advertisers and sponsors serving as development partners, games and
simulations that will appeal to specific target markets. The Company has
conceptual plans for simulations designed to appeal to
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groups which it believes are presently not served effectively by existing Web
programming. These include simulations based on relationships and designed to
appeal to women, educational games for young adults, as well as simulations
created for such diverse groups as those interested in politics, general
business and international sports.
Strategy
The Company's objective is to be a leading provider of Internet games and
simulations that capitalize on the interactive nature of the Internet. The
Company seeks to utilize its proprietary technology to create games and
simulations that feature ease of access and participation, to provide value to
advertisers, and to cost effectively create new games and simulations to reach
new targeted audiences. The Company seeks to provide entertaining and
educational games and simulations that will capture the interest and imagination
of targeted audiences and use its "beyond the banner" advertising strategy to
attract advertisers wishing to reach these audiences. In addition, the Company
seeks to enter into strategic relationships to enhance traffic to its Web sites.
Finally, the Company is seeking to expand its revenue base beyond advertising by
developing additional revenue streams from end-users for product sales, such as
CD-ROMS, and through licensing its proprietary gaming engines for use on Web
sites in niche markets.
Leverage Proprietary Technology Platforms
The Company has proprietary technology that enables it to create games
and simulations that feature ease of access and participation by players and to
provide value to advertisers. The Company's software allows participants to
compete in head-to-head competition without the installation or download of
additional software other than the participant's web browser. With the Company's
products, the data needed to run a game or simulation comes from external
sources, such as sporting events, the stock market or the competition between
players, or will be created as a set of parameters by the players themselves, as
may be the case in some of the Company's future simulations. The software also
allows two-way communication between the participant and advertiser through
direct response "cards", "coupons" and survey mechanisms. The Company's dynamic
advertising tools supply the advertisers with the capability of delivering
customized content to targeted demographic groups. After a player registers for
a game, Company software records the player's movements and actions. Player
identification and tracking is vital for a successful advertising strategy
because it assures advertisers that the targeted consumer is seeing the
advertisement. The Company's technology also facilitates targeted advertising to
specific audiences, thereby creating fewer "wasted views" for the advertiser.
The Company also intends to exploit the adaptability of its proprietary
technology to support existing product growth and to cost effectively create new
products that reach additional targeted audiences. Because new products based on
the Company's existing gaming engines can be rapidly and easily customized, the
Company believes that these games or simulations can be created with relatively
modest development costs, and once completed, will support large participant
bases with comparatively limited additional expenditures for ongoing
maintenance. For example, the Company intends to market a Final Bell version
focused on students, a junior version for children ages 11 to 16 and a third
version for people unfamiliar with the stock market. In the same manner, the
Company intends to repackage SportSim to reach new audiences with specific
sports affinities.
Provide Compelling Games and Simulations Targeted at Specific Audiences
To build large participant databases with demographics and psychographics
(the psychology of why people buy) that are appealing to advertisers, Sandbox
bases its games and simulations on subjects, such as finance or sports, that the
Company believes are of great interest to Internet users. The Company then seeks
to motivate the audience to spend extended time on and return repeatedly to the
Sandbox Web sites by providing, free of charge, the enjoyment of head-to-head
competition, useful information and a chance to win cash prizes and merchandise.
The Company's games and simulations are designed to allow participants to tailor
their level of involvement to best suit their time and interests.
The Company intends to add additional products by creating games and
simulations in conjunction with prospective advertisers and sponsors serving as
development partners, which will appeal to specific target markets. The Company
has conceptual plans for simulations designed to appeal to groups which it
believes are presently not
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served effectively by existing Web programming. These include simulations based
on interpersonal relationships designed to appeal to women, educational games
for young adults, as well as simulations created for such diverse groups as
those interested in politics, general business and international sports.
Prize Incentive Structure
The Company's prize and incentive structure is designed to motivate
participants to visit the Company's Web sites, register and provide demographic
and psychographic statistics, spend time on the site viewing and clicking on
advertisements and complete questionnaires. The Company has determined that
participants in its games prefer a smaller grand prize and several other prizes
with more chances to win, as opposed to one large grand prize which several of
the Company's competitors offer. The Company typically offers prizes for winning
a game, placing in the top three or improving one's position during certain
games. In Final Bell, grand prize winners for each two month simulation win
prizes valued at between $2,500 and $3,000, such as a Bose Home Theater System,
and second or third prize winners are awarded merchandise valued at $400 to
$600. Participants in Final Bell "mini games" have opportunities to win Sand
Dollars, which are exchangeable in the Company's Toy Store for products ranging
from T-shirts and caps to a Sony Play Station. In SportSim, the grand prize
winner for the 1997-98 football season will receive a 51" television and
satellite dish valued at $3,000. Weekly grand prizes valued at $1,000, and daily
awards valued at up to $500, include televisions and other electronic
merchandise. There is also a separate prize structure for players joining the
games at mid-season, and for the playoffs. Purchasers of the Company's Final
Bell CD compete every two months for an Internet shopping spree valued at
$10,000, and in daily and weekly competitions for additional prizes valued at
$6,000. The Company also utilizes its Sand Dollar technology to incentivize
participants to take certain actions, such as answering marketing
questionnaires, providing psychographic data, clicking on certain
advertisements, or visiting a sponsor's Web site, by awarding Sand Dollars
totaling approximately $3,000 every four months.
Strategic Relationships to Build Traffic
The Company seeks to establish strategic relationships with companies
that reach a large number of potential Internet users through multiple media
channels and in so doing increase consumer awareness of its products and
marketing agreements and build traffic to its Web sites. The Company has
recently entered into co-branding and marketing agreements with CNNfn and
CNN/SI, affiliates of the Cable News Network, Inc. and the Turner Broadcasting
System. In the CNNfn arrangement, CNNfn has become the co-branding partner for
the Final Bell simulation, providing content, celebrity endorsements and
editorial promotion for both the on-line version of Final Bell and the CD-ROM
version on its cable channel and Web site. In the CNN/SI arrangement, SportSim
is co-branded with CNN/SI (a joint partnership between CNN and Sports
Illustrated) and receives content, celebrity endorsements and editorial
promotion on several media outlets, including the CNN/SI cable network, CNN
Headline News, Turner's other cable networks, Sports Illustrated and the CNN/SI
Web site. The agreements both provide that the sales force for the Turner
networks will also market the games to prospective advertisers. Since July 1997,
CNN has heavily promoted the Final Bell and SportSim sites. CNN's media support
for the promotion of the SportSim site was valued by CNN at an estimated $5.5
million for the initial 5 weeks following launch. Promotional support included
impressions on CNN Headline News, CNN and CNN/SI cable networks, print promotion
in Sports Illustrated magazine and interactive promotion on the CNN/SI Web site.
The result has been a substantial increase in traffic to the Company's Web sites
since the CNN agreements were signed. Page views to the Company's Web sites have
increased from 3,625,000 during February 1997, the Company's previous busiest
month before the CNN agreements to over 40,000,000 in November 1997. The Company
seeks to continue the growth in traffic to its sites and to encourage its
co-branding partners to continue to promote the sites as they have to date.
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"Beyond the Banner" Advertising Strategy
The Company seeks to enhance the value to advertisers of its proprietary
databases by offering alternatives to traditional banner advertising. The
Company's "beyond the banner" advertising strategy focuses on delivering
"integrated advertising" directed at a target audience through the ability to
customize advertising messages. "Integrated advertising" offers companies the
ability to sponsor a specific Sandbox game or simulation and place
advertisements within the game or simulation content itself. The Company
believes that by purchasing "integrated advertising" in connection with one of
the Company's games or simulations, advertisers can direct their brand to a
targeted group and create a more lasting and penetrating impression. During the
five-month period ending November 30, 1997, the Company entered into strategic
relationships with IBM, MetLife and Quicken Financial Network to sponsor
simulations on Final Bell, and with Saturn Corporation to sponsor games on
SportSim. The Company seeks to continue to add leading advertisers to act as
sponsors of its games and simulations.
Barter Relationships to Conserve Cash
To date, the Company has used barter arrangements to significantly
increase traffic and brand recognition rather than incurring cash expense for
this purpose. Barter arrangements involve the Company's exchange of advertising
space on its Web sites for reciprocal space in other media publications or other
Web sites or receipt of tangible goods used as game prizes or access to
editorial or software content. The Company remains dependent on these third
party barter arrangements and without such arrangements would experience
significant cash flow difficulties.
USA Today
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The Company's most significant barter transactions to date have been with
USA Today, the original sponsor of Final Bell. USA Today was the original
sponsor of Final Bell, and the Company estimates that during the first five
months of 1997, it received approximately 6,000,000 impressions per month from
USA Today. In the USA Today arrangement, the Company received promotion on USA
Today's Money section home page, and rotated through USA Today's home page. In
exchange, USA Today's logos and other identifying marks appeared throughout the
Final Bell site.
PC Quote
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Under the PC Quote contract, which expired in November, 1997 but
continues on a month-to-month basis, the Company receives promotion of Final
Bell through graphic links on the PC Quote home page, Micro Watch page and Quote
watch page, 200,000 banners, and charting and graphing tools accessed from the
Trade Center area within Final Bell. Based upon information provided to the
Company by PC Quote, the link on the home page alone would have received
approximately 4,500,000 impressions per month during the nine months ended
September 1997. In exchange, the Company provides text links to PC Quote's sites
on all Final Bell pages, in addition to delivering 200,000 banner advertisements
each month.
Motley Fool
- -----------
In an additional significant sponsorship relationship, the Company
receives promotion from the Motley Fool, another leading financial information
source, through links appearing on the Motley Fool home page, from various
points on America OnLine, and editorial content from The Fools School. Based
upon Motley Fool's 1997 Media Kit, the Company estimates that it received
approximately 7,800,000 impressions between March 15 and September 30, 1997
through Motley Fool's Web site, while providing links to Motley Fool from the
Exchange area within Final Bell and banner promotion.
TheStreet.com
- -------------
This arrangement, which ended in July 1997, shared similarities with the
Motley Fool alliance in that TheStreet provided Sandbox with impressions and
editorial content in the form of TheStreet's Daily Wake-up Call and one equity
story every weekday morning. Based upon information provided to the Company by
TheStreet, which is a subscription site, Sandbox received approximately 200,000
impressions between March and May 1997. The Company delivered approximately
400,000 impressions to TheStreet during the same period.
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Neural
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Under its contract with Neural Applications Corporation, the Company
exchanges banners with Neural, but more importantly receives the nightly closing
price data feed which it utilizes to drive its Final Bell simulation. The
Company provides a total of 550,000 impressions per month on Final Bell to
promote Neural's NetProphet and InvestorsEdge products.
Kodak
- -----
On November 24, 1997 the Company entered into a written agreement with
Eastman Kodak Company which provides for the exchange of $150,000 in banner
impressions for a like amount of barter credits provided through Global
Marketing Resources. The value of these impressions is not subject to a revenue
split with CNN. The Company intends to use these credits to purchase prizes to
be awarded to game participants.
The Company believes that the approximate 83,000,000 impressions it
received under these barter relationships during the first nine months of 1997
significantly increased traffic to its sights, provided significant brand
recognition of its games and simulations and were instrumental as a part of its
overall growth strategy.
Develop Multiple Revenue Opportunities
To supplement its advertising revenue, the Company is focusing on methods
of generating revenue directly from consumers and Web site developers. For
example, the Company has developed a CD-ROM version of Final Bell and intends to
create a CD-ROM version of SportSim. The Company believes that CD-ROM versions
of Sandbox products can be produced with relatively minimal incremental
development expense, and will allow the purchaser to enjoy significantly
expanded content, as well as bandwidth intensive graphics, audio and video
components. The development costs for the Final Bell CD from outside vendors
totaled approximately $20,000. In addition to its direct on-line marketing of
these products to end-users, the Company's co-branding or media partners may
promote the products through television, cable, on-line or print advertising.
The CD-ROM products also provide the Company an additional medium for sales
advertising or sponsorships with a more TV-like feel.
As the Company's Internet games and simulations are accepted, it intends
to seek to supplement its advertising-based revenues by charging end-users for
access to premium games. The Company also intends to seek to license simplified
versions of its games and simulations for use by third party Web site
developers. For instance, the Company intends to offer private-label sports
fantasy licenses for use on the Web sites of local newspapers to enable these
newspapers to enhance Web site traffic and obtain demographic information about
their readers. The Company anticipates that licensed products would continue to
be housed on the Company servers thus creating a potential for a recurring
revenue stream for site maintenance. The Company anticipates that licenses would
prohibit placement of advertising or use of sponsorships on the site hosting the
game or simulation. The Company intends to establish license fees scaled by size
of traffic.
Development and Production Process
Since the inception of its Internet business, the Company has refined the
process by which it has developed new games, incorporating with each new title,
many of the marketing and software techniques developed previously. The
Company's early games and simulations were created specifically for event driven
promotions and included the initial development of many of the Company's
proprietary software programs and gaming engines. Succeeding games and
simulations have, in part, been built on the foundations of source code,
technology and proprietary gaming components developed in earlier games and
simulations, and together with innovations developed by the Company are combined
to offer a more exciting, easy-to-use, product for both players and advertisers.
The Company currently employs the following development and production process
for the creation of new games and simulations. The Company believes that the
following steps are important to reducing risks associated with new product
development, meeting deadlines and producing quality products.
o The Company conducts informal surveys with potential and
existing advertisers and advertising agencies to identify
targeted audiences that these advertisers wish to reach.
o After identifying desired audiences, the Company formulates
creative approaches for new games and simulations to reach
these audiences. Ideas are sketched out in the form of
"comps" or graphic outlines describing how the product
would look and run from a high level.
o These comps provide the sales force with the ability to
make marketing presentations to potential development or
pre-paid advertising partners. Development partners are
companies that might be
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interested in paying for program development in order to
obtain access to, or a license of, the finished product,
while pre-paid advertisers are companies interested in
reserving advertising space prior to product launch.
o Before, during and after the location of development and
pre-paid advertising partners, the Company will also use
the comps to locate a co-branding partner if one is
required. Typically co-branding partners are not cash
paying clients, but instead provide promotion for the
co-branded site through their media channels to drive
traffic, which adds brand value to increase sales
potential. In return, co-branding partners can use the
co-branded sites to further extend their brand names or
images, provide added value to their end-users and/or
expand their advertising inventory.
o After these partners and advertisers have been identified,
the Company moves to the production phase. Pencil outlines
are produced which detail the functionality, layout and
look and feel of the product. Engineering takes part in
this process to review proper functionality of the game
design and verify that existing technology is being
utilized to the fullest extent. Sandbox staff and external
partners make changes to the product at this time. Once
pencil outlines have been agreed upon, computer generated
comps are produced which describe the design and
functionality of the product in greater detail.
o Once computer comps have been completed and agreed upon,
the Company's engineering staff begins production of the
simulation. The computer software design process uses the
Company's existing gaming technology whenever feasible. The
production takes place on a testing server system that
duplicates the one used for the final product. This allows
for beta testing of the product prior to actual launch.
Advertising and Sales
Advertising
The Company basically offers two forms of advertising services: (1)
traditional banner advertising, a form of advertising similar to billboards
where users can click on graphic elements to visit an advertiser's Web site to
get further information about the advertiser or its products and (2) "integrated
advertising", which involves establishing a game or simulation Web site with a
co-branding or development partner and then offering advertisers the opportunity
to integrate their promotions within a specific game or simulation on such Web
site through sponsorships. The Company's "integrated advertising" concept allows
it to provide "beyond the banner" advertising solutions. Such solutions exploit
the interactive capabilities of the Web, by allowing advertisers to market to
participants on a "one-to-one" basis, as differentiated from the "one-to-many"
approach of traditional media advertising. The Company can help customize the
advertiser's message to appeal to individual participants. Furthermore, unlike
traditional advertising which separates the marketing message from the program,
the Company can integrate messages directly into the programs. The Company
believes that this approach creates the opportunity for a more penetrating
advertising impression. These placement and integration methodologies allow
advertising content to become part of the game or simulation itself. The
advertiser's product, service or message is integrated through identifying
graphics, or hot links are created on displayed messages to create additional
interaction. The Company also utilizes "home page integration" techniques to
create incentives for participants to visit an advertiser's Web site. Players
who choose to visit linked sites are rewarded with prizes, coupons or Sand
Dollars good for selected purchases at the on-line Sandbox Toy Store. An example
of placement and integration techniques is e.Schwab's on-line brokering
interface for the Final Bell game.
$558,000 of written commitments from IBM, Saturn, MetLife and Quicken
Financial Network have been executed with the Company for "integrated
advertising" on its Web site since the execution of the CNN agreements in June
and July 1997. Of this amount, $514,000 (or average monthly cash revenues of
$73,000) relates to the period from October 1, 1997 through May 4, 1998, of
which $454,000 is subject to a 50% revenue split with CNN. These commitments
include an agreement with IBM providing for $180,000 to sponsor the Trade
Center, an area of Final Bell where trades are initiated, and other areas within
Final Bell through March 14, 1998, an agreement with Saturn providing for
$180,000 to sponsor Full Contact and Mid-Season Football, fantasy football games
within SportSim through January 31, 1998, an agreement with MetLife providing
for $138,000 to sponsor planned simulations on Final Bell from November 10, 1997
to May 4, 1998, and an agreement with Quicken Financial Network providing for
$60,000 to sponsor a promotional contest in Final Bell. Except within a given
sponsor's product or service category, co-branding and sponsorships do not
reduce the Company's available inventory of banner advertising.
On November 24, 1997 the Company entered into a written agreement with
Eastman Kodak Company which provides for the exchange of $150,000 in banner
impressions for a like amount of barter credits provided through Global
Marketing Resources. The value of these impressions is not subject to a revenue
split with CNN. The Company intends to use these credits to purchase prizes to
be awarded to game participants.
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Except within a sponsor's product or service category, co-branding and
sponsorships do not reduce the Company's available inventory of banner
advertising, a form of Internet advertising similar to billboards on which
Internet users can click to visit an advertiser's Web site to get further
information about the advertiser or its products. During the five-month period
ending November 30, 1997, the Company invoiced $35,850, $24,000 and $8,500 for
banner advertising to iVillage, MetLife and American Express, respectively. The
simplest and least expensive advertising product offered by the Company, banners
are the commodity Internet advertising vehicle, and seek to compel participants
to visit a Web site to get further information about a company or product. Each
banner presented to a participant is known as an impression, and much as is the
case in traditional media, advertisers typically purchase a guaranteed number of
impressions on a volume basis to communicate with a broad audience.
The Company offers advertisers sponsorship opportunities, in which
Company program titles are made available to clients and customized to suit a
marketer's specific needs. This alternative entitles an advertiser to have its
name displayed on every page of the sponsored area of the game and may include
the name of the sponsor in the title, such as CNNfn's Final Bell or CNN/SI's
SportSim. Program sponsorships deliver the broadest audience exposure to the
advertisers. Sponsorships are individually negotiated agreements that generally
are for a longer period (from 2 to 12 months) than banner arrangements. In
sponsorships, an advertiser has the exclusive right to sponsor a certain game or
simulation or feature within a game or simulation and integrate its advertising
message into the content. The Company believes that the revenue from game
sponsorships is generally incremental to banner income because it does not
decrease the Company's available inventory of banner slots. However, after a
sponsorship is sold, sponsors may receive category exclusivity in which event
banners may not be sold to a sponsor's competitor on the sponsored game,
simulation or feature thereof.
The Company believes that its expertise in providing "integrated
advertising" is an important marketing tool. A March 1997 study by Jupiter
Communications predicted that while not as dominant a media form as banners,
sponsorships and "intermercials" (ads that are viewed when changing pages within
a Web site), will increasingly be an important part of the on-line media mix,
and will rise in proportion to banner advertising from 20% this year to
approximately one-half by 2002.
The Company believes that the combination of its products and technology,
together with co-branding arrangements with leading media companies, should
allow it to charge advertisers higher banner rates than for more commodity-like
products. Banner advertising packages are based on a cost per thousand
impressions delivered (CPM). The average CPM for Yahoo!, a search engine product
that attracts a broad but highly undifferentiated audience, was between $20 and
$23 in the first and second quarter of 1997 as reported in an Alex Brown
research study dated August 5, 1997. Standard banner rates for CNNfn Final Bell
and CNN/SI SportSim, which were launched in the third quarter of 1997, ranged
from $25 to $33 during the four month period ending October 31, 1997.
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Sales
In addition to its Vice President of Sales, the Company employs a sales
representative in New York, and intends to hire 16 additional employees in sales
and marketing, including sales representatives for the New York, San Francisco
and Chicago markets, over the next two years. Company sales representatives will
focus principally on "integrated advertising" and sponsorship opportunities,
which typically require more time and involvement to bring to fruition than
banner advertising sales. The Company also expects that its internal sales force
will be responsible for the origination of any product licensing arrangements.
The Company expects that during the term of its co-branding relationships with
CNNfn and CNN/SI, the majority of banner sales on the Final Bell and SportSim
sites will be produced by the Turner Networks' sales staff of approximately 250
persons. In addition, the Company believes that the strength of the CNNfn and
CNN/SI brands and CNN's existing advertising relationships should provide sales
leads and otherwise facilitate the placement of sponsorships. The Company has
recently completed the introduction of the Turner Networks' sales staff to the
Company's products. The Company's sales representative in New York coordinates
selling efforts, and seeks to facilitate effective communication and cooperation
between the Company and the Turner at his location in Turner Broadcasting's New
York City offices.
Co-Branding and Marketing Agreements with CNN/SI and CNNfn
The Company believes that its success in selling advertising or products
on the Internet will depend on attaining certain minimum levels of participant
traffic. The Company has established strategic relationships to increase
consumer awareness of its products and to build traffic to its Web sites. In
June and July of 1997, the Company entered into Co-Branding and Marketing
Agreements with CNN/SI and CNNfn ("CNNfn"). The CNN/SI Agreement expires October
31, 1998, with an option at CNN's discretion to renew for up to two subsequent
one year terms. The CNNfn Agreement expires July 15, 1999.
The CNN agreements generally provide that the Company will develop,
maintain, host, update and support a CNNfn Final Bell Web site based on
Sandbox's Final Bell stock market simulation game and a CNN/SI SportSim Web site
based on fantasy sports games, initially professional football, but expanding to
professional basketball, baseball (on CNN/SI's request), golf, hockey and (if
permissible from a rights standpoint) college basketball. Before implementing
new games, CNN will advise the Company of its required input for the design of
such games and the Company will host and update each game in accordance with
mutually agreed upon specifications for such design, as the same may be modified
from time to time during the term of the agreements. The commercial launch of
new games shall be determined by mutual agreement of the parties.
CNNfn and CNN/SI have the right to use the games and advertise the CNNfn
Final Bell and CNN/SI SportSim Web sites (the "Sites"), respectively, and the
availability of the games. CNNfn and CNN/SI have agreed to use reasonable
efforts to promote the games and the Sites, and to build traffic for the games
and Sites in accordance with a promotional plan. The CNNfn Agreement provides
that CNNfn will promote Final Bell as follows: (1) on its parent CNN site on the
day of the launch, (2) by including on its Web site a ticker headline promoting
the launch of the Final Bell for such time as the editorial staff deems
appropriate, (3) by use of text links and ticker headlines to inform its Web
site visitors about Final Bell (placement and play of these links and headlines
are at the discretion of the editorial staff), (4) by providing navigation to
Final Bell from the "Markets" section and the "Your Money" section of its Web
site, and from other sections or pages it deems appropriate, and (5) by
providing Web site banner promotion to Final Bell.
The CNN agreements provide that both parties will cooperate regarding the
sale of banner advertising (a form of Internet advertising similar to
billboards) and sponsorships (integration of an advertiser's name and promotion
into the game or simulation itself) for the Sites, but CNN retains primary
control over the sale of banner advertising and the Company retains primary
control over the sale of sponsorships. Each party is responsible for billing,
invoicing, and collection activities related to its sales activities. The
Company is responsible for all development, maintenance, hosting, updating and
support costs, as well as the costs of obtaining all third-party rights and
compliance with all sweepstakes and gaming rules and regulations and any prize
fulfillment activities. The Company is also required to implement a tracking
system to monitor traffic on the sites, page views and other
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relevant data, and is required to deliver monthly reports to CNN. In addition,
the Company is responsible for proper insertion and rotation of all advertising
and sponsorships and is required to maintain accurate logs. Where extraordinary
costs are required to integrate an advertiser, and the parties agree to such
costs, the parties generally split such costs evenly. Net banner advertising
revenues are divided among the parties on a 60/40 basis, with the party
responsible for selling the advertising entitled to retain the higher
percentage. Regardless of which party is responsible for the sale of
sponsorships, net sponsorship revenue is divided evenly.
The Company is required to create a CD-ROM enhancement for each game, as
agreed by the parties, that includes CNN/SI and CNNfn elements and features
heavier use of graphics and animation and an enhanced non-cash prize structure.
The Company retains ownership of such CD-ROM products (except to the CNN
elements therein), while net revenues from the sale of CD-ROM products through
mutually agreed channels are generally divided evenly among the parties. The
CNNfn agreement provides for the appearance of Lou Dobbs on certain CD-ROM
products, in which case CNN's share increases to 52% for the initial 15,000
units sold of such products and further increases to 54% thereafter. During the
term of the agreements, the parties may discuss merchandising and/or licensing
opportunities, which may be exploited only pursuant to mutual agreement of the
parties. Any other merchandising or licensing net revenues relating to the
games, Sites or the CD-ROM products are divided evenly among the parties with
respect to the CNN/SI agreement and on a 70/30 basis with respect to the CNNfn
Agreement, with the Company entitled to 70%. The Company retains all rights to
its games and simulations as well as ownership of participant databases.
The Company anticipates that the CNN agreements, and the Company's
relationship with CNN, will result, over time, in the generation of significant
cash revenues for the Company, although there are no assurances that such
revenues will be realized. Although the Company believes that the production and
marketing costs associated with CD-ROM game enhancements are relatively low, the
Company's initial marketing of the CNNfn Final Bell CD-ROM has not been
successful in producing significant revenues. The costs to the Company of
complying with its obligations under the agreements are substantial, and there
are no assurances that the costs to develop, maintain, host, update and support
the Sites and games will be offset by additional revenues. The failure to
produce significant revenues pursuant to the CNN agreements would have a
material adverse effect on the Company's business, prospects, financial
condition or operating results. In addition, as CNN/SI and CNNfn are primarily
responsible for the marketing and sale of banner advertising for the Sites,
their failure to market and sell sufficient banner advertising on such sites at
attractive terms could have a material adverse effect on the Company's business,
prospects, financial condition or operating results. Furthermore, CNNfn and
CNN/SI have substantial discretion in the substance and quantity of promotional
services it provides in connection with the Sites and games, and there can be no
assurance that the promotional services they provide will enable the Sites and
games to attract sufficient advertising and sponsorship revenues to generate
profits for the Company. The termination or expiration without renewal of either
of these agreements and/or the deterioration of the Company's relationship with
CNN would have a material adverse effect on the Company's business, prospects,
financial condition or operating results. See "Risk Factors - Dependence on CNN
and other Third Parties for Internet Operations".
Pursuant to the CNN Agreements, the Company has issued warrants to
purchase its Common Stock to CNNfn for 21,667 shares and to CNN/SI for 3,334
shares, as adjusted to reflect the Reverse Stock Split. CNNfn's warrant is
subject to a vesting schedule whereby 4,999 shares generally vest upon signing
of the CNNfn Agreement (with certain forfeiture provisions), and the balance of
16,668 shares vest over the course of the initial year of the CNNfn Agreement at
the rate of 4,167 each quarter, provided CNNfn has furnished certain cable
television advertising to the Company.
Competition
The market for Internet services and products is relatively new,
intensely competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of Web sites on the Internet
competing for consumers' attention and spending has proliferated with relatively
few barriers to entry, and the Company expects that competition will continue to
intensify. The Company presently competes, or will compete, as the scope of its
games and simulations expands, directly and indirectly, for advertisers,
viewers, players and licenses and other
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events with the following categories of companies: (i) on-line services offering
interactive games and simulations to targeted participants in association with
existing and new brands (such as Starwave Corporation, Interactive Imaginations,
Inc. (Riddler), Sony Station and YoYodyne Entertainment); (ii) on-line services
or Web sites targeted to sports enthusiasts generally (such as ESPNet SportsZone
and CBS SportsLine or to enthusiasts of particular sports (such as Web sites
maintained by Major League Baseball, the NFL, the NBA and the NHL); (iii)
on-line services or Web sites targeted to existing or potential investors
generally, such as MSNBC's Investment Challenge Fantasy Game, E-TRADE, SMG2000,
the NASDAQ Stock Market, the New York Stock Exchange and the American Stock
Exchange; (iv) publishers and distributors of traditional off-line media (such
as television, radio and print), including those targeted to specific audiences,
many of which have established or may establish Web sites; (v) general purpose
consumer on-line services such as America Online, CompuServe and Microsoft
Network; (vi) vendors of information, merchandise, products and services
distributed through other means, including retail stores, mail, facsimile and
private bulletin board services; and (vii) Web search and retrieval services,
such as Excite, InfoSeek, Lycos and Yahoo!, and other high-traffic Web sites,
such as those operated by C|NET and Netscape. The Company anticipates that the
number of its direct and indirect competitors will increase in the future.
The Company believes that its most significant competitors for its
fantasy football game and future sports-related games and simulations are ESPNet
SportsZone and CBS SportsLine, which are Web sites offering a variety of sports
content. The Company views its most significant competitors with regard to its
stock market simulation as MSNBC's Investment Challenge Fantasy Game, E-TRADE
Group, Inc., an on-line investment services provider that operates a similar
on-line stock market trading game, SMG2000, an electronic educational simulation
program sponsored by the Securities Industry Foundation for Economic Education
and certain corporate sponsors, and, to a lesser extent, other on-line brokerage
services such as Quote.Com and PC Quote, which offer the ability to build
portfolios but generally do not provide for simulated trading activity.
The Company believes that its proprietary technologies and its ability to
create new games and simulations at relatively low incremental costs give it a
competitive advantage. However, many of the Company's current and potential
competitors have longer operating histories, significantly greater financial,
technical and marketing resources, significantly greater name recognition and
substantially larger participant or membership bases than the Company and,
therefore, have a significantly greater ability to attract advertisers and
participants. In addition, many of these competitors may be able to respond more
quickly than the Company to new or emerging technologies and changes in Internet
user requirements and to devote greater resources than the Company to the
development, promotion and sale of their services. There can be no assurance
that the Company's current or potential competitors will not develop products
and services comparable or superior to those developed by the Company or adapt
more quickly than the Company to new technologies, evolving industry trends or
changing Internet user preferences. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which would
materially and adversely affect the Company's business, prospects, financial
condition or operating results. In addition, as the Company expands
internationally it may face new competition. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company would not have a
material adverse effect on its business, prospects, financial condition or
operating results. See "Risk Factors-Competition".
The Company believes that the following sites, which utilize the
interactive capabilities of the Internet to engage a targeted group of
participants, and also leverage existing brands for credibility and promotion,
provide the most direct competition:
Starwave (http://www.starwave.com) - Founded in 1993, Starwave was
originally financed by Microsoft cofounder and technology investor Paul Allen
and is now controlled by the Walt Disney Co. Starwave produces such sites as
ESPNET SportsZone, Mr. Showbiz and Family Planet. Starwave has acquired strong
brands and produces a wide variety of content for delivery on the Web, including
fantasy baseball and football games available on ESPNET SportsZone.
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CBS Sportsline (http://www.cbs.sportsline.com) - Sportsline USA, Inc. was
founded in 1994 and went public in November 1997. Through a strategic alliance
with CBS, Inc. finalized in March 1997, Sportsline produces a full service
sports information site, including fantasy gaming, similar to ESPNET SportsZone.
Riddler (http://www.riddler.com) - The Riddler site offers contestants
multiple opportunities to win prizes by finding the answers to trivia questions
or solving riddles. The site is based on limited content, offering
low-involvement puzzles and games.
YoYodyne (http://www.yoyodyne.com) - YoYodyne is an e-mail based, on-line
gaming system positioned as a direct marketing vehicle. Participants can play
e-mail-based games sponsored by corporations seeking to market a product or
execute a promotion via the Internet. These games test players' knowledge of
trivia, sports and other areas of interest.
MSNBC Investment Challenge Game (http://www.stockplay.msnbc.com) -
MSNBC's Investment Challenge Game is an on-line stock trading game based on the
Nasdaq Stock Market, where users are charged a fee to participate in the game.
E-TRADE (http://www.etrade.com) - E-TRADE Group, Inc. is an on-line stock
brokerage firm which offers the U.S. E-TRADE Stock Market Trading Game, which is
similar to the Company's Final Bell.
SMG2000 (http://www.smg2000.com) - The SMG2000 is an electronic
simulation of Wall Street trading sponsored by the Securities Industry
Foundation for Economic Education and various corporate sponsors designed to
help students and adults understand the stock market.
Government Regulation and Legal Uncertainties
The Company is subject to various laws and governmental regulations
applicable to businesses generally. The Company believes it is currently in
material compliance with such laws and that such laws do not have a material
adverse impact on its operations. In addition, although there are currently few
laws or regulations directly applicable to access to or commerce on the
Internet, due to the increasing popularity and use of the Internet, it is
possible that more stringent federal, state, local and international laws and
regulations may be adopted with respect to the Internet, covering issues such as
participant privacy and expression, consumer protection, pricing, payment
methodologies, financing practices, intellectual property, information security,
anti-competitive practices, the convergence of traditional channels with
Internet commerce, characteristics and quality of products and services and the
taxation of subscription fees or gross receipts of Internet service providers.
The enactment or enforcement of such laws or regulations or others in the future
may increase the Company's cost of doing business or decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's costs, or otherwise have an adverse effect on
the Company's business, financial condition or operating results. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
including laws and regulations relating to matters such as property ownership,
libel and personal privacy is uncertain, may take years to resolve and could
expose the Company to substantial liability for which the Company might not be
indemnified by content providers or other third parties. Any such new
legislation or regulation or the application of existing laws and regulations to
the Internet could have a material adverse effect on the Company's business,
prospects, financial condition or operating results. See "Risk Factors -
Government Regulation and Legal Uncertainties".
The Company's use of prizes in its games and simulations may be subject
to federal, state, local and international laws governing lotteries and
gambling. Such laws vary from jurisdiction to jurisdiction and are complex and
uncertain. The Company seeks to design its prizing structure to fall within
exemptions from such laws, but there can be no assurance that the Company's
prizing structure will be exempt from all applicable laws. Failure to comply
with applicable laws could have a material adverse affect on the Company's
business, prospects, financial condition or operating results.
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Intellectual Property
Through the use of its proprietary technology, the Company believes it
can enhance the value of advertising on its sites by delivering customized
advertising messages to individual participants depending on the demographic and
psychographic data recorded in the Company's proprietary database. The Company's
gaming and simulation engines and other Internet products are also proprietary.
See "Business - Development and Production Process".
The Company regards its databases, products and gaming engines as
proprietary and attempts to protect them under a combination of patent,
copyright, trade secret and trademark laws and contractual restrictions on
employees and third parties. Despite these precautions, it may be possible for
unauthorized parties to copy the Company's software or to reverse engineer or
obtain and use information the Company regards as proprietary. Existing trade
secret and copyright laws provide only limited protection. Certain provisions of
the license and distribution agreements to be used by the Company, including
provisions protecting against unauthorized use, copying, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions and the
Company may be required to negotiate limits on these provisions from time to
time. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. There can be no assurance that the protections put in place by the
Company will be adequate. The Company has two U.S. patent applications pending
with respect to certain of its technologies. There can be no assurance that
patents will issue as a result of these applications, the extent of the
protection any such patent(s) might afford, or whether the rights granted
thereunder will provide a competitive advantage to the Company.
Significant and protracted litigation may be necessary to protect the
Company's intellectual property rights, to determine the scope of the
proprietary rights of others or to defend against claims of infringement. The
Company is not currently involved in any litigation with respect to intellectual
property rights, and with the exception of the Kolbe/Humanagement Litigation
described in "Risk Factors", is not aware of any threatened claims. There can be
no assurance that third party claims, with or without merit, alleging
infringement will not be asserted against the Company in the future. Such
assertions can be time consuming and expensive to defend and could require the
Company to discontinue the use of certain software or processes, to discontinue
certain product lines, to incur significant litigation costs and expenses and to
develop or acquire non-infringing technology or obtain licenses to the alleged
infringing technology. There can be no assurance that the Company would be able
to develop or acquire alternative technologies or to obtain such licenses or, if
licenses were obtainable, that the terms would be commercially acceptable to the
Company.
Employees
At October 31, 1997, the Company had a total of 25 full time employees,
17 in engineering and product development, 5 in sales and marketing, and 3 in
finance and administration. The Company's performance is substantially dependent
on the continued services of Chad M. Little, James A. Layne, Lonnie A.
Whittington, Matthew Stanton, Michael Turico, Mark Gorchoff and the other
members of its senior management team, as well as on the Company's ability to
retain and motivate its other officers and key employees. The Company's
engineering staff was most recently employed by On Word Information Incorporated
and is essential to the development of new games and simulations as well as to
the maintenance of the Company's Web sites. The Company's future success also
depends in large part upon its ability to attract and retain new qualified
employees. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to retain either its senior management
or other key employees or that it will be able to attract and retain such
additional qualified personnel in the future. In order to execute its business
strategy, the Company intends to add significantly to its engineering and sales
staffs, and to the extent that the Company is unable to find highly qualified
personnel in these disciplines, or to employ them at salaries the Company deems
feasible or appropriate, the Company's business may be materially adversely
effected. The Company also anticipates that significant expansion of its
administrative operations will be required in order to execute its strategy.
This rapid growth has placed, and is expected to continue to place, a
significant constraints on the Company's management. In order to manage the
expected growth of its operations, the Company will be required to implement and
improve its operational and financial systems, procedures and controls. Such
improvement will require the Company to
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expand its administrative, finance and accounting staffs, and there can be no
assurance that the Company will be able to identify, hire, train, motivate or
manage these personnel as well. The Company's employees are not represented by
any collective bargaining organization, and the Company considers its relations
with its employees to be good. See "Risk Factors - Dependence on Key Personnel".
Facilities
The Company's corporate headquarters are located in Phoenix, Arizona in
an 6,184 square foot facility that houses the Company's administrative and
finance, engineering and product development, sales and marketing and
administrative functions. The Company leases the facility under a lease which
expires on November 16, 2000. The Company believes that its existing facilities
are adequate for its current requirements, although additional space will be
required to accommodate anticipated increases in employment. The Company
believes that such additional space can be obtained on commercially reasonable
terms.
In August and September 1997, the Company underestimated the amount of
traffic that Final Bell and SportSim would generate, and experienced system
disruptions and delays, which required the Company to acquire additional
hardware and software and which caused some participant dissatisfaction. These
upgrades to its server and database capacity, which were made over a three week
period and totaled approximately $443,000, more than doubled the Company's
capacity to handle traffic to its Web sites. In addition, the Company has
acquired an additional $678,000 of equipment in anticipation of the commencement
of its SportSim basketball season and mid-season football in the fourth quarter
of 1997. Furthermore, as additional games and simulations are brought on-line,
the Company expects additional upgrades will be required. While the Company
believes that the steps it has taken to increase its ability to handle larger
amounts of traffic, and to communicate with and address the concerns of its
participants have been effective, there are no assurances that such system
disruptions will not adversely affect the Company's business, prospects,
financial condition or operating results. Similarly, although the Company is
increasing its systems infrastructure acquisition plans in light of the most
current information and estimates available to it, there are no assurances that
it will accurately foresee traffic levels, system requirements or other facts
that might result in system interruptions, or that such system interruptions
will not occur.
In August and September 1997, also in response to the surge in traffic to
its Web sites, the Company was required to make arrangements with Teleport
Communications Group, Inc., a third party telecommunications service provider
("TSP") to house its Web sites and obtain a more direct link between the Company
and Genuity, Inc. the Company's Internet service provider ("ISP"). The Company
believes that its TSP and ISP are capable of handling its anticipated traffic
growth in the foreseeable future and can provide expanded bandwidth for
communications as Internet technology improves in this area. However, any
failure of the TSP or ISP to perform as anticipated or any unforeseeable
increase in traffic on its Web sites will require the Company to make other
third party arrangements or expand and adapt its network infrastructure. The
Company's inability or failure to make such arrangements or add additional
software and hardware to accommodate increased traffic on its Web sites may
cause unanticipated system disruptions and result in slower response times.
There can be no assurance that the Company will make such arrangements or expand
its network infrastructure on a timely basis to meet increased demand. Any
increase in system interruptions or slower response times resulting from the
foregoing factors could have a material adverse effect on the Company's
business, prospects, financial condition or operating results.
The Company's Web site operations housed at the TSP's facility are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond the Company's or the TSP's control. The TSP
provides certain safeguards against such events. The switch room is monitored 24
hours a day, 7 days a week and maintained at a temperature of 70 degrees with
relative humidity at 50% and the AC power is backed up by a generator. In
addition, the Company's procedures require that software be backed up daily and
stored off-site so that it could be used to restore the Company's Web site
operations in the event of catastrophe. However, there is no assurance that in
the event of a catastrophe, the Company would be able to locate sufficient
equipment to run its Web site operations on a timely basis. If the TSP or ISP
fails for any reason, the Company would have to make other third party
arrangements. The Company carries business interruption insurance, but there is
no assurance that such insurance would be sufficient to compensate the Company
for lost revenues that may occur from a
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substantial system failure, and any losses or damages incurred by the Company
could have a material adverse effect on its business, prospects, financial
condition or operating results. See "Risk Factors - Capacity Constraints and
System Disruptions".
Legal Proceedings
The Company is not currently a party to any legal proceedings, the
adverse outcome of which, individually or in the aggregate, would have a
material adverse affect on the Company's financial position or results of
operations. On July 1, 1997, counsel for the Company received written
notification from plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc. et
al., that plaintiffs intend to add the Company as a defendant in the lawsuit, in
which a preliminary injunction against defendants has been granted regarding,
among other things, claims for copyright infringement in connection with
products marketed by Humanagement, a start-up company in the personality testing
business. The Company has entered into an agreement dated November 25, 1997 with
plaintiffs to settle this matter, pursuant to which the Company issued a
promissory note to plaintiffs in the principal amount of $30,000 due 90 days
after its issuance. Each party agreed to release any and all claims it may have
against the other upon payment of the note in full by the Company. The
preliminary injunction granted against the defendants has not had any material
adverse effect on the Company. See "Risk Factors -- Potential Liability for
Internet Content". From time to time, the Company may be involved in other
litigation relating to claims arising out of its operations in the normal course
of business.
MANAGEMENT
Directors and Executive Officers
The Company's directors and executive officers and their ages as of
September 30, 1997 are as follows:
Name Age Position
---- --- --------
Chad M. Little(1) 29 President, Chief Executive
Officer and Director
James A. Layne 44 Vice President of Marketing,
Secretary and Director
Lonnie A. Whittington 48 Vice President of Creative
Direction, Assistant
Secretary and Director
Mark Gorchoff 48 Vice President and Chief
Financial Officer
Michael S. Turico 47 Vice President of Engineering
and Director
Matthew Stanton 33 Vice President of Sales
John Hall(1) 52 Director
Todd Stevens(2) 38 Director
Brian Burns(1),(2) 38 Director
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Chad M. Little founded the Company's predecessor in 1991 and has served
as President, Chief Executive Officer and director of the Company since that
time. From May 1989 to June 1991, Mr. Little held a position with Audio Visual
Graphics in graphic software design. Mr. Little is also the creator of
Cyberhunt, which the Company believes was the first corporate sponsored
interactive game broadcast (in May 1995) on the Web. Mr. Little received an
Associate degree in Graphic Design from the Collins School of Design in 1989.
James A. Layne has served as Vice President, Secretary and director of
the Company since March 1992. Mr. Layne previously served as a Regional Sales
Manager for Union Carbide, and was Director of Operations responsible for new
business development and client-based strategic direction for Mark Anderson &
Associates, a national business-to-business advertising agency. Mr. Layne
received a B.S. in Biology from the University of Hawaii in 1976.
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Lonnie A. Whittington has served as Vice President, Creative Direction
and director of the Company since March 1992. Mr. Whittington owned and operated
an advertising agency for fifteen years prior to joining the Company. In
addition, Mr. Whittington taught graphic design, typography, product design and
presentation technique at Arizona State University from 1976 to 1985. Mr.
Whittington also served as a visiting lecturer and associate professor at the
College of Art at Arizona State University. Mr. Whittington received a B.S. in
Industrial Design from Ohio State University in 1972.
Mark Gorchoff has served as Vice President and Chief Financial Officer of
the Company since January 1997. From November 1991 to July 1996, Mr. Gorchoff
served as the Chief Financial and Administrative Officer of Peerless Office
Supply. Prior to that, Mr. Gorchoff served as the Vice President of Finance at
Inertia Dynamics Corporation, a lawn and garden products manufacturing company,
as an Assistant Vice President with First Interstate Bank of Arizona, and as
Credit Department Manager for Bank One of Columbus, N.A. Mr. Gorchoff received a
B.S. and an MBA from Ohio State University, and is a CPA.
Michael S. Turico has served as Engineering Director, and a director of
the Company, since August 1995 and as a Vice President of Engineering since July
1997. Prior to his employment with the Company, Mr. Turico served as Director of
Operations of On Word Information Incorporated, a network information provider,
from August 1994 to August 1995, and Info Enterprises, a wholly-owned subsidiary
of Motorola, from June 1991 to August 1994, and prior to that period in a number
of senior technical management positions within Motorola itself.
Matthew Stanton has served as the Company's Director of Sales since July
1996 and as a Vice President of Sales since July 1997. Prior to his employment
with the Company, Mr. Stanton was employed with Katz Media, a leading media
sales representative firm, from June 1990 through July 1996, most recently as
Director of Sales for its new media division, Millennium Marketing, and before
that as Sales Manager of its Los Angeles National Cable Communications Office.
Prior to his employment with Katz Media, he was employed by R. H. Donnelly and
Miller Brewing Company in various sales and marketing capacities.
John Hall has served as a director of the Company since February 1996.
Mr. Hall has been a general partner of Newtek Ventures, a venture capital
investor in the Company, since 1988. Prior to that Mr. Hall held positions with
Cadnetix Corporation, a developer of computer aided design software, as Vice
President - Finance and Chief Financial Officer, and with Intel as Controller -
International Group. Mr. Hall also serves as a director of Right Angle Software,
a developer of process and documentation software, SalesLogix Corporation, a
developer of sales force automation software, and Nextwave Design Automation, a
developer of design automation software. Mr. Hall received a B.S.
in Accounting and Finance and an MBA from San Jose State University.
Todd Stevens has served as a director of the Company since February 1996.
Mr. Stevens has been Managing Director of Wasatch Venture Corporation, a venture
capital investor in the Company, since June 1993. Prior to that Mr. Stevens was
a Partner with Stevens Wood, Inc., a consulting firm, from November 1991 to June
1993. Mr. Stevens also serves as a director for MACC Private Equities, Inc., a
publicly traded Small Business Investment Company. Mr. Stevens received a B.S.
in Accounting and Management from the University of Utah and an MBA from Harvard
University.
Brian Burns has served as a director of the Company since October 1996.
Since April 1994, Mr. Burns has been Vice President - Finance and Chief
Financial Officer of Anderson & Wells, Co., the general partner of Sundance
Venture Partners, L.P., a venture capital investor in the Company. Prior to
that, Mr. Burns held similar positions with AFP, Inc., a chain of retail
photography studios, from July 1993 to April 1994, and Sunven Capital Corp., a
venture capital investor, from April 1989 to June 1993. Mr. Burns received a
B.S. in Accounting from Arizona State University.
Executive officers of the Company are elected by the Board of Directors
on an annual basis and serve until the next annual meeting of stockholders and
until their successors have been duly elected and qualified.
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Designation of Independent Directors; Committees of the Board Of Directors
Following consummation of this offering, the Company intends to add two
independent directors to the Board of Directors to replace two directors who are
members of management.
The Audit Committee of Company's Board of Directors was formed on
September 10, 1997 and is responsible for reviewing audit functions, including
accounting and financial reporting practices of the Company, the adequacy of the
Company's system of internal accounting control, the quality and integrity of
the Company's financial statements and relations with independent auditors. The
Compensation Committee of the Company's Board of Directors was also formed on
September 10, 1997 and is responsible for establishing the compensation of the
Company's directors, officers and employees, including salaries, bonuses,
commission, and benefit plans, and administering the Company's stock plans and
other forms of or matters relating to compensation. Upon consummation of this
offering, the Audit Committee will include three individuals none of whom are
management and the Compensation Committee will include four individuals one of
whom is management.
Director Compensation
Directors do not currently receive any cash compensation from the Company
for their service as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with attendance at Board and
Committee meetings. Non-employee directors are eligible to receive equity-based
incentives under the Company's 1995 Stock Incentive Plan, but have not received
any awards under the Plan as of November 30, 1997.
Executive Compensation
The following table sets forth all compensation received for services
rendered to the Company in all capacities during the last fiscal year by Mr.
Little, the Company's Chief Executive Officer. None of the Company's executive
officers earned salary and bonus during fiscal year 1996 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- Awards(1)
------
<S> <C> <C> <C> <C> <C>
Name and Principal Position (a) Year Salary ($) Bonus ($) Securities All Other
(b) (c) (d) Underlying Compensation ($)
Options/SARS (i)
(#)(2)
(g)
Chad M. Little 1996 $76,355 -0- -0- -0-
President and Chief
Executive Officer
</TABLE>
(1) The column for "Other Annual Compensation" has been omitted because the
aggregate value of perquisites and other personal benefits does not exceed the
lesser of $50,000 or 10% of the total annual salary and bonus reported for Mr.
Little.
(2) The Common Stock of the Company is not publicly traded. The Board of
Directors, in connection with the award of stock options and other stock grants
that it makes from time to time, determines the fair market value of the Common
Stock as of the award date. For the purpose of calculating the value recognized
upon exercise of options and at fiscal year-end, the Company has used the most
recent Board determination of fair market value made prior to the exercise date,
or fiscal year-end, as the case may be.
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Option Grants, Exercises and Fiscal Year-End Values
No stock option grants were made to Mr. Little during the fiscal year
ended December 31, 1996. Mr. Little did not exercise any stock options during
1996.
Employment Agreements
Each of the stock option award agreements between the Company and its
executive officers provides that upon a change in control of the Company (as
defined in the applicable agreement), all shares then exercisable under the
standard vesting schedule, in the case of stock options, shall vest.
The Company has entered into employment agreements or engagement letter
agreements with Messrs. Little, Stanton, Turico and Gorchoff, which generally
provide such officer's title, starting salary, bonus and benefits, moving
allowance (if applicable) and initial stock option awards (if any). The starting
and current annual salary, respectively, for Mr. Little is $50,000 and $80,000,
for Mr. Stanton is $85,000 and $110,000, for Mr. Turico is $90,000 and $91,800,
and for Mr. Gorchoff is $75,000 and $75,000. The current salary for Messrs.
Layne and Whittington is $80,000. The Company does not have a bonus plan. The
Company provides access to a health insurance plan for its employees. All of the
employment agreements are "at-will" and none of the agreements provide for
material severance payments to any such officer on termination. The Company and
each of its executive officers, including Messrs. Whittington and Layne have
also entered into Proprietary Rights and Non-Compete Agreements that generally
prevent disclosure of Confidential Information (as defined therein), assign to
the Company all rights in Inventions (as defined therein) and include certain
non-compete covenants for 24 months after such officers cease to be a
shareholder and non-solicitation covenants for so long as such officers continue
to be a shareholder. A state court may determine not to enforce (or only
partially enforce) such covenants.
Employee Benefit Plans
1995 Equity Incentive Plan
The 1995 Equity Incentive Plan ("Incentive Plan") was adopted by the
Board of Directors and approved by the stockholders on August 1, 1995. The
Incentive Plan authorizes awards of Incentive Stock Options ("ISOs"),
Non-Qualified Stock Options ("NQSOs"), Stock Appreciation Rights ("SARs"),
Performance Units, Restricted Stock and other Common Stock based awards to
officers, directors, employees, consultants and advisors of the Company. The
total number of shares of Common Stock originally available for awards under the
Incentive Plan, as amended, was 215,834, subject to certain adjustments
described in the Incentive Plan. During the year ended December 31, 1996, the
Company granted options to purchase 32,257 shares pursuant to the Incentive Plan
at an exercise price of $.60 per share. From January 1, 1997 through September
30, 1997, the Company granted options to purchase 38,975 shares (net of
cancellations) pursuant to the Incentive Plan at exercise prices ranging from
$.60 to $2.10 per share. During the month ended October 31, 1997, the Company
granted options to purchase 4,584 shares at an exercise price of $2.40 per
share, and canceled options to purchase 1250 shares pursuant to the Incentive
Plan at an exercise price of $1.80 per share.
The Incentive Plan is administered by the Board or a Committee appointed
by the Board from time to time. The Board or authorized Committee has the
exclusive authority to administer the Incentive Plan, including the power to
determine eligibility, the types of awards to be granted, the price and the
timing of awards.
An ISO is a stock option that satisfies the requirements specified in
Section 422 of the Internal Revenue Code (the "Code"). Under the Code, ISOs may
only be granted to employees and are eligible for certain favorable tax
treatment. Generally, the issuing corporation is not entitled to a deduction
with respect to an ISO. A NQSO is any stock option other than an Incentive Stock
Option. The issuing corporation is generally entitled to a corresponding tax
deduction in the same amount and in the same year in which the employee
recognizes such income, provided that it satisfies applicable withholding
obligations.
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An SAR is the right granted to an employee to receive the appreciation in
the value of a share of Common Stock over a certain period of time. Under the
Incentive Plan, the Company may pay that amount in cash, or in Common Stock, or
in a combination of both. An issuer of an SAR generally receives a tax deduction
in an amount equal to taxable income recognized by the employee with respect to
the SAR provided that it satisfies applicable withholding obligations.
Performance Units may also be granted to an eligible employee. Typically, each
Performance Unit will be deemed to be the equivalent of one share of Common
Stock. An award of Performance Units does not entitle an employee to any
ownership, dividend, voting or other rights of a stockholder until distribution
is made in the form of shares of stock, if the award is paid in stock. The value
of the employee's Performance Units is generally measured by the fair market
value of an equivalent number of shares of the Common Stock. At the end of the
performance period, if the employee has satisfied certain performance criteria
established by the Committee, the employee will be entitled to a payment equal
to the difference between the value of the Performance Units on the date of
grant and the value of such units at the end of the performance period. The
award may be payable in either cash, Common Stock or a combination of both. The
issuing corporation generally is entitled to a tax deduction in an amount equal
to taxable income recognized by the employee.
Under the Restricted Stock feature of the Incentive Plan, an eligible
employee may purchase or be granted a specific number of shares of the Common
Stock. However, vested rights to such stock may be subject to certain
restrictions or be conditioned on the attainment of certain performance goals.
If the employee violates any of the restrictions during the period specified by
the committee or the performance standards fairly to be satisfied, the stock may
be forfeited. The issuer of restricted stock generally is entitled to a tax
deduction in an amount equal to taxable income recognized by the employee at the
same time, provided that it satisfies applicable withholding obligations.
The Board or authorized Committee may provide in the written instrument
evidencing the grant for acceleration of vesting of options and other
exercisable rights granted under the Incentive Plan upon a change in control as
defined in the Plan. To date, such instruments include a provision granting
discretion to the Board to waive or accelerate vesting of options, or waive or
extend expiration dates, subject to limitations set forth in the Plan.
Although permitted to issue SARs, Performance Units and Restricted Stock
under the 1995, to date the Company has only issued Options, and currently
intends to only issue Options in the future.
Option Grants to Executives and Others
In August 1995, Tracer granted Michael S. Turico, an executive officer
and director of the Company, an incentive stock option to purchase 14,496 shares
of Common Stock at an exercise price of $.006 per share vesting over 5 years. In
February 1997, (a) the Company and Mr. Turico agreed to cancel the unvested
portion of this option, (b) Mr. Turico exercised the vested portion of 2,899
shares of Common Stock, and (c) Company granted to him a new incentive stock
option to purchase 13,264 shares of Common Stock of the Company at an exercise
price of $.60 per share vesting over 4 years.
In May 1996, the Company granted a nonqualified stock option to Newtek to
purchase 21,923 shares of Common Stock of the Company at an exercise price of
$.60 per share. 10,962 shares vested immediately and were exercised on July 15,
1996, 5,481 shares vested during the period ending September 1, 1997, 1,827 of
which were exercised on December 12, 1996, and 3,654 of which were exercised on
September 16, 1997. The remaining 5,480 vest in approximately equal amounts on
March 1, 1998, September 1, 1998 and March 1, 1999.
In January 1997, the Company granted an incentive stock option to Mark
Gorchoff, an executive officer of the Company, to purchase 7,500 shares of
Common Stock of the Company at an exercise price of $.60 per share vesting over
five years.
In February 1997, the Company granted an incentive stock option to
Matthew Stanton, an executive officer of the Company, to purchase 8,334 shares
of Common Stock of the Company at an exercise price of $.60 per share, vesting
over five years beginning as of July 9, 1996, his original hire date. In July
1997, the Company granted
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Mr. Stanton an additional incentive stock option to purchase 8,334 shares of
Common Stock of the Company at an exercise price of $1.80 per share, 4,167
shares of which vested immediately with the remaining 4,167 shares vesting over
five years.
401(k) Plan
Effective December 28, 1993, the Company adopted a retirement savings
plan (the "401(k) Plan") that covers all employees of the Company meeting
certain eligibility requirements. An employee may make voluntary contributions
to the 401(k) Plan, subject to Internal Revenue Service limitations. Employee
contributions are invested in selected equity mutual funds or a money market
fund at the direction of the employee. Employee contributions are fully vested
and nonforfeitable at all times . The 401(k) Plan permits, but does not require,
additional contributions to the 401(k) Plan by the Company. The Company
presently does not intend to make discretionary contributions to the 401(k) Plan
until it achieves significant profitability.
CERTAIN TRANSACTIONS
Effective April 25, 1996, the Company completed a migratory merger
pursuant to which it reincorporated in Delaware, changed its name to Sandbox
Entertainment Corporation and effected a five-to-one stock split. All references
herein to the Company include its predecessor, Tracer Design, Inc., if
applicable. The description below has been adjusted to reflect (i) the foregoing
five-to-one stock split, (ii) a twenty-five-for-one stock split as of July 13,
1995, (iii) a two-for one stock split as of February 12, 1996, (iv) additional
shares of common stock issued to certain stockholders based upon a revaluation
of the Company at the time of the initial issuance of the Series A Preferred
Stock (See Note 7 of "Notes to Financial Statements"), and (v) the Reverse Stock
Split.
In July 1995, Glenn Gomez, a beneficial owner of more than 5% of the
Common Stock, loaned the Company $116,328 pursuant to a six year note bearing
interest at the prime rate announced by Bank One Arizona, N.A. In connection
with this loan, Mr. Gomez purchased 38,265 shares of Common Stock for a total
purchase price of $183,672. In July 1995, the Company, and Messrs. Little,
Layne, Whittington and Gomez entered a Restated Stockholders' Agreement (the
"Stockholders' Agreement"), which imposes certain restrictions on transfer and
grants a right of first refusal by each stockholder to the Company and each of
the other stockholders. Jon Kailey and Kristin Kailey and Frank X. Helstab
became parties to the Stockholders' Agreement in February 1996 and May 1996,
respectively.
In October 1995, certain investors loaned the Company an aggregate of
$40,000 pursuant to one year term notes bearing interest at 15%. In connection
with these loans, these investors were issued ten year warrants to purchase an
aggregate of 51,000 shares of Common Stock at an exercise price of $4.80 per
share. The shares issued upon exercise of these warrants are subject to the
Stockholders' Agreement. In connection with this financing, Pickwick Group LLC
("Pickwick") and its sole manager and principal member Douglas Greenwood (and
his spouse Susan Greenwood) (the "Greenwoods"), collectively beneficial owners
of more than 5% of the Common Stock, loaned the Company an aggregate of $15,000
and were issued ten year warrants to purchase an aggregate of 19,125 shares of
Common Stock at $4.80 per share. In connection with this financing, an
additional ten year warrant was issued to Pickwick to purchase 38,250 shares of
Common Stock at $4.80 per share in consideration for its payment of $204 and
assistance in arranging the $40,000 in loans.
In October 1996, the Company amended the term notes issued in connection
with the October 1995 financing to extend the maturity by an additional six
months and to decrease the interest rate from 15% to 10%. In connection with
these amendments, the Company issued the noteholders ten year warrants to
purchase an aggregate of 837 shares of Common Stock at $4.80 per share, of which
Pickwick and the Greenwoods received warrants to purchase 314 shares. In April
1997, the Company again amended the term notes to extend the maturity an
additional six months. In connection with these amendments, the Company issued
the noteholders ten year warrants to purchase an aggregate of 837 shares of
Common Stock at $4.80 per share, of which Pickwick and the Greenwoods received
warrants to purchase 314 shares. In October 1997, in exchange for the payment of
all accrued and unpaid interest under the term notes, the noteholders agreed to
extend the maturity date of the term notes to December 31, 1997.
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<PAGE>
In February 1996, the Company entered into that certain Series A
Preferred Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to
which the Company sold (a) 58,334 shares of Series A Preferred Stock and
warrants to purchase 14,583 shares of Series A Preferred Stock at an exercise
price of $.012 per share to Wasatch Venture Corporation ("Wasatch") for a
purchase price of $350,000 and (b) 16,667 shares of Series A Preferred Stock and
warrants to purchase 4,167 shares of Series A Preferred Stock at an exercise
price of $.012 per share to Newtek Ventures II, L.P. ("Newtek") for a purchase
price of $100,000. John Hall, general partner of Newtek, and Todd Stevens,
managing director of Wasatch, became directors of the Company following
consummation of such purchase. Wasatch and Newtek each beneficially own more
than 5% of the Company's Common Stock. In connection with the Stock Purchase
Agreement, the Company also granted to Wasatch and Newtek certain demand and
piggy-back registration rights, a right of first offer on any new issuances of
capital stock by the Company, certain limitations on the size and composition of
the Board of Directors, and certain information and inspection rights pursuant
to an Investor Rights Agreement (the "Investor Rights Agreement") dated February
13, 1996. The right of first offer generally grants holders of Series A
Preferred Stock the right of first offer to purchase its pro rata share of New
Securities (as defined in the Investor Rights Agreement to exclude securities
issued in a registered public offering, among other exclusions) that the Company
proposes to issue. Such right terminates on the closing of a firmly underwritten
public offering on Form S-1 (or successor form) resulting in aggregate gross
proceeds to the Company of at least $5 million. The size of the Board of
Directors is limited to 7 directors under the Investor Rights Agreement. Also in
connection with the Stock Purchase Agreement, Chad Little, James Layne and
Lonnie Whittington gave Wasatch and Newtek a right of co-sale regarding sales by
each of such individuals pursuant to a Co-Sale Agreement (the "Co-Sale
Agreement") dated February 13, 1996. In connection with the consummation of the
Stock Purchase Agreement, the Company paid Frank X. Helstab, as a consultant,
$15,750 in cash and issued him a warrant to purchase 21,923 shares of Common
Stock at an exercise price of $.012 per share, which Mr. Helstab exercised in
May 1996.
In May 1996, Wasatch and Newtek each exercised the Series A Preferred
warrants issued in connection with the February 1996 financing and purchased
additional shares of Series A Preferred Stock in the Company pursuant to the
terms and conditions of the Stock Purchase Agreement. Wasatch purchased 62,500
additional shares of Series A Preferred Stock in the Company for a price of
$300,000 and Newtek purchased 41,666 additional shares of Series A Preferred
Stock in the Company for a price of $200,000.
In November 1996, Wasatch, Newtek, Sundance Venture Partners, L.P.
("Sundance") and Wayne Sorensen ("Sorensen") each purchased 10,417, 10,417,
93,750, and 10,417 shares of Series A Preferred Stock, respectively, at $4.80
per share pursuant to the terms and conditions of the Stock Purchase Agreement,
which included rights under the Investor Rights Agreement and under the Co-Sale
Agreement. Brian Burns, a director of the Company, is a managing partner of
Sundance, a beneficial owner of more than 5% of the Company's Common Stock. A
portion of Sundance's purchase was completed in January 1997.
In May 1997, the following holders of Series A Preferred Stock loaned the
Company an aggregate of $270,000 in the following amounts: Wasatch - $100,000;
Newtek - $50,000; Sundance - $100,000; and Sorensen - $20,000. Such loans were
made pursuant to one year convertible subordinated promissory notes bearing 10%
interest that are convertible, at the option of the holder, into shares of
Series A Preferred Stock at a conversion price of $4.80 per share. In connection
with these loans, the Company also issued to investors seven year warrants to
purchase the following numbers of shares of Series A Preferred Stock at an
exercise price of $4.80 per share: Wasatch - 20,834 shares; Newtek - 10,417
shares; Sundance - 20,834 shares; and Sorensen - 4,167 shares.
In July 1997, the following holders of Series A Preferred Stock loaned
the Company an aggregate of $270,000 in the following amounts: Wasatch -
$100,000; Newtek - $60,000; Sundance - $100,000; and Sorensen - $10,000. Such
loans were made pursuant to one year convertible subordinated promissory notes
bearing 10% interest that automatically convert into shares of Series B
Preferred Stock upon the consummation of this offering at a conversion price
equal to the public offering price for the Series B Preferred Stock if this
offering is consummated on or before January 20, 1998. If this offering is not
consummated on or before January 20, 1998, such notes are not automatically
converted and shall become convertible, at the option of the holder, into shares
of Series A Preferred Stock at a conversion price of $4.80 per share. In
connection with these loans, the Company also issued to investors seven year
warrants to purchase the following numbers of shares of Series A Preferred Stock
at an
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<PAGE>
exercise price of $4.80 per share: Wasatch - 20,834 shares; Newtek - 12,500
shares; Sundance - 20,834 shares; and Sorensen - 2,084 shares. These warrants
are exercisable at any time during the term of the warrants. The exercise price
of these warrants will increase from $4.80 per share to the public offering
price for the Series B Preferred Stock if this offering is consummated by
January 20, 1998; provided, however, that the warrants may be exercised within
the 30 days following the consummation of this offering at $2.00 per share.
In August and September 1997, the Company raised $490,000 in a private
offering under Rule 506 of Regulation D as promulgated by the SEC under the Act
from various "accredited investors" (as defined in Rule 501 of Regulation D).
Such loans were made pursuant to subordinated notes bearing interest at 10%
payable in two years or out of the proceeds of this offering. In connection with
these loans, the Company also issued to investors three year warrants to
purchase that number of shares of Common Stock determined by dividing the amount
loaned by $12.00 per share plus warrants issued as broker's commission for an
aggregate of 43,050 shares of Common Stock. The exercise price of the warrants
is $12.00 per share until 30 days after the consummation of this offering at
which point the exercise price will be the offering price for the Series B
Preferred Stock if that price is greater than $2.00 per share. As part of this
transaction, the Company received $125,000 from a trust controlled by the
parents of Mr. Little, a director and Chief Executive Officer of the Company,
for which this trust received warrants to purchase 10,417 shares of Common Stock
of the Company. The Company also received $100,000 from Mr. Gomez in exchange
for a note and a warrant to purchase 8,334 shares of Common Stock of the
Company. The Company placed the remaining $265,000 of this private offering with
various investors using the assistance of FOX & Company Investments, Inc. For
its efforts, FOX and its brokers received $25,200 and three year warrant(s) to
purchase 11,690 shares of Common Stock which warrants have an exercise price of
$12.00 per share until 30 days after the consummation of this offering at which
point the exercise price will be the offering price in this offering if that
price is greater than $2.00 per share. This placement was completed on September
25, 1997.
On November 26, 1997, the Company obtained a bridge loan from Lonnie
Whittington in the amount of $36,166 pursuant to an unsecured Subordinated
Promissory Note bearing interest at 12% through December 10, 1997, 18% from
December 10, 1997 to January 1, 1998 and 25% thereafter until paid within 30
days after written demand from the holder. On December 12, 1997, the Company
received $150,000 in proceeds from a $172,528 bridge loan from Andrew Todd
pursuant to an unsecured Subordinated Promissory Note without interest payable
on or before March 12, 1998. The Company intends to repay these bridge loans out
of the proceeds from this offering. The Andrew Todd bridge note has been
personally guaranteed by Messrs. Little, Whittington and Layne. In addition,
$178,434 and $207,662 in equipment lease financing has been personally
guaranteed by Messrs. Whittington and Layne and Mr. Little, respectively.
The Company believes that each of the foregoing transactions were on
terms at least as favorable to the Company as were available from independent
third parties in arms' length transactions. In addition, the Company believes
that transactions with the Company's venture capital investors were negotiated
at arms' length and approved by at least a majority of "disinterested
directors". The Board of Directors of the Company is currently comprised of four
members of management and three individuals representing the Company's venture
capital investors. Representatives of venture capital investors may not qualify
as "independent directors", where such venture capital investors stand to
benefit from transactions to be approved by the Board of Directors. However, the
Company believes that the interests of its management directors sufficiently
compete with the interests of such venture capital investors to qualify them as
"disinterested directors" for the purpose of approving such transactions.
Although the Company has no present intention to do so, it may in the
future enter into other transactions and agreements incident to its business
with its directors, officers, principal stockholders and other affiliates. All
future affiliated transactions and loans will be made or entered into on terms
that are no less favorable to the Company than those obtainable from
unaffiliated third parties on an arm's-length basis. In addition, all future
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of the Company's directors, including a majority of the
Company's independent directors who do not have an interest in the transactions
and who had access, at the Company's expense, to the Company's or independent
legal counsel.
Registration Rights
Upon the completion of this offering, Wasatch, Newtek, Sundance and
Sorensen, holders of Series A Preferred Stock (the "Rightsholders"), will be
entitled to require the Company to register under the Securities Act up to a
total of 491,674 shares of Common Stock issuable upon conversion of Series A
Preferred Stock (including all Series A Preferred warrants and convertible notes
on a fully diluted basis) held by the Rightsholders (collectively, the
"Registrable Shares") pursuant to the terms of an Investors' Rights Agreement
(the "Investors' Rights Agreement"). The Investors' Rights Agreement provides
that in the event the Company proposes to register any of its securities under
the Securities Act at any time or times (other than relating solely to employee
benefit plans or a transaction under Rule 145 promulgated under the Securities
Act), the Rightsholders shall be entitled to include Registrable Shares in such
registration but only to the extent such inclusion does not diminish the number
of securities included by the Company or by holders who have demanded such
registration. However, the managing underwriter of any such offering may exclude
for marketing reasons some of such Registrable Shares from such
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<PAGE>
registration, in which case such Registrable Shares will be cut back on a pro
rata basis. In addition, the holders of not less than 20% of the Registrable
Securities have the right to require the Company to prepare and file a
registration statement under the Securities Act with respect to their
Registrable Shares, except that the Company is not required to do so (i) prior
to the earlier of one year following an initial public offering or February 13,
2002, (ii) after effecting two such demand registrations, and (iii) if the
request applies to less than 20% of the securities held by the holders demanding
registration.
Any Rightsholder has the right to require the Company to file a
registration statement on Form S-3 for an aggregate amount (net of underwriting
discounts and commissions) that exceeds $500,000, provided that (i) the Company
is entitled to use Form S-3, (ii) the Company shall not be required to effect
more than two such registrations in any twelve-month period and (iii) the
Company shall not be required to take any action during the period starting
sixty days prior to the filing of any registration statement (other than with
respect to a Rule 145 transaction, an offering solely to employees, or any other
registration which is not appropriate for the registration of Registrable
Securities), and ending on the earlier of one year from such starting date and
six months following the effective date of such registration statement. All
registration rights under the Investors' Rights Agreement terminate on the
earlier of the date when such securities may be sold during a one-year period
pursuant to Rule 144 (but not Rule 144A) or the date seven years after the
effective date of an initial public offering. The Company is generally required
to bear the expenses of all such registrations, except underwriting discounts
and commissions. The Company has also granted "piggy-back" registration rights
to Pickwick, the Greenwoods, Thomas Lescault, Terrance Morris and Geoffrey
Herter, M.D. to include up to an aggregate of 90,924 shares of Common Stock
issuable upon exercise of such warrants in a registration statement under the
Securities Act pursuant to terms and conditions similar to the "piggy-back"
registration rights held by the Rightsholders under the Investors' Rights
Agreement. There are no penalty provisions or default rates under the Investors'
Rights Agreement if the Company fails to perform its obligations thereunder.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the voting securities as of September 30, 1997, as
adjusted to reflect the Reverse Stock Split, and as adjusted to reflect the sale
of the Series B Preferred Stock offered hereby and the conversion of certain
convertible promissory notes into shares of Series B Preferred Stock upon the
consummation of this offering, but not including the warrants to be issued to
the Underwriters in connection with this offering, by (i) each stockholder
beneficially owning more than 5% of the outstanding shares of any class of the
Company's voting securities, (ii) each director of the Company, (iii) each
executive officer, and (iv) all executive officers and directors as a group:
<TABLE>
<CAPTION>
Number of Shares Percentage of Class
---------------- -------------------
Beneficially Owned (1) Beneficially Owned (1)
---------------------- ----------------------
Name and Address of Beneficial Before the After the Before the After the
------------------------------ ---------- --------- ---------- ---------
Title of Class Owner Offering Offering Offering Offering
- -------------- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Series A Wasatch Venture Corporation (2) 208,336 208,336 53.1% 53.1%
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111
Newtek Ventures II, L.P. (3) 106,251 106,251 29.2% 29.2%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(4) 156,252 156,252 39.8% 39.8%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (5) 20,835 20,835 6.1% 6.1%
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and directors 470,839 470,839 96.4% 96.4%
as a group(6)
Series B Wasatch Venture Corporation (7) - 13,115 - 1.9%
Preferred Stock One South Main, Suite 1340
Salt Lake City, UT 84111
Newtek Ventures II, L.P. (8) - 7,869 - 1.1%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P. (9) - 13,115 - 1.9%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Wayne Sorensen (10) - 1,311 - .2%
1925 E. Michigan Avenue
Salt Lake City, UT 85108
All executive officers and directors - 34,099 - 4.9%
as a group (11)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of Class Fully Diluted
---------------- ------------------- -------------
Beneficially Owned (1) Beneficially Owned (1) Common Stock
---------------------- ---------------------- ------------
Ownership
---------
Name and Address of Beneficial Before the After the Before the After the After the
------------------------------ ---------- --------- ---------- --------- ---------
Title of Class Owner Offering Offering Offering Offering Offering (12)
- -------------- ----- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Chad M. Little (13) 264,585 264,585 42.7% 19.7% 8.4%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
James A. Layne (14) 122,917 122,917 23.4% 9.8% 6.1%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Lonnie A. Whittington (15) 122,917 122,917 23.4% 9.8% 6.1%
2231 E. Camelback, Suite 324
Phoenix, AZ 85016
Wasatch Venture Corporation (16) 221,451 221,451 29.6% 15.4% 9.6%
One South Main, Suite 1340
Salt Lake City, UT 84111
Newtek Ventures II, L.P. (17) 130,563 130,563 20.4% 9.7% 6.0%
500 Washington Street,
Suite 720
San Francisco, CA 94111
Sundance Venture Partners, L.P.(18) 169,367 169,367 24.3% 12.2% 7.1%
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004
Pickwick Group LLC (19) 58,003 58,003 9.9% 4.4% 2.9%
172 Dan's Highway
New Canaan, Conn. 06840
Glenn Gomez (20) 46,599 46,599 8.7% 3.7% 2.3%
1950 Stemmons Freeway
Suite 3054
Dallas, TX 75207
All executive officers and directors 988,797 988,797 73.6% 9.5% 46.8%
as a group (21)
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Percentages are based on the total number of
shares outstanding at September 30, 1997, plus the total number of outstanding
options, warrants or convertible notes held by each person that are exercisable
within 60 days of such date assuming completion of this offering. Shares
issuable upon exercise of outstanding options, warrants and convertible notes,
however, are not deemed outstanding for purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each stockholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such stockholder's name.
(2) Includes 41,668 shares of Series A Preferred Stock issuable upon conversion
of warrants and 20,834 shares of Series A Preferred Stock issuable upon
conversion of certain convertible notes at the option of the holder at a
conversion price of $4.80 share.
(3) Includes 22,917 shares of Series A Preferred Stock issuable upon conversion
of warrants and 10,417 shares of Series A Preferred Stock issuable upon
conversion of certain convertible notes at the option of the holder at a
conversion price of $4.80 share.
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<PAGE>
(4) Includes 41,668 shares of Series A Preferred Stock issuable upon conversion
of warrants and 20,834 shares of Series A Preferred Stock issuable upon
conversion of certain convertible notes at the option of the holder at a
conversion price of $4.80 share.
(5) Includes 6,251 shares of Series A Preferred Stock issuable upon conversion
of warrants and 4,167 shares of Series A Preferred Stock issuable upon
conversion of certain convertible notes at the option of the holder at a
conversion price of $4.80 share.
(6) Includes the shares described above in Footnote 2 for Wasatch Venture
Corporation for which Todd Stevens, a director, is an affiliate; the shares
described above in Footnote 3 for Newtek Venture Corporation for which John
Hall, a director, is an affiliate; and the shares described above in Footnote 4
for Sundance Venture Partners, L.P. for which Brian Burns, a director, is an
affiliate.
(7) Includes 13,115 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(8) Includes 7,869 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(9) Includes 13,115 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(10) Includes 1,311 shares of Series B Preferred Stock issuable upon conversion
of certain convertible notes, which notes are convertible upon the consummation
of this offering assuming an offering price of 7.625.
(11) Includes the shares described above in Footnote 7 for Wasatch Venture
Corporation for which Todd Stevens, a director, is an affiliate; the shares
described above in Footnote 8 for Newtek Ventures II, L.P. for which John Hall,
a director, is an affiliate; and the shares described above in Footnote 9 for
Sundance Venture Partners, L.P. for which Brian Burns, a director, is an
affiliate.
(12) Fully diluted percentages are based on the percentage of Common Stock held
after conversion into Common Stock of all (i) outstanding shares of Series A
Preferred Stock and shares of Series A Preferred Stock issued upon conversion,
at the option of the holders, of certain promissory notes (ii) shares of Series
B Preferred Stock issued upon conversion of certain convertible promissory notes
effective upon consummation of this offering and (iii) shares of Series B
Preferred Stock issued in the offering. The Commission's beneficial ownership
rules were not considered in calculating fully diluted percentages.
(13) Includes 10,417 shares exercisable pursuant to a warrant held by a
revocable trust created by Mr. Little's parents. Also includes Mr. Little's
right to vote 41,667 shares owned by Mr. Layne and 41,667 shares owned by Mr.
Whittington pursuant to an irrevocable proxy, which proxy will terminate on May
7, 1999. In the event that either Mr. Layne or Mr. Whittington transfers any of
the 122,917 share owned by each, Mr. Little's right to vote will not apply to
the transferred shares, but will continue to apply to up to 41,667 shares that
continue to be owned by Mr. Layne or Mr. Whittington after such transfer(s).
(14) Includes 41,667 shares for which Mr. Little is also shown as beneficial
owner due to Mr. Little's irrevocable right to vote these shares. See Footnote
13.
(15) Includes 41,667 shares for which Mr. Little is also shown as beneficial
owner due to Mr. Little's irrevocable right to vote these shares. See Footnote
13.
(16) Includes 221,451 shares of Series A Preferred Stock and Series B Preferred
Stock currently held or obtainable upon exercise of options or warrants or
conversion of promissory notes that are convertible into Common Stock within 60
days. See Footnotes 2 and 7.
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(17) Includes 130,563 shares of Common Stock, Series A Preferred Stock and
Series B Preferred Stock currently held or obtainable upon exercise of options
or warrants or conversion of promissory notes that are convertible into Common
Stock within 60 days. See Footnotes 3 and 8.
(18) Includes 169,367 shares of Series A Preferred Stock and Series B Preferred
Stock currently held or obtainable upon exercise of options or warrants or
conversion of promissory notes that are convertible into Common Stock within 60
days. See Footnotes 4 and 9.
(19) Includes 44,835 shares of Common Stock issuable upon exercise of warrants
held by Pickwick Group, LLC and 13,168 shares issuable upon exercise of warrants
held by Douglas and Susan Greenwood; Mr. Greenwood is a principal member of
Pickwick Group, LLC.
(20) Includes 8,334 shares of Common Stock that will be issuable upon exercise
of a warrant that the Company issued to Mr. Gomez on September 23, 1997.
(21) Includes the shares described above in Footnote 13 for Mr. Little (but
excluding the 83,334 shares owned by Messrs. Layne and Whittington that Mr.
Little is entitled to vote); the shares described above in Footnote 14 for Mr.
Layne; the shares described above in Footnote 15 for Mr. Whittington; the shares
described above in Footnote 16 for Wasatch Venture Corporation for which Todd
Stevens, a director, is an affiliate; the shares described above in Footnote 17
for Newtek Ventures II, L.P. for which John Hall, a director, is an affiliate;
the shares described above in Footnote 18 for Sundance Venture Partners, L.P.
for which Brian Burns, a director, is an affiliate; vested options to purchase
5,834 shares of Common Stock held by Matthew Stanton; and 2,899 shares owned by
Mike Turico and vested options to purchase 3,566 shares held by Mr. Turico.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, as adjusted to reflect the Reverse
Stock Split, the authorized capital stock of the Company will consist of
10,000,000 shares of Common Stock, $0.001 par value, 3,000,000 shares of
Preferred Stock, $0.001 par value, of which 600,000 shares have been designated
Series A Preferred Stock and 1,000,000 shares have been designated Series B
Preferred Stock. The Company's Restated Certificate of Incorporation provides
that each holder of Common Stock and Preferred Stock, other than the holders of
record of the Common Stock and the Preferred Stock immediately prior to the
filing of the Restated Certificate of Incorporation with the Delaware Secretary
of State, may, subject to the rules and regulations promulgated by the
Securities and Exchange Commission, revocably consent to receive all stockholder
reports and communications, including but not limited to all prospectuses,
quarterly and annual reports and proxy statements, by delivery of such materials
to such holder's last known mailing address or electronic mail address, at the
Company's discretion, listed on the Company's records, or by delivery of a
notice to such mailing address or electronic mailing address, at the Company's
discretion, which directs such holder to a specific Web address where such
materials can be found, read and printed.
Common Stock
As of September 30, 1997, the Company had issued and outstanding 526,397
shares of Common Stock held of record by 11 stockholders, warrants to purchase
an aggregate of 166,268 shares of Common Stock, options to purchase an aggregate
of 100,506 shares of Common Stock and 509,384 shares of Common Stock reserved
for issuance upon conversion into Common Stock of shares of Series A Preferred
Stock outstanding and issuable upon exercise of warrants to purchase preferred
stock.
The holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders and do not have
cumulative voting rights. Subject to the preferences that may be applicable to
outstanding Preferred Stock, including Series A Preferred Stock and Series B
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy". In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably (together with the holders of Series A Preferred Stock
and Series B Preferred Stock on an as-converted basis) in all assets remaining
after payment of liabilities and the liquidation preferences of any then
outstanding Preferred Stock, including Series A Preferred Stock and Series B
Preferred Stock. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of the Series A Preferred Stock and Series B Preferred Stock,
and any Preferred Stock hereafter authorized by the Board of Directors.
Series A Preferred Stock
As of September 30, 1997, the Company had issued and outstanding 330,211
shares of Series A Preferred Stock held of record by 6 stockholders and warrants
to purchase an aggregate of 122,921 shares of Series A Preferred Stock and
56,252 shares of Series A Preferred Stock reserved for issuance upon conversion
at the option of the holder of certain promissory notes. If the Registration
Statement of which this Prospectus is a part is not declared effective by the
Securities and Exchange Commission on or before January 20, 1998, such notes
shall become convertible, at the option of the holder, into shares of Series A
Preferred Stock at a conversion price of $4.80 per share. See "Certain
Transactions".
The following summary sets forth the material terms and provisions of the
Series A Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Company's Certificate of Incorporation.
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Ranking. Upon liquidation, dissolution and winding-up, proceeds are
distributed to holders of shares of Series A Preferred Stock and Series B
Preferred Stock, pro rata, based on the original issue price of such shares, and
prior to the holders of shares of Common Stock.
Dividends and Distributions. Holders of shares of Series A Preferred
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor prior and in
preference to any dividends paid to the holders of Series B Preferred Stock and
Common Stock at the rate of 9% per annum; provided, however, that in no event
shall any dividend be declared or paid with respect to the Series A Preferred
Stock until the second anniversary of the date the Company's Restated
Certificate of Incorporation is filed with the Delaware Secretary of State in
connection with consummation of this offering. See "Dividend Policy".
Voting. Holders of the Series A Preferred Stock are entitled to vote as a
class with the holders of the Common Stock and Series B Preferred Stock and in
such event are entitled to one vote for each share of Common Stock into which
the Series A Preferred Stock is convertible. Accordingly, the holders of the
Series A Preferred Stock are currently entitled to one vote per share. In
addition, the approval of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting separately as a class, shall be
required to approve the following matters: (i) any material or adverse change in
the rights, preferences or privileges of the holders of the Series A Preferred
Stock, (ii) amend or repeal any provision of, or add any provision to, the
Company's Certificate of Incorporation or Bylaws, (iii) any increase in the
number of authorized shares of Preferred Stock, or (iv) the authorization,
creation or issuance of any shares of any class or series of stock having any
preference or priority equal or superior to the Series A Preferred Stock with
respect to voting, redemption, dividends, or upon liquidation. The affirmative
vote of the holders of at least two-thirds of the Series A Preferred Stock,
voting separately as a class, will be required to approve (i) any merger,
consolidation, or corporate reorganization, or other business transaction in
which 50% or more of the voting power or all, or substantially all, of the
assets of the Company are sold, or (ii) any transaction in which the
stockholders of the Company do not own a majority of the outstanding shares of
the surviving corporation. The holders of Series A Preferred Stock do not have
cumulative voting rights. The holders of Series A Preferred Stock, voting
together as a single class, shall be entitled to elect one director. All other
directors and any vacancies shall be filled by vote of the holders of the Common
Stock and the Preferred Stock, voting together as a single class.
Conversion. Each share of Series A Preferred Stock is convertible, at the
option of each holder thereof, into one share of Common Stock, subject to
anti-dilution adjustments. Immediately upon the consummation of a firm
commitment underwritten public offering following which the Company has a market
capitalization of at least $25 million and which results in proceeds to the
Company of at least $5 million (net of underwriting discounts and commissions
and offering expenses), each share of Series A Preferred Stock shall be
converted, without further action, into one share of Common Stock, subject to
anti-dilution adjustments.
Anti-Dilution. In the event that additional shares of Common Stock or
securities exercisable or convertible into common stock are issued without
consideration or at a price less than the applicable conversion price for the
Series A Preferred Stock in effect on the date of and immediately prior to such
issue, then, subject to certain exceptions, the applicable conversion price of
the Series A Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
additional shares of Common Stock so issued would purchase at such conversion
price; and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
additional shares of Common Stock so issued.
Liquidation. In the event of a liquidation, dissolution or winding up of
the Company, holders of Series A Preferred Stock shall be entitled to receive a
liquidation preference equal to $4.80 per share of the Series A Preferred Stock
(subject to an appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares) plus
an amount equal to all declared and unpaid dividends thereon, prior to the
making of any payments to the holders of Common Stock. After such liquidation
preference and payment of the liquidation preference of the Series B Preferred
Stock, the Series A Preferred Stock shall be
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entitled to share ratably with the Common Stock and the Series B Preferred Stock
in all assets remaining on an as converted basis. If upon liquidation,
dissolution or winding up of the Company, the liquidation preferences with
respect to the Series A Preferred Stock and Series B Preferred Stock are not
paid in full, the holders of the Series A Preferred Stock and the Series B
Preferred Stock will share ratably in any distribution of the assets of the
Company in proportion to the preferential amounts to which they are entitled.
Series B Preferred Stock
The following summary sets forth the material terms and provisions of the
Series B Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series B
Preferred Stock and the Company's Certificate of Incorporation, as amended.
Ranking. Upon liquidation, dissolution and winding-up, proceeds are
distributed to holders of Series A Preferred Stock and Series B Preferred Stock,
pro rata, based on the original issue price of such shares, and prior to the
holders of shares of Common Stock.
Dividends and Distributions. Holders of shares of Series B Preferred
Stock will be entitled to receive, when, as and if declared by the Board of
Directors, a dividend or distribution equal to the dividend or distribution, if
any, declared on the number of shares of Common Stock into which such shares of
Series B Preferred Stock are convertible (without regard to the Restricted
Period, as hereinafter defined).
Voting. Holders of the Series B Preferred Stock are entitled to vote as a
class with the holders of the Common Stock and Series A Preferred Stock and in
such event are entitled to one vote for each share of Common Stock into which
the Series B Preferred Stock is convertible (without regard to the Restricted
Period). Accordingly, the holders of the Series B Preferred Stock are initially
entitled to one vote per share. In addition, the approval of the holders of a
majority of the outstanding shares of Series B Preferred Stock, voting
separately as a class, shall be required to approve the following matters: (i)
any material or adverse change in the rights, preferences or privileges of the
holders of the Series B Preferred Stock (whether by amendment to the Certificate
of Incorporation, merger, consolidation, or otherwise), (ii) any increase in the
number of authorized shares of Series B Preferred Stock, or (iii) the
authorization, creation or issuance of any shares of any class or series of
stock having any preference or priority superior to the Series B Preferred
Stock. The affirmative vote of the holders of a majority of the Series B
Preferred Stock, voting separately as a class, will be required to approve (i)
any merger, consolidation, or corporate reorganization, or other business
transaction in which 50% or more of the voting power or all, or substantially
all, of the assets of the Company are sold, or (ii) any transaction in which
Chad M. Little, James A. Layne and Lonnie Whittington cease to own at least 50%
of the shares they own on the date hereof in the aggregate; provided that no
such separate class vote shall be required if the holders of the Series B
Preferred Stock are to receive cash or marketable securities valued at an amount
at least equal to 125% of the original issue price of the Series B Preferred
Stock (subject to adjustment for certain anti-dilution events). The holders of
Series B Preferred Stock do not have cumulative voting rights.
Conversion; Restrictions on Transfer. Following the expiration of the
Restricted Period (as defined below), each share of Series B Preferred Stock
will be convertible, at the option of each holder thereof, into one share of
Common Stock, subject to certain anti-dilution adjustments. On the date 180 days
following the consummation of a Qualifying Public Offering (as defined below),
each share of Series B Preferred Stock shall be automatically converted, without
further action, into one share of Common Stock, subject to certain anti-dilution
adjustments.
The "Restricted Period" shall begin on the date of the closing of this
offering (the "Closing Date") and end on the earlier of (i) 24 months following
the Closing Date, (ii) 180 days after the consummation of a Qualifying Public
Offering, (iii) the occurrence of any of the following: (1) any merger,
consolidation, or other corporate reorganization in which the shareholders of
the Company do not own a majority of the outstanding shares of the surviving
corporation, (2) prior to the consummation by the Company of a Qualifying Public
Offering, any transaction or series of related transactions in which in excess
of 50% of the Company's voting power is transferred or in which all or
substantially all of the assets of the Company are sold, or (3) subsequent to
the consummation by the Company of a Qualifying Public Offering, the
acquisition, directly or indirectly, by any individual or entity or
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group (as such term is used in Section 13(d)(3) of the Exchange Act) of
beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act, except that such individual or entity shall be deemed to have beneficial
ownership of all shares that any such individual or entity has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of more than 25% of the aggregate outstanding voting power of capital
stock of the Company; or (iv) the date determined by the Board of Directors as
to all of the outstanding Series B Preferred Stock.
"Qualifying Public Offering" means a firm commitment underwritten public
offering following which the Company has a market capitalization of at least $30
million and which results in proceeds to the Company of at least $5 million (net
of underwriting discounts and commissions and offering expenses); provided that
the term "Qualifying Public Offering" shall not include a public offering in
which the securities issued are not freely transferable following issuance.
Anti-Dilution. In the event that additional shares of Common Stock or
securities exercisable or convertible into common stock are issued without
consideration or at a price less than the applicable conversion price for the
Series B Preferred Stock in effect on the date of and immediately prior to such
issue, then, subject to certain exceptions, the applicable conversion price of
the Series B Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
additional shares of Common Stock so issued would purchase at such conversion
price; and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
additional shares of Common Stock so issued.
Further, in the event that additional shares of Common Stock or
securities exercisable or convertible into Common Stock with a purchase price in
excess of $1 million in the aggregate are issued, within one year of the Closing
Date, at a price less than the then current conversion price for the Series
Preferred Stock, the conversion price in respect of the Series B Preferred Stock
shall be reduced to the issue price of such securities. Holders of Series B
Preferred Stock shall be entitled, upon conversion, to receive all other
distributions made in respect of the Common Stock as if such Series B Preferred
Stock had been converted on the date of such event.
Transfer Restrictions. During the Restricted Period, the Series B
Preferred Stock will not be transferable except as follows: (i) to family
members or affiliates (as such term is defined in Rule 12b-2 promulgated under
the Securities Exchange Act of 1934, as amended) of any holder of Series B
Preferred Stock, (ii) pursuant to the laws of descent and distribution, (iii) in
the event of bankruptcy or insolvency of the holder, (iv) as approved by the
Board of Directors for all Series B Preferred Stock then outstanding or (v) by
the Underwriters in connection with the initial distribution of the Series B
Preferred Stock. The Company's transfer agent will not transfer on the Company's
books shares that are not transferred in compliance with applicable transfer
restrictions. Following expiration of the Restricted Period, substantial
practical limitations on the transfer of Series B Preferred Stock will continue
to exist. See "Risk Factors - No Public Market; No Liquidity".
Liquidation. In the event of a liquidation, dissolution or winding up of
the Company, holders of Series B Preferred Stock shall be entitled to receive a
liquidation preference equal to the offering price per share of the Series B
Preferred Stock (subject to an appropriate adjustment in the event of any stock
dividend, stock split, combination or other similar recapitalization affecting
such shares) plus an amount equal to all declared and unpaid dividends thereon,
prior to the making of any payments to the holders of Common Stock. After such
liquidation preference and payment of the liquidation preference of the Series A
Preferred Stock, the Series B Preferred Stock shall be entitled to share ratably
with the Common Stock and the Series A Preferred Stock in all assets remaining
on an as converted basis. If upon liquidation, dissolution or winding up of the
Company, the liquidation preferences with respect to the Series A Preferred
Stock and Series B Preferred Stock are not paid in full, the holders of the
Series A Preferred Stock and the Series B Preferred Stock will share ratably in
any distribution of the assets of the Company in proportion to the preferential
amounts to which they are entitled.
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Options, Warrants and Convertible Notes
Upon completion of this offering, an aggregate of 105,090 shares of
Common Stock will be reserved for issuance upon exercise of outstanding options,
of which 26,799 shares were then exercisable, at exercise prices ranging from
$.60 to $2.40 per share, 90,924 shares of Common Stock will be issuable upon
exercise of outstanding warrants at an exercise price of $4.80 per share, 26,043
shares of Common Stock will be issuable upon exercise of outstanding warrants at
an exercise price of $12.00 per share, 43,050 will be issuable upon exercise of
outstanding warrants at an exercise price of $12.00 per share until 30 days
after the consummation of this offering at which point the exercise price will
be the offering price of the Series B Preferred Stock if that price is greater
than $2.00 per share, 6,251 shares of Common Stock will be issuable upon
exercise of outstanding warrants at an exercise price of $4.00 per share, 66,669
shares of Series A Preferred Stock will be issuable upon exercise of outstanding
warrants at an exercise price of $4.80 per share, 56,252 shares of Series A
Preferred Stock will be issuable upon exercise of outstanding warrants at an
exercise price of $2.00 per share, provided that if the Registration Statement
of which this Prospectus is a part is declared effective on or before January
20, 1998, the exercise price for such shares shall increase to the price per
share in this offering on the thirty-first day following the consummation of
this offering, 56,252 shares of Series A Preferred Stock will be issuable upon
conversion of certain convertible promissory notes, 35,410 shares of Series B
Preferred Stock will be issuable upon automatic conversion of convertible
promissory notes upon consummation of this offering at a conversion price of
$7.63 per share, provided that if the Registration Statement of which this
Prospectus is a part is not declared effective by the Securities and Exchange
Commission on or before January 20, 1998, such notes shall not be automatically
converted and shall become convertible, at the option of the holder, into shares
of Series A Preferred Stock at a conversion price of $4.80 per share, and 52,367
shares of Series B Preferred Stock will be issuable upon exercise of warrants
granted to the Underwriters effective upon consummation of this offering. The
options and warrants may also be exercised on a cashless basis, requiring the
Company to issue a certain number of shares of Common Stock, which is less than
the face amount of the warrants, calculated pursuant to a set formula outlined
in the options and warrants and based on the fair market value of the Common
Stock at the time of such cashless exercise. All of these warrants and
convertible notes are currently outstanding. See "Certain Transactions". Upon
consummation of this offering, the Company will not grant options and warrants
with an exercise price of less than 85% of the fair market value of the
underlying Common Stock on the date of grant. In addition, the Company will not
grant options and warrants in excess of 15% of the number of outstanding shares
of each class of its capital stock to officers, directors, employees, principal
stockholders and affiliates for the one-year period following the consummation
of this offering.
Delaware Law and Certain Charter Provisions
Excluding shares of Series B Preferred Stock issuable upon exercise of
warrants granted to the Underwriters effective upon commencement of this
offering at 110% of the public offering price, under the Certificate of
Incorporation there will be as of the closing of this offering 7,920,862
unissued and unreserved shares of Common Stock, 90,616 unissued and unreserved
shares of Series A Preferred Stock, 310,000 unissued and unreserved shares of
Series B Preferred Stock, and 1,400,000 shares of Preferred Stock which the
Board of Directors has authority to issue in series junior to the Series A and
Series B Preferred Stock, but otherwise with such rights, preferences and
restrictions as it deems appropriate in its discretion, after giving effect to
the sale of the shares offered hereby and the reservation of shares for issuance
upon exercise of outstanding warrants, conversion of convertible debt,
conversion of preferred stock and exercise of options granted pursuant to the
1995 Stock Incentive Plan. The unissued and unreserved shares may be utilized
for a variety of corporate purposes, including future private placements or
public offerings to raise additional capital and for facilitating corporation
acquisitions. Except pursuant to certain employee benefit plans described in
this Prospectus, the Company does not currently have any plans to issue
additional shares of Common Stock, Series A Preferred Stock or Series B
Preferred Stock, although the Company may be required to sell additional equity
or debt securities to satisfy its liquidity requirements. See "Risk Factors Need
for Additional Financing". One of the effects of unissued and unreserved shares
of capital stock may be to enable the Board of Directors to render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby to protect the
continuity of the Company's management. If, in the due exercise of its fiduciary
obligations, for example, the Board of
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Directors determines that a takeover proposal is not in the Company's best
interest, such shares could be issued by the Board of Directors without
stockholder approval in one or more private transactions or other transactions
that might prevent or render more difficult or costly the completion of the
takeover transaction by diluting the voting or other rights of the proposed
acquirer or insurgent stockholder group, by creating a substantial voting block
in institutional or other hands that might undertake to support the position of
the incumbent Board of Directors, or by effecting an acquisition that might
complicate or preclude the takeover.
SHARES ELIGIBLE FOR FUTURE SALE
There is no public market for the shares of Series B Preferred Stock or
the Common Stock into which it is convertible (the "Conversion Shares"), and
none is expected to develop in the foreseeable future.
Upon completion of this offering, the Company will have outstanding
526,397 shares of Common Stock and 330,211 shares of Series A Preferred Stock
and 690,000 shares of Series B Preferred Stock that are convertible into Common
Stock, provided that if the Registration Statement of which this Prospectus is a
part is not declared effective by the Securities and Exchange Commission on or
before January 20, 1998, certain convertible notes will not automatically
convert into Series B Preferred Stock upon consummation of this offering and
only 654,590 shares of Series B Preferred Stock will be outstanding. The shares
of Series B Preferred Stock will be subject to restrictions on transfer until
the earlier of (i) 24 months following the Closing Date, (ii) 180 days after the
consummation of a Qualifying Public Offering, (iii) the occurrence of any of the
following: (1) any merger, consolidation, or other corporate reorganization in
which the stockholders of the Company do not own a majority of the outstanding
shares of the surviving corporation, (2) prior to the consummation by the
Company of a Qualifying Public Offering, any transaction or series of related
transactions in which in excess of 50% of the Company's voting power is
transferred or in which all or substantially all of the assets of the Company
are sold, or (3) subsequent to the consummation by the Company of a Qualifying
Public Offering, the acquisition, directly or indirectly, by any individual or
entity or group (as such term is used in Section 13(d)(3) of the Exchange Act)
of beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act, except that such individual or entity shall be deemed to have beneficial
ownership of all shares that any such individual or entity has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), of more than 25% of the aggregate outstanding voting power of capital
stock of the Company, or (iv) the date determined by the Board of Directors as
to all of the outstanding Series B Preferred Stock (the "Restricted Period").
Following expiration of the Restricted Period, substantial practical limitations
on the transfer of Series B Preferred Stock will continue to exist. See "Risk
Factors - No Public Market; No Liquidity". The remaining 526,397 shares of
Common Stock and 330,211 shares of Series A Preferred Stock (collectively, the
"Restricted Securities") held by existing stockholders were issued and sold by
the Company in reliance on exemptions from the registration requirements of the
Securities Act. Most of the Restricted Securities will be subject to lock-up
agreements or contractual restrictions on transfer as described below. The
remaining Restricted Securities, and the Restricted Securities subject to
lock-up agreements and contractual restrictions upon the expiration of such
agreements and restrictions, may be sold in any public market that may develop
in the future only if registered or pursuant to an exemption from registration
such as Rules 144, 144(k), 144A or 701 under the Securities Act, which are
summarized below.
As of the effectiveness of this offering (the "Effective Date"),
approximately 59,101 of the Restricted Securities are eligible for sale in the
public market in reliance on Rule 144(k) under the Securities Act; however, all
of these shares are subject to the lock-up agreements described below in
"Underwriting" (the "Lock-Up Agreements") or the contractual restrictions on
transfer set forth in various agreements described below (the "Contractual
Restrictions"). Beginning 90 days after the Effective Date, approximately 28,705
additional Restricted Securities will become eligible for sale in the public
market, pursuant to Rule 144 and Rule 701 of the Securities Act; all of these
shares, however, are also subject to the Lock-Up Agreements or the Contractual
Restrictions. Upon the expiration of the Lock-Up Agreements on the earlier of
(a) 30 days following the expiration or early termination of the Restricted
Period or (b) 180 days after the consummation of a Qualifying Public Offering
(the "Lock-Up Period"), approximately 802,402 additional shares will become
eligible for sale in the public market, subject in some cases to the provision
of Rule 144, but 454,933 of these shares will remain subject to the Contractual
Restrictions. In addition, holders of approximately 328,127 shares of Restricted
Securities have the right to require the Company in certain circumstances to
register such shares for sale under the Securities Act. See "Description of
Capital Stock - Registration Rights".
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All directors, officers and certain other stockholders, who hold in the
aggregate 474,275 shares of Common Stock and 328,127 shares of Series A
Preferred Stock convertible into Common Stock, options to purchase 18,744 shares
of Common Stock, and warrants to purchase 66,337 shares of Common Stock and
112,504 shares of Series A Preferred Stock have agreed, pursuant to agreements
with the representatives of the Underwriters, that they will not, without the
prior written consent of a representative of the Underwriters, sell or otherwise
dispose of any such shares, options or warrants during Lock-Up Period. In
addition, certain stockholders are subject to contractual restrictions on
transfer pursuant to the terms of their stock-based awards under the 1995 Equity
Incentive Plan, the Restated Stockholders' Agreement dated as of July 13, 1995,
and the Co-Sale Agreement dated February 13, 1996. However, all of these shares
are subject to the Lock-Up Agreements.
In general, under Rule 144 as currently in effect, beginning 90 days
after the Effective Date, an affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Securities
for at least one year will be entitled to sell in any three-month period a
number of shares that does not exceed 1% of the then outstanding shares of the
same class. Sales pursuant to Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. A person (or person whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the 90 days immediately preceding the sale and who has beneficially owned
Restricted Securities for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits non-affiliates to
sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the Effective Date.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each
of the Underwriters named below has severally agreed to purchase from the
Company, and the Company has agreed to sell to such Underwriters, the respective
number of shares of Series B Preferred Stock set forth opposite the name of such
Underwriters.
Number of
Underwriters Shares
------------ ----------
Wit Capital Corporation
Total ----------
==========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Series B Preferred
Stock offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all shares of Series B Preferred Stock offered hereby if any such
shares are purchased.
The Underwriters propose to offer the Series B Preferred Stock to the
public at the offering price set forth on the cover page of this Prospectus.
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After the initial offering, the offering price may be reduced by the
Underwriters in connection with its initial distribution of the Series B
Preferred Stock. No reduction shall change the amount of proceeds to be received
by the Company as set forth on the cover page of this Prospectus. The
Underwriters have advised the Company that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
The minimum investment by any single purchaser in this offering shall be
the lower of 100 shares or $750. The Underwriters anticipate imposing a
suitability standard for prospective investors to participate in this offering
as follows: (1) prospective investors with (i) a minimum annual net income of
$65,000 and a minimum liquid net worth of $65,000 or, alternatively, (ii) a
minimum liquid net worth of $150,000, will not be restricted as to the amount of
shares of Series B Preferred Stock which may be purchased and (2) prospective
investors not meeting the above standard would be permitted to buy shares of
Series B Preferred Stock but only if such investor's gross annual income is at
least $30,000 and only in amounts not exceeding the lesser of (i) 7 1/2% of the
investor's liquid net worth, (ii) 10% of the investor's net worth excluding
principal residence, or (iii) 7 1/2% of the investor's annual gross income.
Certain jurisdictions may impose more restrictive standards.
Wit Capital Corporation will offer the Series B Preferred Stock on a
"first come, first served" basis subject to the foregoing suitability
requirements. Wit Capital Corporation will prioritize and allocate shares in the
same order that market orders and limit orders (at or above the offering price)
are received.
The Underwriters primarily intend to contact prospective investors by
publicizing the offering through a posting on the Underwriters' Web site and by
e-mail and other solicitation of prospective investors from selected Internet
databases. Prospective investors who so consent will receive a prospectus
through electronic delivery. The Underwriters will also contact prospective
investors through traditional selling efforts.
All directors, officers and 5% stockholders of the Company, and certain
other stockholders of the Company, who hold in the aggregate 436,010 shares of
Common Stock and 328,127 shares of Series A Preferred Stock convertible into
Common Stock, options to purchase 18,744 shares of Common Stock, and warrants to
purchase 58,003 shares of Common Stock and 112,504 shares of Series A Preferred
Stock have agreed, pursuant to agreements with the Underwriters, that they will
not, without the prior written consent of the Underwriters, sell or otherwise
dispose of any such shares, options or warrants until the expiration of 30 days
following the expiration or early termination of the Restricted Period. In
addition, certain directors, officers, and stockholders of the Company are
subject to contractual restrictions on transfer pursuant to the terms of their
stock-based awards under the 1995 Equity Incentive Plan, the Restated
Stockholders' Agreement dated as of July 13, 1995, and the Co-Sale Agreement
dated February 13, 1996.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 or contribute to payments the Underwriters may be
required to make in respect thereof. The Company has granted Wit Capital
Corporation and any other managing underwriter warrants to purchase the number
of shares of Series B Preferred Stock equal to 8% of the shares of Series B
Preferred Stock distributed to the public in this offering or on a cashless
basis. The warrants are exercisable, in whole or in part, until the fifth
anniversary of the effective date of this offering at an exercise price equal to
110% of the per share price in this offering. The exercise price and the number
of shares of Series B Preferred Stock issuable upon exercise of the warrants
may, under certain circumstances, be subject to adjustment pursuant to
anti-dilution provisions. The warrants may not be exercised, sold, transferred
or otherwise disposed of for the later of a period of one year following the
consummation of this offering, or the Restricted Period, provided that the
warrants may not be sold, transferred or otherwise disposed of, except to
officers of the Underwriters who are also shareholders of the Underwriters.
During the period of seven years following the Effective Date, warrant holders
are entitled to "piggyback registration" of warrants, the securities underlying
such warrants, and any other securities of the Company held by such warrant
holders at the time of registration.
To date, Wit Capital Corporation has been a syndicate member in three
public equity offerings. These offerings occurred from October 1997 through
December 1997, and did not involve preferred stock. Wit Capital Corporation has
never served as a managing underwriter in a public equity offering. The limited
experience of the Underwriters may adversely affect the proposed offering of the
Series B Preferred Stock offered hereby.
Prior to this offering, there has been no public market for any class or
series of capital stock of the Company. The offering price for the Series B
Preferred Stock will be determined through negotiations between the Company and
the Underwriters, and should not be regarded as an indication of any future
market price of the Series B Preferred Stock or Common Stock. Among the factors
to be considered in determining the initial offering price for the Series B
Preferred Stock are prevailing market conditions, the history and prospects of
the Company and its industry in general, market valuations of other comparable
companies, estimates of the business and earnings potential of the Company, the
present state of the Company's development, the lack of liquidity of the Series
B Preferred Stock, risks associated with an investment in the Company and other
factors deemed relevant.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of the Company's Certificate of Incorporation provides that
the Company shall indemnify directors, officers, and their legal representatives
to the fullest extent permitted by the Delaware General Corporate Law ("DGCL").
The DGCL contains an extensive indemnification provision which permits a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation
85
<PAGE>
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. In
suits by or in the right of a corporation, only expenses and not judgments,
fines, and amounts paid in settlement may be indemnified against. In addition,
if the director or officer has been adjudged to be liable to the corporation in
such a suit, indemnification of expenses must be approved by a court.
Article VIII of the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty. However, this
provision does not eliminate or limit the liability of a director for breach of
the director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for the payment of dividends or distributions or the
redemption or purchase of the Company's shares of stock in violation of the
DGCL, or for any transaction from which the director derives an improper
personal benefit. This provision does not affect any liability of a director or
officer under the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
LEGAL MATTERS
The validity of the issuance of the shares of Series B Preferred Stock
offered by the Company will be passed upon by Osborn Maledon, P.A., Phoenix,
Arizona. Schulte Roth & Zabel LLP, New York, New York, is acting as counsel for
the Underwriters in connection with certain legal matters relating to the shares
of Series B Preferred Stock offered hereby.
EXPERTS
The financial statements of Sandbox Entertainment Corporation at
December 31, 1996, and for each of the two years in the period ended December
31, 1996, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon which contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going concern as
described in Note 12 to the financial statements appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Series B Preferred
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which have been
omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit, each such statement being qualified in all respects by such reference.
For
86
<PAGE>
further information with respect to the Company and the Series B Preferred Stock
offered hereby, reference is made to the Registration Statement and the exhibits
and schedules thereto. Copies of the Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, at the offices of the
Commission, or obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company is
also required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"). The Commission maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. This Prospectus is available on the Underwriters' Web site at
http://www.witcapital.com. Information contained in the Company's Web sites
shall not be deemed a part of this Prospectus.
87
<PAGE>
Index to Financial Statements
Page
Report of Ernst & Young LLP, Independent Auditors...........................F-2
Audited Financial Statements
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)...F-3
Statements of Operations for the years ended December 31, 1995 and 1996
and the nine-month periods ended September 30, 1996 and 1997
(unaudited)............................................................F-4
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1995 and 1996 and the nine-month period ended September 30, 1997
(unaudited)............................................................F-5
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the nine-month periods ended September 30, 1996 and 1997
(unaudited)............................................................F-6
Notes to Financial Statements...............................................F-7
F-1
<PAGE>
Report of Ernst & Young LLP Independent Auditors
The Board of Directors and Stockholders
Sandbox Entertainment Corporation
We have audited the accompanying balance sheet of Sandbox Entertainment
Corporation as of December 31, 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of Sandbox Entertainment Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sandbox Entertainment
Corporation at December 31, 1996, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company is incurring
operating losses as it moves from early stage toward fuller scale deployment of
its technologies. The operating losses have created a net capital deficiency
which requires that the Company obtain additional financial resources to meet
its business objectives and such committed financing is not yet in place. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. Management's plans as to these matters are also discussed in
Note 12. The financial statements do not include any adjustment that could
result from the outcome of this uncertainty.
Phoenix, Arizona
March 14, 1997, except for Notes 11 and 13,
as to which the date is
December ___, 1997 Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts described in Note 13 to the financial
statements.
Phoenix, Arizona
December 12, 1997 /s/ Ernst & Young LLP
F-2
<PAGE>
Sandbox Entertainment Corporation
Balance Sheets
<TABLE>
<CAPTION>
September 30
December 31 1997
1996 (unaudited)
--------------------- ------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 20,519 $ 311,981
Accounts receivable, less allowance for doubtful accounts of $1,355 at
December 31, 1996 and $0 at September 30, 1997 215,025 172,743
Receivables from stockholders 251,095 -
Prepaid expenses and other current assets 11,539 -
--------------------- ------------------------
Total current assets 498,178 484,724
Property and equipment, net 222,099 820,708
Other assets 29,878 152,008
===================== ========================
Total assets $ 750,155 $ 1,457,440
===================== ========================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to a bank $ - $ 500,000
Accounts payable and accrued expenses 165,244 389,723
Unearned income - 89,844
Current portion of long-term debt and capital lease obligations 132,784 820,239
--------------------- ------------------------
Total current liabilities 298,028 1,799,806
Note payable to a bank 175,000 -
Long-term debt, including related parties, less current portion 152,221 620,410
Capital lease obligations, less current portion 188,640 636,482
Commitments and Contingencies - -
Stockholders' equity (deficit):
Series A Convertible Preferred Stock, par value $.001 per share; 600,000
shares authorized, 328,127 and 330,211 shares issued and outstanding at
December 31, 1996 and September 30, 1997, respectively, at liquidation
value
1,575,000 1,585,000
Common Stock, par value $.001 per share; 10,000,000 shares authorized,
510,481 and 526,397 shares issued and outstanding at December 31, 1996
and September 30, 1997, respectively 510 526
Paid-in capital 305,283 381,108
Accumulated deficit (1,944,527) (3,565,892)
--------------------- ------------------------
Total stockholders' equity (deficit) (63,734) (1,599,258)
===================== ========================
Total liabilities and stockholders' equity (deficit) $ 750,155 $ 1,457,440
===================== ========================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Sandbox Entertainment Corporation
Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30
Year Ended December 31 1996 1997
1995 1996 (unaudited) (unaudited)
-------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Internet revenues $ -- $ 241,322 $ 80,512 $ 171,319
Non-Internet revenues 462,417 154,845 150,751 --
--------------- ---------------- --------------- ----------------
Total revenues 462,417 396,167 231,263 171,319
Costs and expenses:
Production and engineering 594,219 986,593 760,908 786,017
Sales and marketing 130,760 505,954 347,438 502,655
General and administrative 223,676 304,897 222,882 358,025
--------------- ---------------- --------------- ----------------
Total costs and expenses 948,655 1,797,444 1,331,228 1,646,697
--------------- ---------------- --------------- ----------------
Operating loss (486,238) (1,401,277) (1,099,965) (1,475,378)
Other income (expense):
Interest expense (25,759) (76,760) (43,383) (147,621)
Other 4,907 528 94 1,634
--------------- ---------------- --------------- ----------------
Net loss $ (507,090) $ (1,477,509) $ (1,143,254) $ (1,621,365)
=============== ================ =============== ================
Loss per common share $ (0.69) $ (1.86) $ (1.45) $ (1.96)
=============== ================ =============== ================
Shares used in computation 732,229 794,570 787,117 827,378
=============== ================ =============== ================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Sandbox Entertainment Corporation
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Convertible Retained
Preferred Stock Common Stock Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 - $ - 416,668 $ 416 $ 11,849 $ 40,072 $ 52,337
Issuance of common stock - - 8,504 8 183,664 - 183,672
Receipt of stock subscription - - - - 100,008 - 100,008
Paid-in capital-warrants issued - - - - 476 - 476
Net loss - - - - - (507,090) (507,090)
------- ---------- ------- -------- -------- ----------- -----------
Balance at December 31, 1995 - - 425,172 424 295,997 (467,018) (170,597)
Issuance of Series A Preferred Stock 328,127 1,575,000 - - - - 1,575,000
Exercise of stock options - - 12,789 13 7,659 - 7,672
Paid-in capital-warrants issued - - - - 500 - 500
Equity based compensation - - - - 1,200 - 1,200
Other (See Note 7) - - 72,520 73 (73) - -
Net loss - - - - - (1,477,509) (1,477,509)
------- ---------- ------- -------- -------- ----------- -----------
Balance at December 31, 1996 328,127 1,575,000 510,481 510 305,283 (1,944,527) (63,734)
Issuance of Series A Preferred Stock
(unaudited) 2,084 10,000 - - - - 10,000
Exercise of stock options (unaudited) - - 15,916 16 2,645 - 2,661
Paid-in-capital-warrants issued
(unaudited) - - - - 72,700 - 72,700
Equity-based compensation
(unaudited) - - - - 480 - 480
Net loss (unaudited) - - - - - (1,621,365) (1,621,365)
======= ========== ======= ======== ======== =========== ===========
Balance at September 30, 1997
(unaudited) 330,211 $1,585,000 526,397 $ 526 $381,108 $(3,565,892) $(1,599,258)
======= ========== ======= ======== ======== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
Sandbox Entertainment Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30
Year Ended December 31 1996 1997
1995 1996 (unaudited) (unaudited)
------------------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(507,090) $(1,477,509) $(1,143,254) $(1,621,365)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 58,321 96,046 73,230 125,142
Loss on disposal of property and equipment 4,322 15,657 - -
Provision (benefit) for doubtful accounts 5,130 1,355 - (1,355)
Equity-based expenses 476 1,700 272 25,130
Changes in operating assets and liabilities:
Accounts receivable 54,465 (197,430) (25,999) 43,637
Prepaid expenses and other assets 6,877 5,835 12,627 (107,990)
Unearned income - - - 89,844
Accounts payable and accrued expenses 28,896 58,846 (1,459) 224,479
--------- ----------- ----------- -----------
Net cash used by operating activities (348,603) (1,495,500) (1,084,583) (1,222,478)
Cash flows from investing activities
Purchases of property and equipment (9,128) (427) (427) -
--------- ----------- ----------- -----------
Net cash used by investing activities (9,128) (427) (427) -
Cash flows from financing activities
Borrowings from bank - 175,000 400,000 325,000
Borrowings from others, including stockholders, net
150,323 - - 1,030,000
Principal payments under capital lease obligations
and notes
(28,133) (63,880) (43,783) (105,318)
Cash proceeds from issuance of stock 183,672 1,331,577 981,577 264,258
Cash proceeds from stock subscriptions 100,008 - - -
--------- ----------- ----------- -----------
Net cash provided by financing activities 405,870 1,442,697 1,337,794 1,513,940
--------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 48,139 (53,230) 252,784 291,462
Cash and cash equivalents at beginning of period 25,610 73,749 73,749 20,519
--------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 73,749 $ 20,519 $ 326,533 $ 311,981
========= =========== =========== ===========
Supplemental cash flow information
Assets acquired under capital lease obligations $ 139,618 $ 115,365 $ 115,365 $ 723,555
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
1. Nature of Operations and Summary of Significant Accounting Policies
Business and Organization
Sandbox Entertainment Corporation (the Company) is a Delaware corporation
originally formed as an Arizona corporation on February 25, 1992 and
reincorporated in Delaware (by migratory merger) on April 25, 1996. The Company
is a software development company that intends to use its proprietary technology
to become a leading provider of games and simulations on the World Wide Web.
Interim Financial Statements
The interim financial statements as of September 30, 1997 and for the nine month
periods ended September 30, and September 30, 1997 are unaudited, have been
prepared from the books and records of the Company and, in the opinion of
management, contain all adjustments (consisting only of normal recurring
accruals) necessary for such statements to be in accordance with generally
accepted accounting principles. Results for the nine months ended September 30,
1997 are not necessarily indicative of the results for the entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
Receivables from Stockholders
Receivables from stockholders include a $250,000 subscription for 52,084 shares
of Series A Preferred Stock and a $1,095 subscription for 1,827 shares of Common
Stock through the exercise of stock options. These subscriptions were collected
in January 1997.
Property and Equipment
Property and equipment are stated at cost and are depreciated over the estimated
useful lives of the assets (three to seven years) using the straight-line
method.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
Revenue Recognition
Internet revenues are derived from the sale of advertising space in the
Company's games and simulations. Such revenues are recognized in the period the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of a minimum number of "impressions",
or times that any advertisement is viewed by players of the Company's games. To
the extent minimum guaranteed impressions are not met, the Company defers
recognition of the corresponding revenue.
The Company exchanges advertising space on its Web sites for reciprocal
advertising space in other media publications or Web sites ("reciprocal
advertising") or for access to editorial or software content or other goods and
services ("exchanges") utilized in its games and simulations. While management
believes such arrangements are of substantial value to the Company, no revenue
or expense is recorded with respect to reciprocal advertising
F-7
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
arrangements. Revenue and expense is, or may be, recorded for exchanges only to
the extent that the fair value of such transactions is objectively measurable.
No revenue or expense has been recorded with respect to exchange arrangements.
Prior to 1997 the Company had recorded revenues and expenses for its estimates
of such amounts and such amounts have been reclassified to conform with the 1997
presentation.
In 1996 and prior years, the Company generated non-Internet revenues from the
production of traditional and interactive marketing programs for client
companies. Revenue from the related services was recognized as the services were
performed.
Product Development
Costs incurred in the development of the Company's games, simulations and Web
sites are charged to expense as incurred.
Advertising and Public Relations Costs
Advertising and public relations costs are expensed as incurred. Advertising and
public relations expense was approximately $24,000 and $146,000 for the years
ended December 31, 1995 and 1996, respectively, and $113,000 and $45,000 for the
nine months ended September 30, 1996 and September 30, 1997, respectively.
Loss Per Common Share
Loss per common share is calculated using weighted average common shares
outstanding and equivalents. Common share equivalents have been excluded as
antidilutive, except that, in accordance with Staff Accounting Bulletin No. 83
and staff positions, common and equivalent shares, warrants and options issued
within one year of the initial filing of the proposed offering at amounts less
than the expected offering price (see Note 13) are deemed to have been issued in
contemplation of the offering and have been treated as outstanding for all
periods presented using the treasury stock method.
On December 31, 1997, the Company must adopt Statement of Financial Accounting
Statements No. 128, "Earnings Per Share" (SFAS No. 128) which changes the
methodology for computing earnings per share. Due to the Company's losses, SFAS
No. 128 is not expected to have a material impact on the Company's earnings per
share.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. Like Kind Exchanges
The Company has entered into several strategic relationships including
Co-Branding and Marketing Agreements with CNN in which it has exchanged
advertising space on a Company Web site for reciprocal advertising in other
on-line and traditional media publications or on other Web sites or for access
to editorial or software content utilized in its games and simulations.
Management believes that such arrangements have been instrumental in developing
user awareness of the Company's games and simulations and are in large part
responsible for the growing number of participants presently accessing the
Company's Web sites. In addition, such arrangements have enabled the Company to
conserve its cash resources through the exchange of available advertising space
on its Web sites for advertising and editorial content and software tools that
otherwise may have required cash resources. While the Company believes that such
arrangements are of considerable importance to the growth of
F-8
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
the business and have assisted the Company in developing a user base that
management believes will be instrumental in obtaining increasingly greater
amounts of cash revenues in the future, due to the difficulty in objectively
measuring the value of such relationships, no accounting recognition is given in
the financial statements for such arrangements. (See Note 1).
3. Property and Equipment
Property and equipment consists of the following:
September 30
December 31 1997
1996 (unaudited)
-------------- ---------------
Computer equipment $ 349,929 $ 1,073,483
Furniture and fixtures 30,891 30,891
Leasehold improvements 8,803 8,803
-------------- ---------------
389,623 1,113,177
Less accumulated depreciation
and amortization 167,524 292,469
============== ===============
$ 222,099 $ 820,708
============== ===============
Substantially all property and equipment is held under capital lease agreements.
Amortization of leased assets is included in depreciation and amortization
expense.
4. Line of Credit
At December 31, 1996 and September 30, 1997, the Company has borrowed $175,000
and $500,000, respectively, from a bank on a $500,000 revolving line of credit
collateralized by substantially all of the Company's assets. Accrued interest
payments are due monthly on the line of credit at the bank's prime rate plus
1.50 percent per annum (9.75 percent at December 31, 1996 and 10.00 percent at
September 30, 1997). The revolving line of credit is subject to renewal on March
5, 1998. The Company had $225,000 and $-0- available under the line of credit at
December 31, 1996 and September 30, 1997, respectively. The Company's borrowing
agreement prohibits payment of cash dividends.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30
December 31 1997
1996 (unaudited)
----------- ------------
<S> <C> <C>
Subordinated Notes, $1,030,000 principal, net (See below) $ - $ 984,999
Note payable to an individual, interest at prime rate (8.25 percent at
December 31, 1996 and 8.50 percent at September 30, 1997), quarterly
payments of $7,271 plus interest beginning September 30, 1997 116,328 109,058
Notes payable to various individuals, interest at 10.00 percent, due
October 28, 1997 39,667 39,917
Stockholder loans, interest at 8.00 percent through 10.00 percent,
unspecified repayment terms not sooner than September 30, 1998 50,434 50,434
----------- ------------
206,429 1,184,408
Less current portion 54,208 563,998
----------- ------------
$ 152,221 $ 620,410
=========== ============
</TABLE>
F-9
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
Convertible Subordinated Notes in the principal amount of $270,000 will
automatically convert into Series B Preferred Stock upon completion of the
proposed offering described in Note 13. The pro forma effect of this conversion,
had it occurred on the first day of the year ended December 31, 1996 or the
nine-month period ended September 30, 1997, is not material to the Company's
operating results.
Future maturities of long-term debt consist of the following:
Year Ending Period Ending
December 31 September 30
------------------------------- ----------------------------------
1997 $ 54,208 1998 $ 563,998
1998 29,082 1999 519,082
1999 29,082 2000 29,082
2000 29,082 2001 21,812
2001 14,541 2002 --
Thereafter 50,434 Thereafter 50,434
------------- -------------
$ 206,429 $ 1,184,408
============= =============
In March 1997, the Company obtained a $500,000 commitment for lease financing of
property, plant and equipment acquisition. In connection with obtaining this
commitment, the Company issued warrants to purchase 12,501 shares of Series A
Preferred Stock at $4.80 per share. 2,084 of the warrants were subsequently
exercised. On September 27, 1997, the Company received an increase in this
commitment to $650,000 and issued 6,251 warrants at an exercise price of $4.00
per share, provided that on or after the 30th day following the offering
described in Note 13, the exercise price will increase to the offering price of
the Series B Preferred Stock in this offering if such offering price is greater
than $12.00.
In May 1997, certain Series A Preferred stockholders loaned the Company
$270,000. Each stockholder received a one year convertible subordinated
promissory note bearing 10% interest that converts into shares of Series A
Preferred Stock at the option of the holder at a conversion price equal to $4.80
per share. In connection with these loans, the stockholders also received
warrants to purchase 56,252 shares of Series A Preferred Stock at an exercise
price of $4.80 per share. These warrants are exercisable at any time during the
term of the warrants and expire in May 2004. The fair value of the warrants have
been recorded as a debt discount in the September 30, 1997 Financial Statements.
In July 1997, certain Series A Preferred stockholders loaned the Company an
additional $270,000. Each stockholder received a one year convertible
subordinated promissory note bearing 10% interest that automatically converts
into shares of Series B Preferred Stock upon the consummation of the proposed
offering described in Note 13 at a conversion price equal to the public offering
price of the Series B Preferred Stock if the offering is consummated on or
before January 20, 1998. In connection with these loans, the stockholders also
received warrants to purchase 56,252 shares of Series A Preferred Stock at an
exercise price of $2.00 per share, which exercise price will increase to the
public offering price of the Series B Preferred Stock if the effective date of
this offering is on or before January 20, 1998; provided, however, that the
warrants may be exercised within 30 days following the consummation of the
offering at $2.00 per share. These warrants are exercisable at any time during
the term of the warrants and expire in July 2004. The fair value of the warrants
have been recorded as a debt discount in the September 30, 1997 Financial
Statements.
In August and September 1997, the Company borrowed $490,000 from various
"accredited investors" (as defined in Rule 501 of Regulation D as promulgated by
the SEC under the Act). These borrowings bear interest at 10% and are due upon
the earlier of the successful completion of a proposed public offering or two
years. In connection
F-10
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
with these loans, the lenders received warrants to purchase 43,050 shares of
Common Stock at an exercise price of $12.00 per share, provided, however, that
the warrants may be exercised on or after 30 days following the consummation of
the public offering at the price of the Series B Preferred Stock. The warrants
expire in August 2000 and are exercisable immediately.
6. Leases
The Company leases office facilities and equipment under capital and operating
leases that expire in various years through November 2000. Future minimum annual
payments under capital leases (including leases with related parties) and
noncancellable operating leases with initial terms of one year or more consisted
of the following at December 31, 1996:
Capital Leases Operating Leases
--------------- ----------------
1997 $117,739 $ 99,714
1998 100,937 105,905
1999 52,761 112,085
2000 15,932 102,806
2001 - -
Thereafter 49,213 -
--------------- ----------------
Total minimum lease payments 336,582 $420,510
================
Amounts representing interest 69,366
---------------
Present value of net minimum lease payments
(including current portion of $78,576) $267,216
===============
Total rent expense for all operating leases amounted to approximately $36,000
and $104,000 and for the years ended December 31, 1995 and 1996, respectively,
and $73,000 and $81,000 for the nine months ended September 30, 1996 and 1997,
respectively.
7. Capital Shares
Each share of Series A Preferred Stock is voting and is convertible, at the
option of the holder, into one share of Common Stock. The Series A Preferred
Stock is entitled to a 9 percent noncumulative dividend prior to payment of any
dividends on the Common Stock. All Series A Preferred Stock will automatically
be converted upon a public offering of common stock that meets certain minimum
price, market value and proceeds criteria.
Upon the liquidation, dissolution, or winding up of the Company, the Series A
Preferred Stockholders are entitled to receive, prior to and in preference to
any distribution made to other stockholders, a liquidation preference equal to
$4.80 per share of Series A Preferred Stock. Should the net assets of the
Company exceed this amount, the Series A Preferred Stockholders are also
entitled to receive a pro rata amount of the remaining distribution.
F-11
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
As of July 13, 1995, February 12, 1996, and April 25, 1996, the Company's Board
of Directors approved stock splits of twenty-five-for-one, two-for-one, and
five-for-one, respectively, with respect to the Common Stock. All share amounts
have been retroactively adjusted to reflect these splits (See Note 13).
During 1996, the Company issued 72,520 additional shares of common stock to
certain stockholders based upon a revaluation of the Company at the time of the
initial issuance of the Series A Preferred Stock and executed unilaterally by
the Company, on a one-time basis.
8. Stock Options and Warrants
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), in accounting for its
employee stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Standards No. 123,
Accounting and Disclosure of Stock-Based Compensation (SFAS No. 123), requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, no compensation expense is recognized on
option grants to the extent the exercise price of the Company's employee stock
options equals or exceeds the fair market value of the underlying stock on the
date of the grant.
During 1995, the Board of Directors authorized the implementation of an equity
incentive plan for certain employees, directors, consultants and independent
contractors. The Company has reserved 187,129 shares for future issuance under
the plan as of September 30, 1997. Under the plan, options to purchase stock of
the Company will be granted to participants at an exercise price to be
determined by the Board. Incentive stock options granted under the plan may be
granted to employees only and may not have an exercise price less than the fair
market value of the stock as of the date of the grant. Incentive stock options
have a maximum term of ten years, or in some circumstances, five years.
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using a minimum value pricing model with the
following assumptions for 1995 and 1996: risk-free interest rate of 5 percent,
dividend yield of 0 percent and an expected life of the option from three to
seven years. The pro forma effect of SFAS No. 123 was not material for the years
ended December 31, 1995 or 1996 or the nine months ended September 30, 1996 and
1997. However, the pro forma effects of applying SFAS No. 123 for these periods
are not likely to be representative of the effects on reported net loss for
future years. The weighted average fair values of options granted in 1995 and
1996 were $0.00 and $0.02, respectively, with weighted average remaining
contractual lives of approximately nine years and ten years, respectively.
Option activity under the equity incentive plan is as follows:
Weighted Average
Exercise Price
Shares
---------- ----------------
Outstanding at January 1, 1995 - $ -
Granted 57,979 .01
---------- ----------------
Outstanding at December 31, 1995 57,979 .01
Granted 32,257 .60
Exercised (12,789) .60
---------- ----------------
Outstanding at December 31,1996 77,447 .16
Granted 85,360 .93
Canceled (46,385) .01
Exercised (15,916) .17
---------- ----------------
F-12
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
Outstanding at September 30, 1997 100,506 $.88
========== ================
Exercisable at December 31, 1996 13,596 $.01
========== ================
Exercisable at September 30, 1997 26,799 $1.03
========== ================
At December 31, 1996 and September 30, 1997, respectively, warrants for the
purchase of 90,087 and 166,268 shares of Common Stock are outstanding. The
warrants are exercisable at prices ranging from $4.00 to $12.00 per share and
may be exercised on a net basis. Certain of these warrants were issued in
conjunction with loans in 1995 and subsequent renewals and expire ten years from
the date of issuance. The Company has also issued warrants for its Series A (See
Note 5). The fair value of the warrants issued has been recorded as a debt
discount which is being amortized to expense over the repayment term.
9. Benefit Plans
The Company has a 401(k) Retirement Savings Plan (Plan) covering substantially
all employees. Under terms of the Plan, employees may make voluntary
contributions, subject to Internal Revenue Service limitations. The Company may
make discretionary annual contributions to the Plan, or may be required to make
payments to the Plan to meet ERISA requirements. The Company made compliance
payments of $2,000 and $14,000 for Plan years ending December 31, 1995 and 1996.
10. Income Taxes
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $1,950,000 for U.S. federal and state income tax purposes that
expire in years 2000 through 2010. A valuation allowance of $791,000 has been
recognized at December 31, 1996 to offset a portion of the Company's deferred
tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax items as of December 31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards $ 780,000
Valuation allowances 1,000
Nondeductible liabilities 20,000
Other 1,000
-----------
Total deferred tax assets 802,000
Valuation allowance for deferred tax assets (791,000)
-----------
Net deferred taxes 11,000
Deferred tax liabilities:
Tax in excess of book depreciation (11,000)
===========
Net deferred taxes $ -
===========
The amount of the Company's loss carryforwards ultimately available to offset
future taxable income in any one year will be subjected to annual limitations as
a result of changes in ownership of the Company's common stock through equity
offerings including offerings that have recently occurred.
F-13
<PAGE>
Notes to Financial Statements
December 31, 1996
(Information as of September 30, 1997 and for the periods ended
September 30, 1996 and 1997 is unaudited.)
11. Contingencies
The Company, in the ordinary course of business, may be a party to litigation
and claims. The ultimate resolution and financial liability to the Company from
such matters cannot be estimated with certainty. However, based on its
examination of such matters, the Company believes that the ultimate resolution
will not have a material effect on its operations or financial position.
The Company is not currently a party to any legal proceedings that management
believes the adverse outcome of which, individually or in the aggregate, would
have a material adverse effect on the Company's financial position or results of
operations. On July 1, 1997, counsel for the Company received written
notification from plaintiffs' counsel in Kolbe, et al. v. Humanagement, Inc. et
al., that plaintiffs intend to add the Company as a defendant in the lawsuit, in
which a preliminary injunction against defendants has been granted regarding,
among other things, claims for contributory copyright infringement. The Company
entered into an agreement dated November 25, 1997 with plaintiffs to settle this
matter, pursuant to which the Company issued a promissory note to plaintiffs in
the principal amount of $30,000 due 90 days after its issuance, and each party
agreed to release any and all claims it may have against the other upon payment
of the note in full by the Company.
12. Going Concern
The Company is incurring operating losses as it moves from early stage to fuller
scale deployment of its technologies. The operating losses have created a net
capital deficiency which requires that the Company obtain additional financial
resources to meet its business objectives, and such committed financing is not
yet in place. These conditions raise substantial doubt about the ability of the
Company to continue as a going concern.
As discussed in Note 5, the Company has raised an additional $1,030,000 in debt
financing from certain stockholders and related parties subsequent to December
31, 1996 to fund its operations. The Company also plans to file a Registration
Statement with the Securities and Exchange Commission which management expects
will provide an additional $5 million in equity to the Company, if declared
effective. Management believes that the proceeds from the proposed offering,
along with the Company's bank and equipment leasing lines of credit, will
provide sufficient resources for the Company to continue its operations.
13. Subsequent Events
In September 1997, the Company's Board of Directors authorized the Company to
register up to 725,000 shares of Series B Preferred Stock with the Securities
and Exchange Commission on Form SB-2. In connection with the proposed offering,
the Board also authorized a one-for-six reverse split of the Company's Common
Stock and Series A Convertible Preferred Stock to be effective upon the
effective date of the offering on __________ __, 199_. All share and per share
amounts in the accompanying financial statements have been adjusted to reflect
the split.
Certain of the Company's Series A Preferred Stock warrants contain a provision
whereby the exercise price is at a fixed dollar amount for the 30 day period
following a qualifying public offering (See Note 5). The reverse stock split
effected by the Company on December __, 199_ will create a new measurement date
for valuing such warrants. Upon consummation of the reverse stock split, the
Company will revalue any outstanding warrants and amortize the resulting amount
over the remaining period of benefit.
On November 26, 1997, the Company obtained a bridge loan of $36,166 from an
officer. The note bears interest at 12% through December 10, 1997, 18% from
December 10, 1997 to January 1, 1998, and 25% thereafter until paid. The note is
due 30 days after written demand from the holder.
On December 12, 1997, the Company received $150,000 in proceeds from a bridge
loan of $172,528 pursuant to a discount note with no stated interest rate, which
is due on or before March 12, 1998.
F-14
<PAGE>
APPENDIX A
SCRIPT OF ROAD SHOW AUDIO VIDEO PRESENTATION OF THE COMPANY TO BE DISPLAYED
ON-LINE BY HTML LINK TO THE UNDERWRITERS' WEB SITE
At the beginning of the script, there will be a box labeled "Road Show
Audio Video Presentation" for viewers to click through to the video road show.
Visual:
Text on screen: This audio video presentation is part of the Company's
Prospectus dated December , 1997. This presentation is made in conjunction with
such Prospectus, is qualified in its entirety by such Prospectus and should be
viewed in conjunction with such Prospectus. This presentation is neither an
offer to sell nor a solicitation of an offer to buy securities of the Company
and such offers may only be made by means of the Prospectus. Prospective
investors should carefully consider the information set forth under the heading
"Risk Factors" in the body of this Prospectus.
Pictorial chart of the Company depicting Chad M. Little, the Company's
Chief Executive Officer, Lonnie A. Whittington, Vice President of Creative
Direction, James A. Layne, Vice President of Marketing, Mark Gorchoff, Chief
Financial Officer, Michael S. Turico, Vice President of Engineering, and Matthew
Stanton, Vice President of Sales. Upon clicking on any of the executive
officers, the viewer will see such officers seated at a conference table in the
Company's offices with background promotional pictures of the Company's
co-branded products, CNNfn Final Bell and CNN/SI SportSim. The viewer will then
hear such officer's presentation, the text of which is set forth below.
Text on screen: Welcome to the Sandbox Road Show. Click on any of the
Company's executive officers to see and hear a presentation of the Company from
such officer.
Chad M. Little's Presentation: I'm Chad Little, the Chief Executive
Officer. In 1991 Lonnie Whittington, Jim Layne and I started Sandbox with the
goal of using technology to pioneer more effective ways of communicating with
consumers. As the business grew in parallel with the acceptance of the Internet,
we were presented with the opportunity to accomplish our original goal by
developing on-line games and simulations. Our initial game, Cyberhunt, was the
first corporate-sponsored game on the Internet. It was a success; and not only
was it fun and highly educational, but advertisers paid for the development and
hosting of the on-line game. This is a theme that's become a common thread
throughout our development process.
The addition of Mike Turico and his engineering group in 1995 allowed us
to expand our games; focus on improving and producing new software for our Road
Trip series. With our enhanced technological capabilities in place Mike, Lonnie
and Jim focused their respective technological, creative and marketing teams
toward producing Final Bell. This was the first Sandbox simulation driven by
external data to produce creative integration opportunities for our advertisers.
These opportunities have allowed us to develop a more robust user experience,
which in turn further builds demand for our products. We believe that the
successful launches of Final Bell and, most recently, SportSim demonstrate the
potential future growth of our business.
Concurrently, we understood the importance of brand reliance and searched
for a powerful co-marketing partner both on- and off-line to help promote our
simulations. We found such a partner in CNNfn and CNN/SI. To continue our sales
momentum we brought on Matt Stanton as Vice President of Sales. To fill out our
management team, we brought on Mark Gorchoff as Sandbox's CFO.
We've learned a tremendous amount since we launched that first game. Our
participants are looking for our products to be fun, highly interactive,
educational if possible, and helpful in creating a sense of competition and
community. For our advertisers, we have to give them more than just exposure for
their products and services. We have to provide ways in which they can integrate
their messages into the content which in turn will create a more lasting
impression on their customers. For ourselves, we need to continually focus on
creating scaleable products
A-1
<PAGE>
that require less overhead in order to reach more people than our competitors.
To accomplish all of this, we recognize the need to keep our working environment
productive and fun. After all, this is the interactive entertainment business.
We recognize that our success depends on accomplishing four objectives.
We must:
o One, maintain creative excellence
o Two, aggressively pursue high-quality co-marketing and
development partners
o Three, continue to develop scalable products to handle
continued growth and
o Four, increase the visibility of our sales force efforts,
while we maintain fiscal responsibility
It's the people who make up the company. I believe we not only have a
top-notch management staff, but a team of employees that provide expertise in
marketing, sales, copy, graphics, engineering, creative and finance. Assembling
the best team is integral to reaching our goals and our vision of providing the
best possible products for our customers to interact with and the highest
quality interaction with our sponsors.
I hope you will view the presentation of each Sandbox executive officer
to get their perspective of the Company and a complete picture of the Sandbox
management team. Remember, these presentations are a part of, and not a
substitute for, the Company's Prospectus, which you should read carefully before
investing money.
You have my personal invitation to come see what we've created. I
encourage you to take a tour of SportSim or Final Bell, and consider becoming a
regular part of our community.
We would love to have you as an investor, a participant in the Sandbox
and a member of the Sandbox community.
Thank You.
Lonnie A. Whittington's Presentation: Hello, my name is Lonnie
Whittington, a co-founder and the Creative Director of Sandbox Entertainment.
With over three years in the interactive entertainment business, I feel like an
Internet pioneer, but I've been in advertising and graphic design for over 25
years.
In late 1994, Jim Layne, Chad Little and I had been crafting advertising
messages for the high tech business-to-business community. Our success in
traditional advertising came from the fact that we, as the three founders, had
strong talents in the three foundation principles; that is sales, creativity and
technology. None of the sites that we saw on the net had this combination, so we
saw a tremendous opportunity to be successful by applying our talents to this
new medium.
Creativity and experimentation allowed us to quickly learn what variety
of concepts and techniques worked well. After we ran Cyberhunt in May of 1995,
our first "full length feature" was the three-month-long Arizona Super Bowl Road
Trip event. I was responsible for helping develop daily content, including the
route, story and the daily game. Although the race was grueling, it was
gratifying to receive favorable comments from viewers all over the world. We
were dedicated to creating a content-rich event and to pushing the limits of how
the users react as well as how to integrate advertisers into the game. That is
still my motivation as well as the focus of the content.
I think Final Bell is the perfect title for the Internet and it's one of
the more gratifying projects for me to help put together. It's a terrific
combination of gaming-type entertainment and education. Speaking selfishly, I
have learned more about the stock market from my involvement with Final Bell
than I have with my sporadic self-learning over the last twenty years. And, that
aspect is largely reflected in response from the players. Many players say that
they appreciate Final Bell because they can practice buying and selling stock
without the pesky worry about losing real money.
A-2
<PAGE>
Now, we have SportSim, the fantasy sports site. It's exciting watching
the enthusiasm of an entirely different set of players. The way it came about
was very interesting. Two of our employees are the most rabid sports fans ever.
They were told that they could create the ultimate sports site so, they set
about evaluating existing sites and listing all the functions that would make
ours superior. Their research was exhaustive as well as fun for both of them.
Their documentation made launching SportSim one of the easiest, albeit one of
the most complicated games we have created to date.
My vision for Sandbox as the entertainment network for the future is
based on three principles:
o Creating unique content where the users are an integral
part of an entertaining and educational experience
o Offering a platform from which the advertiser can direct
their message so that it is entertaining and rewarding for
the viewer, and
o Experimenting with the medium and the technology to
continually find creative ways to interact with the
audience.
Brian Aldiss, a British science fiction writer once said, "Whatever
creativity is, it is in part a solution to a problem." I'm sure that you'll
agree that the entire concept of the Internet is an organic problem. It grows
and changes daily. Everything in this new medium moves at the speed of light and
most of the conventions that were once the rules are no longer applicable. That
is both the opportunity and the challenge.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. I hope you will view the presentation
of each Sandbox executive officer to get their perspective of the Company and a
complete picture of the Sandbox management team. Remember, these presentations
are a part of, and not a substitute for, the Company's Prospectus which you
should read carefully before investing money.
James A. Layne's Presentation: Hello, I'm Jim Layne, a founder and Vice
President of Marketing of Sandbox Entertainment. Prior to joining Sandbox, I was
Director of Operations for the Phoenix office of Mark Anderson Associates, a
national business-to-business full service marketing communications agency.
Sandbox's earliest foray onto the Internet, Cyberhunt, was successful in
that IBM and ATT Multimedia bought sponsorships of the contest. Our products
employ creative ways to promote user interaction, while using technological
innovation to achieve marketing integration. Our goal is to build a diverse,
loyal and committed customer base; therefore our marketing strategy is to create
meaningful distinction in our product and ensure that all of our programming
provides users with an entertaining and rewarding experience. My job is to
develop, build and protect each brand name. Having the Sandbox Entertainment
brand behind a program allows the user to interact with a quality program that
presents a personalized experience.
Sandbox's marketing objectives are:
o To understand our participants and their needs
o To understand our advertisers and their needs and
o To aggressively continue to pursue co-marketing
partnerships.
The individual games are built on a common foundation. The participant is
presented with familiarity with overall navigation, accuracy in the data
presented, top quality administrational aspects of the game, logical, clear and
concise presentation of information and a high level of customer support.
Because Sandbox pays attention to these details, the player's experience is
focused on the real strategy behind the game: competing for prizes, building a
community with other players and, most importantly, being entertained in a fun
and educational way! Additionally, Sandbox has developed a variety of ways to
motivate the users. As an example, our Sand Dollar program allows users to earn
Sand Dollars, which can be redeemed for prizes when the user wins a contest.
A-3
<PAGE>
To help our advertisers, our products are created with the objective of
registering an audience. Once a user registers with us, we begin to build a
database of demographic and psychographic information about that participant.
With our technology, we can target pertinent messages to each visitor, based on
information they have given us or in reaction to completed events within our
programs. Our strength is helping advertisers gain information about our
audience, assisting them to begin and maintain a dialogue with the customer and
actually aiding them in the direct marketing of their products. Bottom line: The
more we know about our audience, the easier it will be for us to win the battles
for future advertising and marketing dollars.
Our latest challenge has been to find a way to cost effectively promote
our products on an ongoing basis and increase the likelihood that we continue to
reach a sizable audience. Early this year, we created a marketing partnership
with CNN, this gave us the promotion needed to sustain an audience that is
attractive to our advertising community.
We believe Final Bell and SportSim are program brands that our audience
consciously relates to for their entertainment, and the brands need to be
nurtured because they have to compete for the user's mind share as reference
points for financial and sports simulations. Since the products are co-branded
with sponsor's names, the challenge is to create strong individual brands that
users will remember.
Strong business partnerships are essential. We have to think beyond
existing products and technology to serve our present and new customer groups.
With the success of our current games, the levels of marketing opportunities
with other partners have increased. We are being sought after for our expertise
in gaming, web delivery of information, creative marketing and technology. Our
products can be adapted for media navigators and aggregators in addition to
being the web component for CD-ROM technology. We evaluate these possible
relationships based on the creation of priority market niches, which are defined
by user and advertiser needs, in conjunction with the profit potential. In
developing these marketing relationships, our focus lies in opportunities for
promotion through various media, distribution of products through retail outlets
and major content aggregators.
We believe we have accomplished a lot over the past two years, and I look
forward to even greater challenges ahead.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. Please view the presentation of each
Sandbox executive officer to get their perspective on the Company. These
presentations are a part of, and not a substitute for, the Company's Prospectus.
Thank You.
Mark Gorchoff's Presentation: Hello, I'm Mark Gorchoff, Chief Financial
Officer and the newest member of the management group. Shortly after I had
joined Sandbox last December, we learned quickly from the Final Bell launch what
a potent combination education and competition could be. Additionally, we began
the process of clarifying the other elements of our current strategy-the key
role that media partners and development partners would play in our continuing
growth as well as the need to focus on adding additional revenue streams to our
income model.
I believe our approach to developing and marketing new products is a
prudent one. By identifying parties who might be interested in assisting us with
program development costs, we reduce the up-front impact of new product
launches. Then, when we add a co-branding or media partner such as CNN to the
mix, we believe we significantly improve the likelihood that the product will
receive the necessary levels of traffic and promotion.
It is also important to note that our business model also allows us to
selectively apply financial resources to support our growth. We have the ability
to add new production, engineering and customer support personnel incrementally.
We do this after we have positive feedback about the product from our intended
development and media partners. We also plan to increase our sales and marketing
expenditures by applying these same disciplines. Whether the expense involves
adding in-house sales representation in the major media cities or planning a
A-4
<PAGE>
campaign that involves the full range of advertising and promotional activities,
the idea is to directly tie the expenditures to what the products demand, and to
preserve capital.
We expect that approximately $1.2 million of offering proceeds will go to
retire debt. Of this number, $500,000 will be paid to our bank under a revolving
line of credit, and can be re-borrowed as the need arises. We expect to utilize
the balance of offering proceeds, or approximately $3.2 million, in roughly
equal proportions to add to our engineering and sales staffs, and for product
and services marketing. I want to emphasize, however, that we believe these
funds, if spent in the manner described, will allow us to develop and market
several new products over the coming months.
I also wanted to take a moment to talk to you about the risks and rewards
of Public Venture Capital Offerings such as this one. You have the ability as an
individual investor to participate in the sort of deal usually reserved for
venture capitalists or institutional lenders. It's exciting to be a part of a
young and growing company, especially one in an emerging industry such as the
Internet. But of course, there are risks. In the Sandbox Public Venture Capital
Offering, investors will be financing the growth of an early stage company, and
like venture capitalists, you will be buying an illiquid security. Please make
sure you review the Prospectus to learn more about and understand the risks.
From the bottom up, we've got a great bunch of people at Sandbox, a good
mix of skills and a common vision. I'm looking forward to doing some exciting
things.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. I hope you will view the presentation
of each Sandbox executive officer to get their perspective of the Company and a
more complete picture of the Sandbox management team. Remember these
presentations are a part of, and not a substitute for, the Company's Prospectus,
which you should carefully read before investing money.
Michael Turico's Presentation: Hello, my name is Mike Turico the Director
of Engineering at Sandbox Entertainment.
Since my staff and I joined Sandbox from Motorola two years ago, we've
been challenged to meet the increased growth and complexity in the Company's
products and processes. When we created Cyberhunt in 1995, we wanted to test the
notion that this would gain support from advertisers for the games. We thought
it had the potential to bring in numerous participants to the site. On its first
day, Cyberhunt impressed us by drawing 20,000 page-views, and we considered that
a success. Currently, we reach a daily average of 1.6 million page views!
When we developed our first simulation, Final Bell, we integrated actual
data from an outside source. In addition to stock prices, we incorporated such
complex elements as stock splits, dividends and delistings into the simulation.
This is what makes the game appear life-like. Final Bell was a major step along
the path that proved invaluable when we launched SportSim.
With SportSim, which includes our Full Contact fantasy football event, we
felt the potential was enormous. Our challenge was to prepare the network for an
audience that we initially estimated to be 20,000 teams. But we had no idea that
our partnership with CNN/SI would be as powerful as it turned out. By the time
the season was ready to begin, 80,000 teams had signed up, and suddenly we were
being overwhelmed by our own popularity. As a result, we experienced system
delays and disruptions in August and September.
Due to our commitment to scalability and customer satisfaction, we had to
test and install a T3 line in a day and a half. On the average, this process
takes 30 to 45 days to complete. We also had to order and install a new Sparc
Enterprise 5000 database server, as well as six additional web servers. This
project usually takes about 10 days. Again, we finished in a day and a half.
While Cyberhunt required five programs to run, more than 200 have been
created for the execution of fantasy football. Before June of 1997, we were
signing on an average of 500 new registrants each day. When SportSim
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began running with CNN in August, we averaged 700 new registrants each hour and
averaged 680,000 page-views each day.
The overriding theme here is the challenge to develop new games that have
a scaleable architecture. In producing our games, we work with creative by
discovering what the focus of the game is and offering solutions on better ways
for user interaction. We also research and test part of the creation process
from the original penciling all the way through the final computer comps. Once
those are completed, we can produce the game with very little interaction with
creative.
So where do we go from here? None of us think that we've reached the
pinnacle. In October, we began a whole new set of products, including fantasy
basketball, mid-season football sign-ups and the Final Bell CD contest. We're
excited to tackle these challenges and to see what lies beyond.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. I hope you will view the presentation
of each Sandbox executive officer to get their perspective of the Company and a
more complete picture of the Sandbox management team. Remember these
presentations are a part of, and not a substitute for, the Company's Prospectus,
which you should read carefully before investing money.
Matthew Stanton's Presentation: My name is Matt Stanton. I'm the Vice
President of Sales at Sandbox Entertainment. I joined the Company in July of
1996. I joined Sandbox because I felt their unique blend of creativity,
technical capability and marketing expertise could offer the interactive
advertisers a great marketing opportunity.
Prior to joining Sandbox, I worked for two divisions of Katz Media. Most
recently, I was Director of Sales for their new media division, Millennium
Marketing. Millennium served as the national rep firm for several interactive
companies, including Sandbox Entertainment. Prior to that, I managed the Los
Angeles and Washington DC offices for the Katz cable division, National Cable
Communications.
Selling the Sandbox model requires a strong understanding of marketing.
My foundation in marketing was developed while working for Miller Brewing
Company. This is where I learned the value of branding, the basis for creating
new market segments and the factors that influence individual buying behavior.
My experience in working with branding strategies, statistical analysis and
consumption trends has been a great help throughout my career.
It's important for "new media" sales management to understand the unique
nature of on-line advertising communities. Large advertising agencies earn
substantial revenue from the placement of costly mass media, such as network
television, radio, cable and national print. Now, traditionally these forms are
relatively easy to evaluate, sell to the client and execute. However, the
implementation in more targeted media, such as direct mail or spot cable,
represents a significantly greater challenge to those involved. The targeting of
qualified consumers in a cost effective manner requires a lot more effort,
therefore making it easier for the agencies to avoid this medium altogether. In
addition, managing an interactive media campaign is time-consuming and has the
added challenge of being based on technology that is beyond the experience of
many agency personnel.
We offer two primary products to the advertiser: banners and integrated
sponsorships. Banners are the standard vehicle of the Internet advertising
community. Integrated sponsorships provide advertisers with customized
applications of our proprietary technology. These applications enable the
sponsor to expose users to their products and services in an engaging and
non-intrusive manner. As we successfully explore and sell sponsorships that go
beyond the banner we believe Sandbox is trending toward the future of Internet
advertising.
In our relationship with Turner, both of our top-tier sponsors, IBM and
Saturn Corporation, were compelled enough by our unique sponsorship
opportunities that they pulled money from other areas to fund their sponsorships
with us. Both cited not only our technology as a critical factor in their
decision, but also our innovative approach
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to integrating their message into the content. We believe this is also the
primary reason Turner chose us as a partner.
The relationship with Turner is a win-win for both parties. The CNNfn and
CNN/SI brands provide Sandbox with an audience of selective blue chip
advertisers. Our capabilities attract additional revenues that the CNN brands
would not otherwise capture. The relationship also extends our sales effort.
Turner has one of the top media sales forces in the country and, as part of our
relationship, they have agreed to sell our products, which extends our own sales
efforts.
Another lesson I have learned in my career is the importance of being
able to juggle the demands of a large number of clients with varying needs. This
is one of the key skills I look for, and instill in the members of our sales
force. This understanding is critical knowledge for the building of an internal
sales force and the management of an external sales force who is responsible for
the sale of many products beyond our own. CNN's Turner and Sports Illustrated's
Time Warner sales forces represent such a relationship to Sandbox Entertainment.
They sell several cable networks, interactive, print and co-branded products as
well. To enhance our relationship, part of my responsibilities are to help them
earn more money by simplifying this process and creating a multimedia
opportunity that our clients find attractive. My experience selling Turner
networks for our affiliates makes this an enjoyable and very familiar task.
Thank you for your interest in Sandbox Entertainment Corporation and for
taking the time to view this presentation. Please view the presentations of the
other Sandbox executive officers to get their perspective of the Company and
receive a more complete picture of our Sandbox management team. The
presentations are a part of, and not a substitute for, the Company's Prospectus.
At the bottom of the on-line script, there will be a box for viewers to
click through to the audio video presentation.
At the bottom of the audio video presentation, there will be a hyperlink
to the on-line script and a box labeled "Sandbox Road Show Q&A." After the
"Sandbox Road Show Q&A" box, there will be an HTML Link with the following
language: If you have additional questions regarding the Sandbox Entertainment
public venture capital offering, please feel free to e-mail us at
[email protected].
Viewers will click through the Sandbox Road Show Q&A box to a separate
page with the following heading:
At the top of the screen the following text will be presented:
Chad Little's Response to E-Mail Questions
While the initial filing of the Registration Statement was being reviewed
by the Securities and Exchange Commission, certain questions were received via
e-mail by the Company and/or Wit Capital Corporation, the Company's lead
underwriter. The following represents some of those frequently asked e-mail
questions concerning the offering and the Company's responses. To get the
response, click on the question.
What will Sandbox's stock symbol be?
When will Sandbox start trading?
What exchange will Sandbox be traded on?
Sandbox's Series B Preferred Stock, Series A Preferred Stock and Common
Stock will not trade on any stock market nor will any of the securities carry a
ticker symbol.
As page 1 of the Prospectus says, "The Company has no intention to list
any of its securities...on any stock exchange or trading in the NASDAQ stock
market or over the counter." There is no assurance that a liquid market for the
Series B Preferred Stock will develop in the future.
The Series B Preferred Stock is a venture capital investment. As
discussed in the prospectus in the Venture Capital Investing section, venture
capital investors buy illiquid shares of less-established companies in the hope
of
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achieving superior returns. One of the risks that prospective investors should
consider in determining whether to invest in Sandbox is the lack of liquidity of
the Sandbox Series B Preferred Stock.
Venture capital investing has not been historically open to individuals
because most of us can't make large, illiquid investments. In the Sandbox
offering, however, Wit Capital intends to establish a relatively low investment
minimum.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
What % of the Company is being offered to the public?
The shares of Series B Preferred Stock being offered to the public
represents approximately 31% of the fully diluted Common Stock of the Company
that would be outstanding after giving effect to the conversion of all Series B
Preferred Stock, all Series A Preferred Stock, and the exercise of outstanding
stock options and warrants. As described in the Risk Factors, it is likely that
the Company will require additional equity financing after approximately 15
months. The holders of Series B Preferred Stock will have certain antidilution
protection in the event of additional issuances at a price less than the issue
price of the Preferred Stock, of additional shares of Common stock or of
securities exercisable for or convertible into Common Stock. Whether or not this
antidilution protection applies in a particular issuance, investors in Series B
Preferred Stock should anticipate that their percentage interest in the Company
will decline as the Company issues additional equity.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
Who are the Company's competitors?
The Company believes that its most significant competitors for its
fantasy football and future sports-related games and simulations are ESPNet
SportsZone and CBS SportsLine, which are Web sites offering a variety of sports
content. The Company views its most significant competitors with regard to its
stock market simulation as E-TRADE Group, Inc., an on-line investment services
provider that operates a similar on-line stock market trading game, SMG2000,
electronic educational simulation programs sponsored by the Securities Industry
Foundation for Economic Education, certain corporate sponsors, and, to a lesser
extent, other on-line brokerage services such as Quote.Com and PC Quote, which
offer the ability to build portfolios but generally do not provide for simulated
trading activity.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
How was the Company valued?
How was the offering price range determined?
The offering price for the Series B Preferred Stock will be determined by
Wit Capital after negotiations with Sandbox, and should not be regarded as an
indication of any future market price for the Series B Preferred Stock or the
Conversion Shares. Among the factors that will be considered in determining the
offering price are prevailing market conditions, the history and prospects of
Sandbox and its industry in general, the valuation of its competitors, its
current operations and earnings potential, its management, the lack of liquidity
for the Series B Preferred Stock and risks associated with an investment in
Sandbox.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
If I become a shareholder, what information will I regularly get from the
Company?
How will I know how Sandbox is doing?
As discussed on the Table of Contents page of the Prospectus,
shareholders will receive annual reports containing audited financial statements
and quarterly reports containing interim unaudited information.
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Shareholders will also receive traditional 8-K reports. Shareholders can
revocably elect to receive all reports electronically.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
What is the difference between an IPO and Public Venture Capital Offerings?
They are similar in that both are securities that are registered with the
Securities and Exchange Commission and can be sold through a general
solicitation.
However, Public Venture Capital Offerings differ from traditional Initial
Public Offerings in two ways: the issuing company is generally at an earlier
stage of development than a traditional IPO, and the shares sold to the public
are subject to substantial restrictions on transfer that make them illiquid.
Unlike IPOs, which usually trade freely in the stock market after they
are issued, shares in the Sandbox Public Venture Capital Offering will not trade
at least until the earlier of two years or six months after a qualified IPO.
There is no assurance that an active trading market will develop after that date
or of the price at which the Series B Preferred Stock or Common Stock to into
which it is convertible will trade.
Please read the complete Prospectus to best understand the risks of
investing in Sandbox Entertainment.
Text on screen: Thank you for your interest in Sandbox Entertainment
Corporation and for taking the time to review this Q&A presentation. This
presentation is a part of, and not a substitute for, the Company's complete
Prospectus.
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================================================================================
690,000 Shares
SANDBOX ENTERTAINMENT CORPORATION
Series B Convertible Preferred Stock
(par value $.001 per share)
(subject to substantial restrictions on transfer)
---------------
[SANDBOX ENTERTAINMENT LOGO]
---------------
Wit Capital Corporation
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses in
connection with the offering described in the Registration Statement, other than
underwriting commissions and discounts. All of such costs and expenses will be
borne by the Company.
Registration Fee..................... $ 1,844
Accounting Fees and Expenses......... 75,000
Legal Fees and Expenses.............. 175,000
Printing Expenses.................... 30,000
Blue Sky Fees and Expenses........... 65,000
Miscellaneous........................ 3,156
--------
Total........................... $350,000
========
Item 25. Indemnification of Directors and Officers
Article IX of the Company's Certificate of Incorporation provides that
the Company shall indemnify directors, officers, and their legal representatives
to the fullest extent permitted by the Delaware General Corporate Law ("DGCL").
The DGCL contains an extensive indemnification provision which permits a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In suits by or in the
right of a corporation, only expenses and not judgments, fines, and amounts paid
in settlement may be indemnified against. In addition, if the director or
officer has been adjudged to be liable to the corporation in such a suit,
indemnification of expenses must be approved by a court.
Article VIII of the Company's Certificate of Incorporation provides that
directors of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty. However, this
provision does not eliminate or limit the liability of a director for breach of
the director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for the payment of dividends or distributions or the
redemption or purchase of the Company's shares of stock in violation of the
DGCL, or for any transaction from which the director derives an improper
personal benefit. This provision does not affect any liability of a director or
officer under the federal securities laws.
Article III, Section 9 of the Company's Bylaws provides that the
Company's indemnification obligations as set forth in the Company's Certificate
of Incorporation are a contract right and include the right by an indemnified
party to be paid such person's expenses of the defense of any action by the
Company in advance of its final disposition upon delivery to the Company of an
undertaking by such person to repay all amounts so advanced if it should
ultimately be determined that such person was not entitled to be indemnified.
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The Company does not currently carry directors' and officers' liability
insurance. Article III, Section 9 of the Company's Bylaws permit the Company to
maintain insurance to protect itself and its officers, directors, and
representatives against liability, whether or not the Company would have the
power to indemnify any such officer, director or other representative under the
DGCL.
Item 26. Recent Sales of Unregistered Securities
Effective April 25, 1996, the Company completed a migratory merger
pursuant to which it reincorporated in Delaware, changed its name to Sandbox
Entertainment Corporation and effected a five-to-one stock split. Since
September 1, 1994, the Company has sold and issued securities in the
transactions described below, as adjusted to reflect (i) the foregoing
five-to-one stock split, (ii) a twenty-five for one stock split as of July 13,
1995, (iii) two-for-one stock split as of February 12, 1996, (iv) certain
antidilution adjustments required by the issuance of Series A Preferred Stock in
February 1996, and (v) Reverse Stock Split.
1. As of September 30, 1997, the Company has granted 112,768 shares of
Common Stock to employees and consultants at prices ranging from $.60 to $2.10
per share upon their exercise of options under the 1995 Stock Incentive Plan, as
amended. As of September 30, 1997, these employees and consultants have
exercised options to purchase 17,111 shares of Common Stock, the exercise prices
of which were paid in cash. These sales were made in reliance upon Rule 701
promulgated under the Securities Act ("Rule 701").
2. In February 1992, the Company issued 416,668 shares of Common Stock
to the Company's founder in exchange for an aggregate payment of $12,265 in
cash. These issuances were made in reliance on Section 4(2) of the Securities
Act. The securities were issued with no general solicitation or advertising and
the purchaser was sophisticated and had adequate access to information about the
Company.
3. In July 1995, the Company issued 38,265 shares of Common Stock in a
private placement to an individual investor in exchange for a payment of
$183,672 in cash. This issuance was made in reliance on Section 4(2) of the
Securities Act. The securities were issued with no general solicitation or
advertising and the purchaser was sophisticated and had adequate access to
information about the Company.
4. In October 1995, in connection with term notes evidencing loans to the
Company in an aggregate amount of $40,000, the Company issued warrants to
investors to purchase an aggregate of 51,000 shares of Common Stock at an
exercise price of $4.80 per share. The Company also issued warrants to purchase
38,250 shares of Common Stock at an exercise price of $4.80 per share to an
individual for assistance in arranging the loans. These issuances were made in
reliance on Section 4(2) of the Securities Act. The securities were issued with
no general solicitation or advertising and the purchasers were sophisticated and
had adequate access to information about the Company
5. In December 1995, the Company issued 20,836 shares of Common Stock in
a private placement to an individual investor and his spouse in exchange for a
payment of $100,008 in cash. This issuance was made in reliance on Section 4(2)
of the Securities Act. The securities were issued with no general solicitation
or advertising and the purchasers were sophisticated and had adequate access to
information about the Company.
6. In February 1996, the Company issued 75,000 shares of Series A
Preferred Stock and issued warrants to purchase an aggregate of 18,750 shares of
Series A Preferred Stock at an exercise price of $.01 per share, which were
subsequently exercised in May 1996. The Company also issued warrants to purchase
21,923 shares of Common Stock at an exercise price of $.12 per share to a
consultant in connection with this private offering, which were subsequently
exercised in April 1996. These issuances were made in reliance on Section 4(2)
of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The
securities were issued with no general solicitation or advertising and the
purchasers were accredited and had adequate access to information about the
Company.
7. In May 1996, the Company's founder transferred 122,917 shares to each
of two executive officers of the Company for no consideration.
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8. In May 1996, the Company issued 104,166 shares of Series A Preferred
Stock in exchange for an aggregate payment of $500,000 in cash. These issuances
were made in reliance on Section 4(2) of the Securities Act. The securities were
issued with no general solicitation or advertising and the purchasers were
sophisticated and had adequate access to information about the Company.
9. In October 1996, in connection with amendments made to the October
1995 term notes, the Company issued warrants to investors to purchase an
aggregate of 837 shares of Common Stock at an exercise price of $4.80 per
shares. These issuances were made in reliance on Section 4(2) of the Securities
Act. The securities were issued with no general solicitation or advertising and
the purchasers were sophisticated and had adequate access to information about
the Company.
10. In November 1996, the Company issued 125,001 shares of Series A
Preferred Stock in exchange for an aggregate payment of $600,000 in cash. These
issuances were made in reliance on Section 4(2) of the Securities Act. The
securities were issued with no general solicitation or advertising and the
purchasers were sophisticated and had adequate access to information about the
Company.
11. In May 1997, in connection with convertible notes evidencing loans to
the Company in an aggregate amount of $270,000, the Company issued warrants to
investors to purchase an aggregate of 56,252 shares of Series A Preferred Stock
at an exercise price of $4.80 per share. These issuances were made in reliance
on Section 4(2) of the Securities Act. The securities were issued with no
general solicitation or advertising and the purchasers were sophisticated and
had adequate access to information about the Company.
12. In July 1997, in connection with convertible notes evidencing loans
to the Company in an aggregate amount of $270,000, the Company issued warrants
to investors to purchase an aggregate of 56,252 shares of Series A Preferred
Stock at an exercise price of $4.80 per share; provided that such exercise price
increases to the offering price in this offering is effective on or before
January 20, 1998; provided, further, that the warrants may be exercised within
the 30 days following the consummation of this offering at $2.00 per share.
These issuances were made in reliance on Section 4(2) of the Securities Act. The
securities were issued with no general solicitation or advertising and the
purchasers were sophisticated and had adequate access to information about the
Company.
13. In August and September 1997, in connection with term notes
evidencing loans to the Company in an aggregate amount of $490,000, the Company
issued warrants to investors to purchase an aggregate of 43,050 shares of Common
Stock at an exercise price of $12.00 per share until 30 days after the
consummation of this offering at which point the exercise price will be the
offering price for the Series B Preferred Stock if that price is greater than
$2.00 per share. The Company also issued warrants to purchase an aggregate of
11,690 shares of Common Stock at an exercise price of $12.00 per share until 30
days after the consummation of this offering, at which point the exercise price
will be the offering price for the Series B Preferred Stock if that price is
greater than $2.00 per share. These issuances were made in reliance on Section
4(2) of the Securities Act. The securities were issued with no general
solicitation or advertising and the purchasers were accredited and had adequate
access to information about the Company.
14. In June and July 1997, the Company issued warrants to purchase an
aggregate of 25,001 shares of Common Stock at an exercise price of $12.00 per
share, in connection with co-branding and marketing agreements with CNNfn and
CNN/SI. No separate consideration was paid to the Company for issuance of the
warrants.
15. In September 1997, in connection with an extension of the Company's
equipment lease line from $500,000 to $650,000, the Company issued to its lease
lender warrants to purchase 6,251 shares of Common Stock at an exercise price of
$4.00 per share. No separate consideration was paid to the Company for issuance
of the warrants.
16. In September 1997, in connection with an extension of the Company's
bank line of credit, the Company issued to its bank warrants to purchase 1,042
shares of Common Stock at an exercise price of $12.00 per share. No separate
consideration was paid to the Company for issuance of the warrants.
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Item 27. Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
1(a)* Form of Underwriting Agreement.
1(b)* Form of Master Agreement Among Underwriters
1(c)* Form of Master Selected Dealer Agreement
3(a) Certificate of Incorporation.
3(b) Certificate of Amendment to Certificate of Incorporation.
3(c)* Form of Restated Certificate of Incorporation to be filed
in connection with the closing of the offering made
pursuant to this Registration Statement.
3(d) Form of Certificate of Designation of Series B Preferred
Stock to be filed in connection with the closing of the
offering made pursuant to this Registration Statement.
3(e) Bylaws of the Company.
4(a) Loan and Security Agreement and Schedule thereto dated
September 6, 1996 between the Company and Silicon Valley
Bank.
4(b) Amendment to Loan and Security Agreement dated September
15, 1997 between the Company and Silicon Valley Bank.
4(c) Promissory Note dated July 13, 1995 in the principal
amount of $116,328 payable to Glenn Gomez.
4(d) Warrant Purchase Agreement between Tracer Design, Inc.
and Pickwick Group, LLC, dated September 15, 1995.
4(e) Stock Subscription Warrant to purchase 5,100 shares of
Common Stock of Tracer Design, Inc. held by Pickwick
Group, LLC, dated September 15, 1995.
4(f) Form of Loan and Warrant Purchase Agreement dated October
25, 1995 by and between Tracer Design, Inc. and the
investors listed on Schedule 4(f) attached thereto.
4(g) Form of Stock Subscription Warrant dated October 25, 1995
to purchase shares of common stock of Tracer Design, Inc.
A list of warrant holders is attached thereto as Schedule
4(g).
4(h) Form of Term Note dated October 25, 1995; Tracer Design,
Inc. as Maker; Holders are listed on Schedule 4(h)
attached thereto.
4(i) Form of April 25, 1996 Substitute Stock Subscription
Warrant to purchase shares of Common Stock of the Company
in substitution for the Stock Subscription Warrants dated
October 25, 1995 held by the investors listed on Schedule
4(i) attached thereto.
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4(j) Form of Amendment to Loan and Warrant Purchase Agreement
and Term Note dated October 25, 1996 between the Company
and the investors listed on Schedule 4(j) attached
thereto.
4(k) Form of Stock Subscription Warrant dated October 25, 1996
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(k) attached thereto.
4(l) Form of April 1997 Amendment to Loan and Warrant Purchase
Agreement and Term Note dated April 25, 1997 between the
Company and the investors listed on Schedule 4(l)
attached thereto.
4(m) Form of Stock Subscription Warrant dated April 25, 1997
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(m) attached thereto.
4(n) Form of Bridge Note and Warrant Purchase Agreement dated
May 9, 1997 between the Company and the investors listed
on Schedule 4(n) attached thereto.
4(o) Form of Stock Subscription Warrant dated May 9, 1997 to
purchase shares of Series A Preferred Stock of the
Company held by the investors listed on Schedule 4(o)
attached thereto.
4(p) Form of Convertible Subordinated Promissory Note dated
May 9, 1997; the Company as Maker. A list of Holders is
attached thereto as Schedule 4(p).
4(q) Form of July 1997 Bridge Note and Warrant Purchase
Agreement dated July 25, 1997 between the Company and the
investors listed on Schedule 4(q) attached thereto.
4(r) Form of July 1997 Stock Subscription Warrant dated July
25, 1997 to purchase shares of Series A Preferred Stock
of the Company held by the investors listed on Schedule
4(r) attached thereto.
4(s) Form of July 1997 Convertible Subordinated Promissory
Note dated July 25, 1997; the Company as Maker. A list of
Holders is attached thereto as Schedule 4(s).
4(t) Form of Two Year Note and Warrant Purchase Agreement
between the Company and the Investors listed on Schedule
4(t) attached thereto. The dates of each agreement are
listed on Schedule 4(t).
4(u) Form of Subordinated Promissory Note with the Company as
Maker. A list of the Holders is attached thereto as
Schedule 4(u). The dates of each Note are listed on
Schedule 4(u).
4(v) Form of Stock Subscription Warrant to purchase shares of
Common Stock of the Company held by the investors listed
on Schedule 4(v) attached thereto. The dates of issuance
for each warrant are listed on Schedule 4(v).
4(w) Form of Lock-Up Agreement executed by each of the
investors listed on Schedule 4(w) attached thereto on the
dates set forth thereon.
4(x) Intellectual Property Security Agreement dated September
17, 1997 between the Company and Silicon Valley Bank.
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4(y) Common Stock Purchase Warrant dated September 17, 1997,
held by Silicon Valley Bank.
4(z) Form of October 1997 Amendment to Loan and Warrant
Purchase Agreement and Term Note dated October 25, 1997,
executed by the Investors listed on Schedule 4(z)
attached thereto.
4(aa) September 16, 1997 Amendment to Bridge Note and Warrant
Purchase Agreement dated May 9, 1997 between the Company
and Wasatch Venture Corporation, Newtek Ventures II,
L.P., Sundance Venture Partners II, L.P. and Wayne
Sorensen.
4(bb)* Amended and Restated Stockholders' Agreement dated July
13, 1995 among Tracer Design, Inc., Chad Little, Lonnie
Whittington, James Layne, Glenn Gomez, Jon and Kristen
Kailey and Frank Helstab.
5* Opinion of Osborn Maledon, P.A. as to the validity of the
securities being registered.
9(a) Proxy dated May 7, 1996 of Lonnie Whittington granting
Chad Little the right to vote shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad
Little the right to vote shares of Common Stock.
10(a) Master Lease Agreement dated March 31, 1997 between the
Company and Third Coast Venture Lease Partners I, L.P.
10(b) May 6, 1997 Addendum No. 1 to the Master Lease Agreement
dated March 31, 1997 between the Company and Third Coast
Venture Lease Partners I, L.P.
10(c) Subordination Agreement between the Company and Third
Coast Venture Lease Partners I, L.P., and Silicon Valley
Bank, dated May 6, 1997.
10(d) September 27, 1997 Addendum No. 2 to the Master Lease
Agreement dated March 31, 1997 between the Company and
Third Coast Venture Lease Partners I, L.P.
10(e) Series A Preferred Stock Purchase Agreement by and among
Tracer Design, Inc. and Wasatch Venture Corporation and
Newtek Ventures II, L.P., dated February 13, 1996.
10(f) Investor Rights Agreement dated February 13, 1996 between
the Company and various Series A Preferred stockholders.
10(g) Co-Sale Agreement dated February 13, 1996 between the
Company, Chad M. Little, Lonnie A. Whittington, James A.
Layne and various Series A Preferred stockholders.
10(h) Form of Stock Subscription Warrant dated February 13,
1996 to purchase shares of Series A Preferred Stock of
Tracer held investors listed on Schedule 10(h) attached
thereto.
10(i) Holliman Stock Purchase Agreement between Tracer Design,
Inc. and John M. Holliman III, dated February 28, 1996.
II-6
<PAGE>
10(j) Wasatch and Newtek Stock Purchase Agreement by and among
the Company and Wasatch Venture Corporation and Newtek
Ventures II, L.P., dated May 6, 1996.
10(k) Sundance Stock Purchase Agreement by and among the
Company and Sundance Venture Partners, L.P., Wasatch
Venture Corporation, Newtek Ventures II, L.P., Wayne
Sorensen, Chad M. Little, Lonnie A. Whittington and James
A. Layne, dated November 11, 1996.
10(l) Co-Branding and Marketing Agreement dated as of July 11,
1997 between the Company and CNNfn.
10(m) Stock Subscription Warrant dated July 11, 1997 issued to
CNNfn to purchase shares of Common Stock of the Company.
10(n) Co-Branding and Marketing Agreement dated as of June 20,
1997, between the Company and CNN/SI.
10(o) Stock Subscription Warrant dated June 20, 1997 issued to
CNN/SI to purchase shares of Common Stock of the Company.
10(p) Source Code License Agreement dated February 23, 1996
between the Company and INFO Enterprises, Inc.
10(q) License Agreement dated July 28, 1997 between the Company
and the National Football League Players Incorporated.
10(r) Letter Agreement dated March 27, 1997 between the Company
and STATS, Inc., as amended July 7, 1997.
10(s) Office Lease dated September 8, 1995 between the Company
and Anchor Center Properties, Inc.
10(t) Collocation Agreement by and between the Company and TCG,
dated August 28, 1997.
10(u) 1995 Equity Incentive Plan of the Company (the "Plan")
dated August 1, 1995, as amended. ----
10(v) Form Incentive Stock Option Award Agreement under the
Plan.
10(w) Form Nonqualified Stock Option Award Agreement under the
Plan.
10(x) Employment Agreement dated February 19, 1992 between the
Company and Chad M. Little.
10(y) Employment Agreement between Tracer Design, Inc. and Mike
Turico, dated August 1, 1995.
10(z) Engagement Letter by the Company to Mark Gorchoff dated
as of December 30, 1996.
10(aa) Engagement Letter by the Company to Matt Stanton dated as
of June 20, 1996.
II-7
<PAGE>
10(bb) Form Proprietary Rights and Non-Compete Agreement.
10(cc) Retainer/Non-Circumvention Agreement dated May 16, 1995
between the Company and Frank X. Helstab.
10(dd) Letter Agreement dated May 30, 1996 between Newtek
Ventures II, L.P. and the Company for certain consulting
services.
10(ee) Letter Agreement between the Company and Fox & Company
Investments, Inc., dated August 11, 1997.
10(ff) Telephone Service Agreement dated November 17, 1995
between Tracer Design, Inc. and Equity
Telecommunications.
10(gg) Internet Access Agreement dated September 1, 1995 between
the Tracer Design, Inc. and MCI.
10(hh) Contract Agreement for Public Relations dated January 20,
1996 between Tracer Design, Inc. and Technology
Solutions.
10(ii) Internet Access Agreement dated December 9, 1996 between
the Company and Genuity and related agreement with TCG.
10(jj) Warrant Purchase Agreement dated September 27, 1997
between the Company and Third Coast Venture Lease
Partners I, L.P.
10(kk) Common Stock Subscription Warrant dated September 29,
1997 held by Third Coast Venture Lease Partners I, L.P.
10(ll) Common Stock Subscription Warrant dated September 29,
1997 held by Third Coast Venture Lease Partners I, L.P.
10(mm)* Form of Warrant Agreement between the Company and the
Underwriters.
10(nn)* Settlement Agreement dated November 25, 1997 between the
Company and Kathryn W. Kolbe and Kolbe Corp.
10(oo)* Promissory Note of the Company dated November 25, 1997
issued to Kathryn W. Kolbe and Kolbe Corp.
10(pp)* Promissory Note of the Company dated November 26, 1997
issued to Lonnie Whittington.
10(qq)* Promissory Note of the Company dated December 12, 1997
issued to Andrew Todd.
10(rr)* Sponsorship Agreement dated September 23, 1997 between
the Company and IBM.
10(ss)* Sponsorship Agreement dated September 23, 1997 between
the Company and Saturn Corp.
10(tt)* Sponsorship Agreement dated September 29, 1997 between
the Company and Metropolitan Life Insurance Co.
10(uu)* Sponsorship Agreement dated November 6, 1997 between the
Company and Quicken Financial Network.
II-8
<PAGE>
10(vv)* Barter Agreement dated November 24, 1997 between the
Company and Kodak.
11* Statement of Computation of Weighted Average Shares
Outstanding.
23(a)* Consent of Ernst & Young, LLP, Independent Auditors.
23(b)* Consent of Osborn Maledon, P.A. (included in Exhibit 5).
24(a) Power of Attorney of Michael S. Turico.
24(b) Power of Attorney of Todd J. Stevens.
24(c) Power of Attorney of Brian N. Burns.
24(d) Power of Attorney of Lonnie A. Whittington.
24(e) Power of Attorney of James A. Layne.
24(f) Power of Attorney of Matthew D. Stanton.
24(g) Power of Attorney of John E. Hall.
27 Financial Data Schedule.
* Filed herewith.
II-9
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes that it will provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Phoenix,
State of Arizona, on the 17th day of December, 1997.
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ CHAD M. LITTLE
--------------------------------
Chad M. Little
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on December 17, 1997.
Signature Title
--------- -----
/s/ CHAD M. LITTLE Chief Executive Officer;
- -------------------------- Director
Chad M. Little
/s/ MARK GORCHOFF Chief Financial Officer;
- -------------------------- Chief Accounting Officer
Mark Gorchoff
James A. Layne )
Lonnie A. Whittington ) At least a majority of the
Michael S. Turico ) Board of Directors*
Todd J Stevens )
John E. Hall
Brian N. Burns )
By: /s/ CHAD M. LITTLE As attorney-in-fact for the above
- -------------------------- directors marked by an asterisk
(Chad M. Little pursuant to powers of attorney duly
Attorney-in-Fact) executed by such persons.
II-11
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
1(a)* Form of Underwriting Agreement.
1(b)* Form of Master Agreement Among Underwriters
1(c)* Form of Master Selected Dealer Agreement
3(a) Certificate of Incorporation.
3(b) Certificate of Amendment to Certificate of Incorporation.
3(c)* Form of Restated Certificate of Incorporation to be filed
in connection with the closing of the offering made
pursuant to this Registration Statement.
3(d) Form of Certificate of Designation of Series B Preferred
Stock to be filed in connection with the closing of the
offering made pursuant to this Registration Statement.
3(e) Bylaws of the Company.
4(a) Loan and Security Agreement and Schedule thereto dated
September 6, 1996 between the Company and Silicon Valley
Bank.
4(b) Amendment to Loan and Security Agreement dated September
15, 1997 between the Company and Silicon Valley Bank.
4(c) Promissory Note dated July 13, 1995 in the principal
amount of $116,328 payable to Glenn Gomez.
4(d) Warrant Purchase Agreement between Tracer Design, Inc.
and Pickwick Group, LLC, dated September 15, 1995.
4(e) Stock Subscription Warrant to purchase 5,100 shares of
Common Stock of Tracer Design, Inc. held by Pickwick
Group, LLC, dated September 15, 1995.
4(f) Form of Loan and Warrant Purchase Agreement dated October
25, 1995 by and between Tracer Design, Inc. and the
investors listed on Schedule 4(f) attached thereto.
4(g) Form of Stock Subscription Warrant dated October 25, 1995
to purchase shares of common stock of Tracer Design, Inc.
A list of warrant holders is attached thereto as Schedule
4(g).
4(h) Form of Term Note dated October 25, 1995; Tracer Design,
Inc. as Maker; Holders are listed on Schedule 4(h)
attached thereto.
4(i) Form of April 25, 1996 Substitute Stock Subscription
Warrant to purchase shares of Common Stock of the Company
in substitution for the Stock Subscription Warrants dated
October 25, 1995 held by the investors listed on Schedule
4(i) attached thereto.
II-12
<PAGE>
4(j) Form of Amendment to Loan and Warrant Purchase Agreement
and Term Note dated October 25, 1996 between the Company
and the investors listed on Schedule 4(j) attached
thereto.
4(k) Form of Stock Subscription Warrant dated October 25, 1996
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(k) attached thereto.
4(l) Form of April 1997 Amendment to Loan and Warrant Purchase
Agreement and Term Note dated April 25, 1997 between the
Company and the investors listed on Schedule 4(l)
attached thereto.
4(m) Form of Stock Subscription Warrant dated April 25, 1997
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(m) attached thereto.
4(n) Form of Bridge Note and Warrant Purchase Agreement dated
May 9, 1997 between the Company and the investors listed
on Schedule 4(n) attached thereto.
4(o) Form of Stock Subscription Warrant dated May 9, 1997 to
purchase shares of Series A Preferred Stock of the
Company held by the investors listed on Schedule 4(o)
attached thereto.
4(p) Form of Convertible Subordinated Promissory Note dated
May 9, 1997; the Company as Maker. A list of Holders is
attached thereto as Schedule 4(p).
4(q) Form of July 1997 Bridge Note and Warrant Purchase
Agreement dated July 25, 1997 between the Company and the
investors listed on Schedule 4(q) attached thereto.
4(r) Form of July 1997 Stock Subscription Warrant dated July
25, 1997 to purchase shares of Series A Preferred Stock
of the Company held by the investors listed on Schedule
4(r) attached thereto.
4(s) Form of July 1997 Convertible Subordinated Promissory
Note dated July 25, 1997; the Company as Maker. A list of
Holders is attached thereto as Schedule 4(s).
4(t) Form of Two Year Note and Warrant Purchase Agreement
between the Company and the Investors listed on Schedule
4(t) attached thereto. The dates of each agreement are
listed on Schedule 4(t).
4(u) Form of Subordinated Promissory Note with the Company as
Maker. A list of the Holders is attached thereto as
Schedule 4(u). The dates of each Note are listed on
Schedule 4(u).
4(v) Form of Stock Subscription Warrant to purchase shares of
Common Stock of the Company held by the investors listed
on Schedule 4(v) attached thereto. The dates of issuance
for each warrant are listed on Schedule 4(v).
4(w) Form of Lock-Up Agreement executed by each of the
investors listed on Schedule 4(w) attached thereto on the
dates set forth thereon.
4(x) Intellectual Property Security Agreement dated September
17, 1997 between the Company and Silicon Valley Bank.
II-13
<PAGE>
4(y) Common Stock Purchase Warrant dated September 17, 1997,
held by Silicon Valley Bank.
4(z) Form of October 1997 Amendment to Loan and Warrant
Purchase Agreement and Term Note dated October 25, 1997,
executed by the Investors listed on Schedule 4(z)
attached thereto.
4(aa) September 16, 1997 Amendment to Bridge Note and Warrant
Purchase Agreement dated May 9, 1997 between the Company
and Wasatch Venture Corporation, Newtek Ventures II,
L.P., Sundance Venture Partners II, L.P. and Wayne
Sorensen.
4(bb)* Amended and Restated Stockholders' Agreement dated July
13, 1995 among Tracer Design, Inc., Chad Little, Lonnie
Whittington, James Layne, Glenn Gomez, Jon and Kristen
Kailey and Frank Helstab.
5* Form of Opinion of Osborn Maledon, P.A. as to the
validity of the securities being registered.
9(a) Proxy dated May 7, 1996 of Lonnie Whittington granting
Chad Little the right to vote shares of Common Stock.
9(b) Proxy dated May 7, 1996 of James Layne granting Chad
Little the right to vote shares of Common Stock.
10(a) Master Lease Agreement dated March 31, 1997 between the
Company and Third Coast Venture Lease Partners I, L.P.
10(b) May 6, 1997 Addendum No. 1 to the Master Lease Agreement
dated March 31, 1997 between the Company and Third Coast
Venture Lease Partners I, L.P.
10(c) Subordination Agreement between the Company and Third
Coast Venture Lease Partners I, L.P., and Silicon Valley
Bank, dated May 6, 1997.
10(d) September 27, 1997 Addendum No. 2 to the Master Lease
Agreement dated March 31, 1997 between the Company and
Third Coast Venture Lease Partners I, L.P.
10(e) Series A Preferred Stock Purchase Agreement by and among
Tracer Design, Inc. and Wasatch Venture Corporation and
Newtek Ventures II, L.P., dated February 13, 1996.
10(f) Investor Rights Agreement dated February 13, 1996 between
the Company and various Series A Preferred stockholders.
10(g) Co-Sale Agreement dated February 13, 1996 between the
Company, Chad M. Little, Lonnie A. Whittington, James A.
Layne and various Series A Preferred stockholders.
10(h) Form of Stock Subscription Warrant dated February 13,
1996 to purchase shares of Series A Preferred Stock of
Tracer held investors listed on Schedule 10(h) attached
thereto.
10(i) Holliman Stock Purchase Agreement between Tracer Design,
Inc. and John M. Holliman III, dated February 28, 1996.
II-14
<PAGE>
10(j) Wasatch and Newtek Stock Purchase Agreement by and among
the Company and Wasatch Venture Corporation and Newtek
Ventures II, L.P., dated May 6, 1996.
10(k) Sundance Stock Purchase Agreement by and among the
Company and Sundance Venture Partners, L.P., Wasatch
Venture Corporation, Newtek Ventures II, L.P., Wayne
Sorensen, Chad M. Little, Lonnie A. Whittington and James
A. Layne, dated November 11, 1996.
10(l) Co-Branding and Marketing Agreement dated as of July 11,
1997 between the Company and CNNfn.
10(m) Stock Subscription Warrant dated July 11, 1997 issued to
CNNfn to purchase shares of Common Stock of the Company.
10(n) Co-Branding and Marketing Agreement dated as of June 20,
1997, between the Company and CNN/SI.
10(o) Stock Subscription Warrant dated June 20, 1997 issued to
CNN/SI to purchase shares of Common Stock of the Company.
10(p) Source Code License Agreement dated February 23, 1996
between the Company and INFO Enterprises, Inc.
10(q) License Agreement dated July 28, 1997 between the Company
and the National Football League Players Incorporated.
10(r) Letter Agreement dated March 27, 1997 between the Company
and STATS, Inc., as amended July 7, 1997.
10(s) Office Lease dated September 8, 1995 between the Company
and Anchor Center Properties, Inc.
10(t) Collocation Agreement by and between the Company and TCG,
dated August 28, 1997.
10(u) 1995 Equity Incentive Plan of the Company (the "Plan")
dated August 1, 1995, as amended. ----
10(v) Form Incentive Stock Option Award Agreement under the
Plan.
10(w) Form Nonqualified Stock Option Award Agreement under the
Plan.
10(x) Employment Agreement dated February 19, 1992 between the
Company and Chad M. Little.
10(y) Employment Agreement between Tracer Design, Inc. and Mike
Turico, dated August 1, 1995.
10(z) Engagement Letter by the Company to Mark Gorchoff dated
as of December 30, 1996.
10(aa) Engagement Letter by the Company to Matt Stanton dated as
of June 20, 1996.
10(bb) Form Proprietary Rights and Non-Compete Agreement.
II-15
<PAGE>
10(cc) Retainer/Non-Circumvention Agreement dated May 16, 1995
between the Company and Frank X. Helstab.
10(dd) Letter Agreement dated May 30, 1996 between Newtek
Ventures II, L.P. and the Company for certain consulting
services.
10(ee) Letter Agreement between the Company and Fox & Company
Investments, Inc., dated August 11, 1997.
10(ff) Telephone Service Agreement dated November 17, 1995
between Tracer Design, Inc. and Equity
Telecommunications.
10(gg) Internet Access Agreement dated September 1, 1995 between
the Tracer Design, Inc. and MCI.
10(hh) Contract Agreement for Public Relations dated January 20,
1996 between Tracer Design, Inc. and Technology
Solutions.
10(ii) Internet Access Agreement dated December 9, 1996 between
the Company and Genuity and related agreement with TCG.
10(jj) Warrant Purchase Agreement dated September 27, 1997
between the Company and Third Coast Venture Lease
Partners I, L.P.
10(kk) Common Stock Subscription Warrant dated September 29,
1997 held by Third Coast Venture Lease Partners I, L.P.
10(ll) Common Stock Subscription Warrant dated September 29,
1997 held by Third Coast Venture Lease Partners I, L.P.
10(mm)* Form of Warrant Agreement between the Company and the
Underwriters.
10(nn)* Settlement Agreement dated November 25, 1997 between the
Company and Kathryn W. Kolbe and Kolbe Corp.
10(oo)* Promissory Note of the Company dated November 25, 1997
issued to Kathryn W. Kolbe and Kolbe Corp.
10(pp)* Promissory Note of the Company dated November 26, 1997
issued to Lonnie Whittington.
10(qq)* Promissory Note of the Company dated December 12, 1997
issued to Andrew Todd.
10(rr)* Sponsorship Agreement dated September 23, 1997 between
the Company and IBM.
10(ss)* Sponsorship Agreement dated September 23, 1997 between
the Company and Saturn Corp.
10(tt)* Sponsorship Agreement dated September 29, 1997 between
the Company and Metropolitan Life Insurance Co.
10(uu)* Sponsorship Agreement dated November 6, 1997 between the
Company and Quicken Financial Network.
II-16
<PAGE>
10(vv)* Sponsorship Agreement dated November 24, 1997 between the
Company and Kodak.
11* Statement of Computation of Weighted Average Shares
Outstanding.
23(a)* Consent of Ernst & Young, LLP, Independent Auditors.
23(b)* Consent of Osborn Maledon, P.A. (included in Exhibit 5).
24(a) Power of Attorney of Michael S. Turico.
24(b) Power of Attorney of Todd J. Stevens.
24(c) Power of Attorney of Brian N. Burns.
24(d) Power of Attorney of Lonnie A. Whittington.
24(e) Power of Attorney of James A. Layne.
24(f) Power of Attorney of Matthew D. Stanton.
24(g) Power of Attorney of John E. Hall.
27 Financial Data Schedule.
* Filed herewith.
EXHIBIT 1(a)
_______________ Shares
SANDBOX ENTERTAINMENT CORPORATION
Series B Convertible Preferred Stock
Form of
UNDERWRITING AGREEMENT
__________ __, 1997
Wit Capital Corporation
[Other lead Underwriters]
As Representatives of the Several Underwriters
c/o Wit Capital Corporation
826 Broadway
New York, New York 10013
Attn: William Feeley
Dear Sirs:
Sandbox Entertainment Corporation, a Delaware corporation (the
"Company"), proposes to sell __________ shares of the Company's Series B
Convertible Preferred Stock, par value $0.001 per share (the "Series B Preferred
Stock"). This is to confirm the agreement (the "Agreement") concerning the
purchase of the Series B Preferred Stock from the Company by the several
Underwriters named in Schedule 1 hereto (the "Underwriters") for whom Wit
Capital Corporation, _____ and _____ are acting as representatives (the
"Representatives").
1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form SB-2
(Registration No. 333-36787), and one or more amendments
thereto, with respect to the Series B Preferred Stock have (i)
been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective
under the Securities Act. Copies of the registration statement
and the amendments to such registration statement have been
delivered by the Company to the Representatives As used in
this Agreement "Effective Time" means the date and the time as
of which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date
of the Effective Time of such registration statement;
"Preliminary Prospectus" means each prospectus included in
such registration statement, or amendments thereof,
<PAGE>
before it became effective under the Securities Act and any
prospectus filed with the Commission by the Company with the
consent of the Underwriter pursuant to Rule 424(a) of the
Rules and Regulations; "Registration Statement" means the
registration statement referred to in this Section l(a), as
amended at its Effective Time, including all information
contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 5(a) hereof and deemed to be a part of
the Registration Statement as of the Effective Time of the
Registration Statement pursuant to paragraph (b) of Rule 430A
of the Rules and Regulations; and "Prospectus" means such
final Prospectus, as first filed with the Commission pursuant
to paragraphs (1) or (4) of Rule 424(b) of the Rules and
Regulations. The Commission has not issued any order
preventing or suspending the use of any Preliminary
Prospectus;
(b) The Registration Statement conforms (and any
further amendments or supplements thereto, when they become
effective, will conform) in all material respects to the
requirements of the Securities Act and the Rules and
Regulations and do not and will not, as of the applicable
Effective Date contain any untrue statement of a material fact
or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, and the Prospectus conforms (and any further
amendments or supplements thereto, when they are filed with
the Commission, will conform) in all material respects to the
requirements of the Securities Act and the Rules and
Regulations and do not and will not, as of the applicable
filing date with the Commission, contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading; provided that no representation or
warranty is made as to information contained in or omitted
from the Registration Statement or the Prospectus in reliance
upon and in conformity with written information furnished to
the Company by or on behalf of the Underwriters specifically
for inclusion therein;
(c) The Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T;
(d) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, is duly qualified
to do business and is in good standing as a foreign
corporation in each jurisdiction in which ownership or lease
of property or the conduct of its business requires such
qualification, except where the failure to be so qualified and
in good standing would not have a material adverse effect on
the business, management, financial condition, results of
operations, or prospects of the Company, is in compliance in
all material respects with the laws, orders, rules,
regulations and directives issued or administered by such
jurisdiction and has all
2
<PAGE>
corporate power and authority necessary to own or hold its
properties and to conduct the business in which it is engaged;
(e) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued and
outstanding shares of capital stock of the Company have been
duly and validly authorized and issued, are fully-paid and
non-assessable and conform to the description thereof
contained in the Prospectus;
(f) The Certificate of Designation for the Series B
Preferred Stock has been duly authorized by all necessary
corporate and shareholder action and duly filed with the
Secretary of State of the State of Delaware. The shares of the
Series B Preferred Stock to be issued and sold by the Company
to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued,
fully paid and nonassessable, free of preemptive rights to
subscribe for or to purchase any shares of the Series B
Preferred Stock of the Company pursuant to the Company's
charter or by-laws or any agreement or other instrument and
the Series B Preferred Stock will conform to the description
thereof contained in the Prospectus. Shares of the common
stock, par value $0.001 per share (the "Common Stock"), of the
Company issuable upon conversion of the Series B Preferred
Stock (the "Conversion Shares") have been duly and validly
authorized and reserved for issuance upon conversion of the
Series B Preferred Stock, and upon such conversion, will be
duly issued, fully paid and nonassessable, free of preemptive
rights to subscribe for or to purchase any shares of the
Common Stock of the Company pursuant to the Company's charter
or by-laws or any agreement or other instrument;
(g) The execution, delivery and performance of this
Agreement by the Company and the consummation of the
transactions contemplated hereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company is a party or by which the
Company is bound or to which any of the properties or assets
of the Company are subject, except for such breaches,
violations or defaults as would not individually or in the
aggregate have a material adverse effect on the business,
management, financial condition, results of operations, or
prospects of the Company, nor will such actions result in any
violation of the provisions of the charter or by-laws of the
Company or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over
the Company or any of its properties or assets; and except for
the registration of the Series B Preferred Stock under the
Securities Act and such filings or registrations as may be
required under applicable state securities laws in connection
with the purchase and distribution of the Series B Preferred
Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for
3
<PAGE>
the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions
contemplated hereby;
(h) There are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Securities Act with respect
to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration
Statement, except for such rights as have been duly waived or
are inapplicable to the Registration Statement;
(i) Except as described in the Prospectus, the
Company has not sold or issued any shares of Common Stock
during the six-month period preceding the date of the
Prospectus, including any sales pursuant to Rule 144A under,
or Regulations D or S of, the Securities Act, other than
grants of options made under shareholder-approved stock option
plans, or shares issued pursuant to shareholder-approved stock
option plans or pursuant to outstanding options and warrants;
(j) The Company has not sustained, since the date of
the latest audited financial statements included in the
Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital
stock or long-term debt of the Company (other than as
contemplated in Section 1(i) above) or any material adverse
change, or any development involving a prospective material
adverse change, in or affecting the business, management,
financial condition, results of operations, or prospects of
the Company, other than as set forth or contemplated in the
Prospectus;
(k) The financial statements (including the related
notes and supporting schedules) filed as part of the
Registration Statement or included in the Prospectus present
fairly, in all material respects, the financial condition and
results of operations of the Company purported to be shown
thereby, at the dates and for the periods indicated, and have
been prepared in conformity with generally accepted accounting
principles applied on a consistent basis throughout the
periods involved;
(l) Ernst & Young LLP, who have certified certain
financial statements of the Company, whose report appears in
the Prospectus and who have delivered the initial letter
referred to in Section 7(e) hereof, are independent public
accountants as required by the Securities Act and the Rules
and Regulations;
(m) The Company owns or possesses adequate licenses
or other rights to use all material patents, patent
applications, technology, software, know-how, trade secrets,
trademarks, service marks, trade names, trademark
registrations,
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service mark registrations, copyrights and licenses necessary
for the conduct of its business as described in the Prospectus
and has no reason to believe that such conduct of its business
will conflict with, and, except as disclosed in the
Prospectus, has not received any notice of any claim of
conflict with, any such rights of others. Except as disclosed
in the Prospectus, the discoveries, inventions, products,
services or processes of the Company referred to in the
Prospectus do not infringe or conflict with any right or
patent of any third party, or any discovery, invention,
product or process which is the subject of a patent
application filed by any third party;
(n) Except as disclosed in the Prospectus, there are
no legal or governmental proceedings pending to which the
Company is a party or of which any property or asset of the
Company is the subject which might have a material adverse
effect on the business, management, financial condition,
results of operations, or prospects of the Company; and to the
best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others;
(o) There are no contracts or other documents which
are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act
or by the Rules and Regulations which have not been described
in the Prospectus or filed as exhibits to the Registration
Statement;
(p) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of
the Company on the other hand, which is required to be
described in the Prospectus which is not so described;
(q) Since the date as of which information is given
in the Prospectus through the date hereof, and except as may
otherwise be disclosed in the Prospectus, the Company has not
(i) issued or granted any securities, other than as
contemplated in Section 1(i) above, (ii) incurred any
liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the
ordinary course of business, (iii) entered into any
transaction not in the ordinary course of business or (iv)
declared or paid any dividend on its capital stock;
(r) The Company is not (i) in violation of its
charter or by-laws, (ii) in default in any material respect,
and no event has occurred which, with notice or lapse of time
or both, would constitute such a material default, in the due
performance or observance of any term, covenant or condition
contained in any material indenture, mortgage, deed of trust,
loan agreement, investor purchase or servicing agreement or
other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets
is subject or (iii) in violation in any material respect of
any law, ordinance, governmental rule, regulation or court
decree to which it or its properties or assets may be subject
or has failed to obtain any material license, permit,
certificate, franchise or other
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governmental authorization or permit necessary to the
ownership of its properties or assets or to the conduct of its
business;
(s) The Company is not, nor upon the sale of the
Series B Preferred Stock as herein contemplated will be, an
"investment company" or an entity "controlled" by an
"investment company" within the meaning of such terms under
the Investment Company Act of 1940, as amended, and the rules
and regulations of the Commission thereunder (the "1940 Act");
(t) The Company has not taken nor will take, directly
or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale
of the shares of the Series B Preferred Stock.
2. Purchase of the Series B Preferred Stock by the
Underwriters. On the basis of the representations and warranties contained in,
and subject to the terms and conditions of, this Agreement, the Company hereby
agrees to sell ____ shares of the Series B Preferred Stock to the Underwriters
(the "Stock"), and each of the Underwriters agrees to purchase the number of
shares of the stock set forth opposite that Underwriter's name in Schedule 1
hereto.
The price of the Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock
to be delivered on the Delivery Date (as hereinafter defined), except upon
payment for all the Stock to be purchased on the Delivery Date (as hereinafter
defined) as provided herein.
As compensation for its commitments hereunder, the
Underwriters shall receive, on the Delivery Date, an amount equal to $____ per
share for all of the Stock to be delivered by the Company hereunder on the
Delivery Date, such amount to be paid on such date to the Representatives, for
the accounts of the several Underwriters.
As additional compensation for such commitments, Wit Capital
Corporation and any other managing underwriter shall receive a warrant (the
"Warrant") to purchase the number of shares of Series B Preferred Stock as set
forth opposite such Underwriter's name on Schedule 2 exercisable, in whole or in
part, at an initial exercise price of $____ or on a cashless basis, until the
fifth anniversary of the Effective Date, such warrant to be issued pursuant to
the Warrant Agreement attached as Exhibit A. The initial exercise price and
number of shares of Series B Preferred Stock issuable upon exercise of the
warrant shall be subject to adjustment pursuant to certain antidilution
provisions. Neither the Underwriters nor any permitted transferee of the
Underwriters shall exercise, sell, transfer, assign, hypothecate or otherwise
dispose of the Warrants, in whole or in part, for the later of a period of one
year from the Effective Date or the "Restricted Period," as defined in the
Certificate of Designation for the Series B Preferred Stock. Thereafter, the
Warrants may be sold, transferred, hypothecated or otherwise disposed of only
to: (i) to officers of the Underwriters who are also shareholders of the
Underwriters; (ii) by will and pursuant to the laws of descent and distribution;
or (iii) by operation of law. Pursuant to the Warrant Agreement, the
Underwriters shall be granted certain rights to include the Underwriters'
Warrants, shares issuable upon exercise of such Warrants ("Warrant Shares") and
shares issuable upon conversion of the Warrant Shares and other securities of
the Company held as of the date of the filing of the registration statement in
any registration statement covering the Common Stock of the Company filed by the
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<PAGE>
Company during the period of seven years following the Effective Date; provided,
however, that such rights shall not include the right of demand registration.
3. Offering of the Stock by the Underwriters. Upon
authorization by the Representatives of the release of the Stock, the several
Underwriters propose to offer the Stock for sale upon the terms and conditions
set forth in the Prospectus.
4. Delivery of and Payment for the Stock. Delivery of and
payment for the Stock shall be made at the office of Schulte Roth & Zabel LLP at
900 Third Avenue, New York, New York, at 11:00 A.M., New York City time, on the
third full business day following the date of this Agreement or at such other
date or place as shall be determined by agreement between the Representatives
and the Company. This date and time are sometimes referred to as the "Delivery
Date." On the Delivery Date, the Company shall deliver or cause to be delivered
certificates representing the Stock to the Representatives for the account of
each of the Underwriters against payment to or upon the order of the Company of
the purchase price (net of the discount provided for in the fifth paragraph of
Section 2) by certified or official bank check, checks or wire transfer, payable
in next day New York Clearing House funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Stock shall be registered in such names and in such denominations as the
Representatives shall request in writing not less than two full business days
prior to the Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Stock, the Company shall make the
certificates representing the Stock available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the Delivery Date.
On the Delivery Date, the Company will pay the commission
payable and deliver a fully executed warrant to the Underwriters under the last
two paragraphs of Section 2. The Company hereby authorizes the Representatives,
in order to effect the payment of such commission, to deduct from the purchase
price payable to the Company in exchange for the Stock sold on such date an
amount equal to such commission, calculated in accordance with the fourth
paragraph of Section 2.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than 10:00 A.M., New York City time,
on the day following the execution and delivery of this Agreement; to
make no further amendment or any supplement to the Registration
Statement or to the Prospectus except as permitted herein; to advise
the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with
copies thereof; to advise the Representatives, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Series B Preferred Stock for offering or sale in
any jurisdiction, of
7
<PAGE>
the initiation or threatening of any proceeding for any such purpose,
or of any request by the Commission for the amending or supplementing
of the Registration Statement or the Prospectus or for additional
information; and, in the event of the issuance of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending any such qualification, to
use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed
with the Commission, including all consents and exhibits filed
therewith;
(c) To make prompt delivery to the Representatives in New York
City (which delivery if requested by the Representatives shall be in
electronic form in addition to hard copy) such number of the following
documents as the Underwriter shall request: (i) conformed copies of the
Registration Statement as originally filed with the Commission and each
amendment thereto (in each case excluding exhibits other than this
Agreement and the computation of per share earnings) and (ii) each
Preliminary Prospectus, the Prospectus (not later than 10:00 A.M., New
York City time, of the day following the execution and delivery of this
Agreement) and any amended or supplemented Prospectus (not later than
10:00 A.M., New York City time, on the day following the date of such
amendment or supplement); and, if the delivery of a prospectus is
required at any time after the Effective Time of the Registration
Statement in connection with the offering or sale of the Series B
Preferred Stock and if at such time any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such
Prospectus is delivered, not misleading, or, if for any other reason it
shall be necessary to amend or supplement the Prospectus in order to
comply with the Securities Act, to notify the Representatives and, upon
its request, to prepare and furnish without charge to each Underwriter
and to any dealer in securities as many copies as the Representatives
may from time to time request of an amended or supplemented Prospectus
which will correct such statement or omission or effect such
compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the Underwriter,
be required by the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission (i) any amendment to
either of the Registration Statement or supplement to the Prospectus or
(ii) any Prospectus pursuant to Rule 424 of the Rules and Regulations,
to furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to any such
filing;
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<PAGE>
(f) As soon as practicable after the Effective Date of the
Registration Statement, to make generally available to the Company's
security holders and to deliver to the Representatives an earnings
statement of the Company (which need not be audited) complying with
Section 11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) For a period of three years following the Effective Date
of the Registration Statement, to furnish to the Representatives (i)
copies of all materials furnished by the Company to its shareholders
and all public reports and all reports and financial statements
furnished by the Company to the Commission pursuant to the Exchange Act
or any rule or regulation of the Commission thereunder, and (ii) such
other information as the Underwriters may reasonably request regarding
the Company;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Series B
Preferred Stock for offering and sale under the securities laws of such
jurisdictions as the Representatives may request and to comply with
such laws so as to permit the continuance of sales and dealings therein
in such jurisdictions for as long as may be necessary to complete the
distribution of the Series B Preferred Stock; provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation or file a general consent to service of process in
any jurisdiction;
(i) for a period of 180 days from the date of the Prospectus,
not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock, Series
A Convertible Preferred Stock, par value $0.001 per share ("Series A
Preferred Stock"), or Series B Preferred Stock or any securities
convertible into or exercisable or exchangeable for Series B Preferred
Stock, Series A Preferred Stock or Common Stock (other than shares
issued pursuant to stock option plans and warrants existing on the date
hereof, as described in the Prospectus) without the prior written
consent of the Representative; and to cause each officer and director
and five percent (5 %) stockholder of the Company to furnish to the
Representatives, prior to the Delivery Date, a letter or letters, in
form and substance satisfactory to counsel for the Underwriters,
pursuant to which each such person shall agree not to (x) offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Series B Preferred Stock, Series
A Convertible Preferred Stock, or Common Stock or any securities
convertible into or exercisable or exchangeable for Series B Preferred
Stock, Series A Preferred Stock or Common Stock (other than shares
issued pursuant to stock option plans and warrants existing on the date
hereof, as described in the Prospectus) which may be deemed to be
beneficially owned by such persons in accordance with the rules and
regulations of the Securities and Exchange Commission) or (y) enter
into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Series B
Preferred Stock, Series A Preferred Stock or Common Stock (regardless
of whether any of the transactions described in clause (x) or (y) is to
be settled by the delivery of Common Stock, Series A Preferred Stock or
Series B Preferred
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<PAGE>
Stock, or such other securities, in cash or otherwise), for a period of
30 days following the expiration or early termination of the Restricted
Period (as defined in the Certificate of Designation for the Stock),
without the prior written consent of the Representatives, provided that
this Section 5(i) shall not apply to recipients of: (i) gifts, (ii)
transfers or dispositions to a spouse, direct lineal relative
(including adopted descendants) or the spouse of a direct lineal
relative, and (iii) transfers or dispositions by will or by the laws of
decent and distribution (collectively, the "Permitted Transferees") of
shares of Series B Preferred Stock, Series A Convertible Preferred
Stock, or Common Stock or any securities convertible into or
exercisable or exchangeable for Series B Preferred Stock, Series A
Preferred Stock or Common Stock, if the Permitted Transferees each
shall have furnished to the Underwriter a letter, in form and substance
satisfactory to counsel for the Underwriters, whereby the Permitted
Transferee agrees to comply with the terms and provisions of (x) and
(y) above;
(j) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus;
(k) To take such steps as shall be necessary to ensure that
the Company thereof shall not become an "investment company" or an
entity "controlled" by an "investment company" within the meaning of
such terms under the 1940 Act; and
(l) Not to waive its right to terminate the Restricted Period
pursuant to clause (iv) of the definition thereof in the Certificate of
Designation for the Series B Preferred Stock without the consent of the
Underwriter.
6. Expenses. The Company agrees to pay, in addition to the
commissions specified in the fourth paragraph of Section 2, (a) the costs
incident to the authorization, issuance, sale and delivery of the Series B
Preferred Stock to the Underwriters and any taxes payable in that connection;
(b) the costs incident to the preparation, printing and filing under the
Securities Act of the Registration Statement and any amendments and exhibits
thereto provided, however, that Wit Capital Corporation agrees to pay one half
of the costs incident to the printing of any Preliminary Prospectus and any
amendment or supplement thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereto (including, in each case, exhibits), any Preliminary
Prospectus and the Prospectus and any amendment or supplement to the Prospectus,
and costs and expenses of any transfer agent; (d) the costs of reproducing and
distributing this Agreement, the Master Agreement Among Underwriters and the
Selected Dealers Agreement; (e) the costs of distributing the terms of agreement
relating to the organization of the underwriting syndicate and selling group to
the members thereof by mail, telex or other means of communication and (f) all
reasonable costs up to $10,000 incident to any roadshow in connection with the
offering of the Stock; (g) legal fees and expenses of underwriters' counsel in
connection with state securities and blue sky law clearances; (h) filing fees
with the National Association of Securities Dealers, Inc.; and (i) other costs
and expenses incident to the performance of the obligations of the Company under
this Agreement; provided that, except as provided in this Section 6 and in
Section 11, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Series B
Preferred Stock which it may sell and the expenses of advertising any offering
of the Series B Preferred Stock made by the Underwriters.
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<PAGE>
7. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with
the Commission in accordance with Section 5; no stop order
suspending the effectiveness of either of the Registration
Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the
Commission for inclusion of additional information in either
of the Registration Statement or the Prospectus or otherwise
shall have been complied with.
(b) No Underwriter shall have discovered and
disclosed to the Company on or prior to such Delivery Date
that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains any untrue statement
of a fact which, in the opinion of Schulte Roth & Zabel LLP,
counsel for the Underwriters, is material or omits to state
any fact which, in the opinion of such counsel, is material
and is required to be stated therein or is necessary to make
the statements therein not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this
Agreement, the Series B Preferred Stock, the Conversion
Shares, the Registration Statement and the Prospectus, and all
other legal matters relating to this Agreement and the
transactions contemplated hereby and thereby shall be
satisfactory in all respects to counsel for the Underwriters,
and the Company shall have furnished to such counsel all
documents and information that they may reasonably request to
enable them to pass upon such matters.
(d) Osborn Maledon, P.A., shall have furnished to the
Representatives its written opinion, as counsel to the
Company, addressed to the Underwriters and dated such Delivery
Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) The Company has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation is duly
qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which its respective
ownership or lease of property or the conduct of its business
requires such qualification, except where the failure to be so
qualified and in good standing would not have a material
adverse effect on the business, management, financial
condition, results of operations, or prospects of the Company,
and has all corporate power and authority necessary to own or
hold its properties and to conduct the business in which it is
engaged;
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(ii) This Agreement has been duly
authorized, executed and delivered by the Company;
(iii) The Company has an authorized
capitalization as set forth in the Prospectus, and all of the
issued shares of capital stock of the Company (including the
shares of Series B Preferred Stock being delivered on such
Delivery Date) have been duly and validly authorized and
issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus;
(iv) The Registration Statement was declared
effective under the Securities Act as of the date and time
specified in such opinion, the Prospectus was filed with the
Commission pursuant to the subparagraph of Rule 424(b) of the
Rules and Regulations specified in such opinion on the date
specified therein and no stop order suspending the
effectiveness of the Registration Statement has been issued
and, to the knowledge of such counsel, no proceeding for that
purpose is pending or threatened by the Commission;
(v) The Registration Statement, as of its
Effective Date, and the Prospectus, as of its date, and any
further amendments or supplements thereto, as of their
respective dates, made by the Company prior to such Delivery
Date (other than the financial statements (including the notes
thereto) and other financial, statistical and accounting data
contained therein, as to which such counsel need express no
opinion) complied as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations, it being understood that counsel expresses no
view with respect to the financial statements, schedules, pro
forma financial statements, projections and other financial
and statistical data included in the Registration Statement or
Prospectus;
(vi) The issue and sale of the shares of
Series B Preferred Stock being delivered on such Delivery Date
by the Company and the compliance by the Company with all of
the provisions of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or
result in a material breach or violation of any of the terms
or provisions of, or constitute a material default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Company is a party or by which the Company is bound or to
which any of the properties or assets of the Company are
subject, nor will such actions result in any material
violation of the provisions of the charter or by-laws of the
Company or any statute or any order, rule or regulation known
to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its properties
or assets; and, except for the registration of the Series B
Preferred Stock under the Securities Act and such filings and
registrations as may be required under applicable state
securities laws in connection with the purchase and
distribution of the Series B Preferred Stock by the
Underwriters, no consent, approval, authorization or order of,
or filing or registration with, any such court or governmental
agency or body is required for the execution, delivery and
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<PAGE>
performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby;
(vii) Except as described in the Prospectus,
there are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer or
conversion of any shares of the Series B Preferred Stock
pursuant to the Company's charter or by-laws or any agreement
or other instrument known to such counsel;
(viii) To the best of such counsel's
knowledge, there are no legal or governmental proceedings
pending to which the Company is a party or of which any
property or asset of the Company is the subject which might
have a material adverse effect on the business, management,
financial condition, results of operations, or prospects of
the Company; except as disclosed in the Prospectus, to the
best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or
threatened by others; except as disclosed in the Prospectus,
to the best of such counsel's knowledge, the Company is in
material compliance with the laws, orders, rules and
regulations generally applicable to its business;
(ix) To the best of such counsel's
knowledge, there are no contracts or other documents which are
required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act
or by the Rules and Regulations which have not been described
or filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the Rules
and Regulations;
(x) The form of certificate used to evidence
the Series B Preferred Stock complies in all material respects
with all applicable statutory requirements, with any
applicable requirements of the certificate of incorporation
and by-laws of the Company;
(xi) To the best of such counsel's
knowledge, except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company
and any person granting such person the right to require the
Company to file a registration statement under the Securities
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Securities Act;
(xii) The Company is not, nor upon the sale
of the Series B Preferred Stock as herein contemplated will be
an "investment company" or an entity "controlled" by an
"investment company" within the meaning of such terms under
the 1940 Act; and
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In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of
the United States of America and the laws of the State of
Arizona and the General Corporation Law of Delaware; (ii) rely
on an opinion or opinions of other counsel retained by them or
the Company as to the laws and jurisdiction other than the
State of Arizona and the general corporation law of the State
of Delaware, provided that each such opinion is satisfactory
in scope and form to the Representatives and, in its opinion,
such counsel is and the Underwriters are justified in relying
thereon, and (iii) as to matters of fact, such counsel may
rely on certificates of officers of the Company and of
government officials and the representations and warranties of
the Company set forth in this Agreement. Such counsel shall
also have furnished to the Representatives a written
statement, addressed to each Underwriter and dated such
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel has acted
as counsel to the Company on a regular basis and has acted as
counsel to the Company in connection with the preparation of
the Registration Statement, (y) such counsel has participated
in conferences with representatives of the Company, the
Representatives, counsel to the Underwriters and the
independent accountants of the Company at which the contents
of the Registration Statement, Prospectus and related matters
were discussed, and (z) based on the foregoing, no facts have
come to the attention of such counsel which lead it to believe
that the Registration Statement (excluding the financial
statements and notes thereto, schedules, pro forma financial
statements, projections and other financial and statistical
data included therein), as of its Effective Date, contained
any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary
in order to make the statements therein not misleading, or
that the Prospectus (excluding the financial statements and
notes thereto, schedules, pro forma financial statements,
projections and other financial and statistical data included
therein) contains as of its filing date and the Delivery Date
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
foregoing opinion and statement may be qualified by a
statement to the effect that such counsel is not passing on,
and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for the
statements made in the Prospectus under the caption
"Description of Capital Stock", insofar as such statements
relate to the Series B Preferred Stock and concern legal
matters.
(e) With respect to the letter of Ernst & Young
delivered to the Representatives concurrently with the
execution of this Agreement (the "initial letter"), the
Company shall have furnished to the Representatives a letter
(the "bring-down letter") of such accountants, addressed to
the Underwriters and dated such Delivery Date (i) confirming
that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the
applicable requirements relating to the qualification of
accountants under Rule 2-01 of
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Regulation S-X of the Commission, (ii) stating, as of the date
of the bring-down letter (or, with respect to matters
involving changes or developments since the respective dates
as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the
date of the bring-down letter), the conclusions and findings
of such firm with respect to the financial information and
other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and
findings set forth in the initial letter.
(f) The Company shall have furnished to the
Representatives a certificate, dated such Delivery Date, of
its Chief Executive Officer and its Chief Financial Officer
stating that:
(i) The representations, warranties and
agreements of the Company in Section 1 are true and correct as
of such Delivery Date; the Company has complied with all its
agreements contained herein; and the conditions set forth in
Section 7(a) have been fulfilled;
(ii) The Company has not sustained, since
the date of the latest audited financial statements included
in the Prospectus, any material loss or interference with its
business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital
stock or long-term debt of the Company or any material adverse
change, or any development involving a prospective material
adverse change, in or affecting the business, management,
financial condition, results of operations, or prospects of
the Company, other than as set forth or contemplated in the
Prospectus.
(iii) They have carefully examined the
Registration Statements and the Prospectus and, in their
opinion, (A) the Registration Statement, as of its Effective
Date, and the Prospectus, as of the Effective Date, did not
include any untrue statement of a material fact and did not
omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading,
and (B) since the Effective Date of the Registration
Statement, no event has occurred which should have been set
forth in a supplement or amendment to the Registration
Statement or the Prospectus.
(g) (i) The Company shall not have sustained
since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (ii)
since such date there shall not have been any change in the
capital stock or long-term debt of the Company or any change,
or any development involving a prospective change, in or
affecting the business, management, financial condition,
results of operations, or prospects of the
<PAGE>
Company, other than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is, in the judgment of the
Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public
offering or the delivery of the Series B Stock being delivered
on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(h) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following:
(i) trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or in the
over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or
such market by the Commission, by such exchange or by any
other regulatory body or governmental authority having
jurisdiction, (ii) a banking moratorium shall have been
declared by Federal authorities or authorities in the State of
New York or Arizona, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have
been a declaration of a national emergency or war by the
United States or (iv) there shall have occurred such a
material adverse change in general economic, political or
financial conditions (or the effect of international
conditions on the financial markets in the United States shall
be such) as to make it, in the judgment of a majority interest
of the several Underwriters, impracticable or inadvisable to
proceed with the offering or delivery of the Series B
Preferred Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance satisfactory to
counsel for the Representatives.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, from
and against any loss, claim, damage or liability, joint or several, or
any action in respect thereof (including, but not limited to, any loss,
claim, damage, liability or action relating to purchases and sales of
Series B Preferred Stock), to which that Underwriter, officer, employee
or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any
amendment or supplement thereto, (ii) the omission or alleged omission
to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, any material
fact required to be stated therein or necessary to make the statements
therein not misleading or (iii) any act or failure to act, or any
alleged act or failure to act, by any Underwriter in connection with,
or relating in any manner to, the Series B Preferred Stock or the
offering contemplated
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<PAGE>
hereby, and which is included as part of or referred to in any loss,
claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall
not be liable in the case of any matter covered by this clause (iii) to
the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such act or failure to act undertaken
or omitted to be taken by such Underwriter through its gross negligence
or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee and controlling person promptly upon demand for
any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such
loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus,
or in any such amendment or supplement, in reliance upon and in
conformity with the written information furnished to the Company
through the Representative by or on behalf of the Underwriter
specifically for inclusion therein and described in Section 8; and
provided further that as to any Preliminary Prospectus this indemnity
agreement shall not inure to the benefit of any Underwriter, its
officers or employees or any person controlling any Underwriter on
account of any loss, claim, damage, liability or action arising from
the sale of Series B Preferred Stock to any person by that Underwriter
if that Underwriter failed to send or deliver a copy of the Prospectus,
as the same may be amended or supplemented, to that person within the
time required by the Securities Act, and the untrue statement or
alleged untrue statement of any material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus was
corrected in the Prospectus, unless such failure resulted from
non-compliance by the Company with Section 5. The foregoing indemnity
agreement is in addition to any liability which the Company may
otherwise have to any Underwriter or to any officer, employee or
controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees,
each of its directors and each person, if any, who controls the Company
within the meaning of the Securities Act, from and against any loss,
claim, damage or liability, joint or several, or any action in respect
thereof, to which the Company or any such director, officer or
controlling person may become subject, under the Securities Act or
otherwise, to the extent that it is determined in a final judgment by a
court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any act or failure to act
undertaken or omitted to be taken by the Underwriter through its gross
negligence or willful misconduct, or insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or (ii) the
omission or alleged omission to state in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, any material fact required to be stated therein or
necessary to make the statements therein
17
<PAGE>
not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with the written
information furnished to the Company through the Representative by or
on behalf of that Underwriter specifically for inclusion therein and
described in Section 8, and shall reimburse the Company and any such
director, officer or controlling person for any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or
action as such expenses are incurred. The foregoing indemnity agreement
is in addition to any liability which any Underwriter may otherwise
have to the Company or any such director, officer or controlling
person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under
this Section 8 except to the extent it has been materially prejudiced
by such failure and, provided further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may
have to an indemnified party otherwise than under this Section 8. If
any such claim or action shall be brought against an indemnified party,
and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that
it wishes, jointly with any other indemnifying party, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified
party; provided, however, that the Representatives shall have the right
to employ counsel to represent jointly the Representatives and those
other Underwriters and their respective officers, employees and
controlling persons who may be subject to liability arising out of any
claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment
of the Representatives, it is advisable for the Representatives, those
Underwriters, officers, employees and controlling persons to be
represented by separate counsel, and in that event the fees and
expenses of such separate counsel shall be paid by the Company to the
extent provided in this Section 8. After notice from the indemnifying
party to the indemnified party of its election to assume the defense of
such claim or action, the indemnifying party shall not be liable to the
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation. Each
indemnified party, as a condition of the indemnity agreements contained
in Section 8(a) and (b) shall use its reasonable best efforts to
cooperate with the indemnifying party in the defense of any such action
or claim. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of
any judgment with respect to any pending or threatened claim, action,
suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are
actual or potential parties to such claim or
18
<PAGE>
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be
liable for any settlement of any such action effected without its
written consent (which consent shall not be unreasonably withheld), but
if settled with its written consent or if there be a final judgment of
the plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and against any
loss of liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8
shall for any reason be unavailable to or insufficient to hold harmless
an indemnified party under Section 8(a) or 8(b) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred
to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage or
liability, or action in respect thereof, (i) in such proportion as
shall be appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, from
the offering of the Series B Preferred Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other hand with
respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the
other hand, with respect to such offering shall be deemed to be in the
same proportion as the total net proceeds from the offering of the
Series B Preferred Stock purchased under this Agreement (before
deducting expenses) received by the Company, on the one hand, and the
total underwriting discounts received by the Underwriters with respect
to the shares of the Series B Preferred Stock purchased under this
Agreement, on the other hand, bear to the total gross proceeds from the
offering of the shares of the Series B Preferred Stock under this
Agreement, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the intent of
the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8 were to be
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an
indemnified party as a result of the loss, claim, damage or liability,
or action in respect thereof, referred to above in this Section 8 shall
be deemed to include, for purposes of this Section 8, any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall
be required to contribute any amount in excess of the amount by which
the total price at which the Series B Preferred Stock underwritten by
it and distributed to
19
<PAGE>
the public was offered to the public exceeds the amount of any damages
which such Underwriter has otherwise paid or become liable to pay by
reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 8 are several in proportion to their
respective underwriting obligations and not joint.
(e) The Underwriters severally confirm that the statements
with respect to the public offering of the Series B Preferred Stock set
forth on the cover page of, and under the caption "Underwriting" in,
the Prospectus are correct and constitute the only information
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the
Prospectus.
9. Defaulting Underwriters. If, on the Delivery Date, any
Underwriter defaults in the performance of its obligations under this Agreement,
the remaining non-defaulting Underwriters shall be obligated to purchase the
Series B Preferred Stock which the defaulting Underwriter agreed but failed to
purchase on the Delivery Date in the respective proportions which the number of
shares of the Series B Preferred Stock set forth opposite the name of each
remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total
number of shares of the Series B Preferred Stock set forth opposite the names of
all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided,
however, that the remaining non-defaulting Underwriters shall not be obligated
to purchase any of the Series B Preferred Stock on such Delivery Date if the
total number of shares of the Series B Preferred Stock which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such date exceeds
9.09% of the total number of shares of the Series B Preferred Stock to be
purchased on the Delivery Date, and any remaining non-defaulting Underwriter
shall not be obligated to purchase more than 110% of the number of shares of the
Series B Preferred Stock which it agreed to purchase on the Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representative who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Series B Preferred Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representative
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on the Delivery Date, this Agreement
shall terminate without liability on the part of any non-defaulting Underwriter
or the Company, except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 6 and 11. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 9, purchases Series B Preferred
Stock which a defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company for damages caused by
its default. If other underwriters are obligated or agree to purchase the Series
B Preferred Stock of a defaulting or withdrawing Underwriter, either the
Representatives or the Company may postpone the Delivery Date for up to seven
full
20
<PAGE>
business days in order to effect any changes that in the opinion of counsel for
the Company or counsel for the Underwriters may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Series B Preferred Stock if,
prior to that time, any of the events described in Sections 7(g) or 7(h) shall
have occurred or if the Underwriters shall decline to purchase the Series B
Preferred Stock for any reason permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If (a) the
Company shall fail to tender the Series B Preferred Stock for delivery to the
Underwriters for any reason permitted under this Agreement, or (b) the offering
does not take place for a reason that cannot reasonably be described as
constituting a failure or unreasonable unwillingness on the part of the
Underwriters to proceed, the Company shall reimburse the Underwriters up to
$25,000 for the fees and expenses of their counsel and for such other
out-of-pocket expenses as shall have been incurred by them in connection with
this Agreement and the proposed purchase of the Series B Preferred Stock, and
upon demand the Company shall pay the full amount thereof to the Underwriters.
If this Agreement is terminated pursuant to Section 9 by reason of the default
of one or more Underwriters, the Company shall not be obligated to reimburse any
defaulting Underwriter on account of those expenses.
12. Notices, etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Representative, shall be delivered or sent by
mail, e-mail or facsimile transmission to Wit Capital Corporation, 826
Broadway, New York, New York 10013, Attention: William Feeley (Fax:
212-253-4610) (E-mail Address: [email protected]);
(b) if to the Company, shall be delivered or sent by mail,
e-mail or facsimile transmission to the address of the Company set
forth in the Registration Statement, Attention: __________ (Fax:
_____________) (E-mail Address: _____________); and
provided, however, that any notice to an Underwriter pursuant to Section 8 shall
be delivered or sent by mail, telex, facsimile or e-mail transmission to such
Underwriter at its address set forth in its acceptance to the Representative,
which address will be supplied to any other party hereto by the Representative
upon request. Any such statements, requests, notices or agreements shall take
effect at the time of receipt thereof. The Company shall be entitled to act and
rely upon any request, consent, notice or agreement given or made on behalf of
the Underwriters by the Representatives.
13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company
and their respective personal representatives and successors. This Agreement and
the terms and provisions hereof are for the
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<PAGE>
sole benefit of only those persons, except that (A) the representations,
warranties, indemnities and agreements of the Company contained in this
Agreement shall also be deemed to be for the benefit of the officers and
employees of each Underwriter and the person or persons, if any, who control
each Underwriter within the meaning of Section 15 of the Securities Act and (B)
the indemnity agreement of the Underwriters contained in Section 8 of this
Agreement shall be deemed to be for the benefit of directors, officers and
employees of the Company and any person controlling the Company within the
meaning of Section 15 of the Securities Act. Nothing in this Agreement is
intended or shall be construed to give any person, other than the persons
referred to in this Section 11, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Series B Preferred
Stock and shall remain in full force and effect, regardless of any investigation
made by or on behalf of any of them or any person controlling any of them.
15. Certain Definitions. For purposes of this Agreement,
"business day" means any day on which the New York Stock Exchange, Inc. is open
for trading.
16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
17. Counterparts. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement among the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
SANDBOX ENTERTAINMENT CORPORATION
By _________________________
{name}
Accepted and agreed:
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<PAGE>
On behalf of themselves and the several other Underwriters named in Schedule 1
hereto.
WIT CAPITAL CORPORATION
By: _____________________
By: _____________________
By: _____________________
23
<PAGE>
SCHEDULE 1
EXHIBIT 1(b)
MASTER AGREEMENT AMONG UNDERWRITERS
December __, 1997
Dear Sirs:
On or after the date hereof we may invite you to participate
as an underwriter in connection with one or more public offerings of securities
in which we are serving as sole or lead representative of the underwriting
syndicates. This Agreement will confirm our mutual agreement to the following
general terms and conditions applicable to your participation in any such
underwriting syndicate.
1. Applicability of this Agreement; Invitation and Acceptance.
From time to time on or after the date hereof we may be responsible for managing
or otherwise implementing the sale of securities offered publicly pursuant to a
registration statement filed under the Securities Act of 1933, as amended (the
"Securities Act"), or offered pursuant to an exemption from registration
thereunder. The terms and conditions of this Agreement shall be applicable to
any such offering in which we have invited you to participate as an underwriter
and have expressly informed you that the terms and conditions of this Agreement
shall apply. This Agreement shall not apply to any offering of securities
effected wholly outside the United States of America. Any offering to which the
terms and conditions of this Agreement apply is herein referred to as an
"Offering", and the securities offered in an Offering, including any
Over-Allotment Securities (as hereinafter defined), are herein referred to as
the "Securities" with respect to such Offering.
We shall invite you to participate in an Offering and in
connection therewith shall advise you of:
(a) the principal terms of the Securities;
(b) the names of the issuer of the Securities, any
seller of Securities other than the issuer; any guarantor or insurer of the
Securities, the trustee or trustees under any indenture governing the Securities
and any Representative (as hereinafter defined) other than us;
(c) the amount of Securities to be underwritten by
you;
(d) the expected offering date and the expected
closing date or dates for the Securities; and
(e) the initial offering price or prices of the
Securities and the gross underwriting discounts and commissions in connection
therewith, together with the management fee, underwriting compensation (and, if
the Invitation, as defined below, states that the provisions of Section 7(b)
hereof shall apply to the Offering, the portion of such underwriting
compensation designated as the selling underwriters' fee, as such term is
defined in Section 7(b) hereof) and
<PAGE>
selling concession to Selected Dealers (as hereinafter defined) comprising such
underwriting discounts and commissions and with any reallowance to other
dealers, except that if the initial offering price or prices of the Securities
are to be determined by reference to the market price of the Securities or to a
formula based upon the market price of certain securities (either such procedure
being herein referred to as "Market Pricing"), we shall so indicate in lieu of
specifying such initial offering price or prices (and other applicable terms of
the Securities) and shall specify only the maximum gross underwriting discounts
and commissions and the maximum management fee, instead of the fixed gross
underwriting discounts and commissions and the management fee, underwriting
compensation (and, if applicable, selling underwriters' fee), selling concession
and reallowance.
Such invitation and additional information, to the extent
applicable and then determined, shall be conveyed to you in a telegram, telex,
facsimile transmission, e-mail or other written form (electronic or otherwise)
of communication (any communication in any such form being herein referred to as
a "written communication"). Any such additional information, to the extent
applicable but not determined at the time such invitation is conveyed to you,
will be conveyed to you in a subsequent written communication. All written
communications addressed to you with respect to the Offering are herein referred
to collectively as the "Invitation". The Invitation will include instructions
for advising us of your acceptance (your "Acceptance") of the Invitation. If we
have received your Acceptance, a subsequent written communication from us shall
state that you may reject your allotment of Securities by notifying us prior to
the time and in the manner specified in such written communication.
If any seller of Securities proposes to authorize the
Underwriters (as hereinafter defined) to solicit offers to purchase the
Securities pursuant to delayed delivery contracts (such contracts being herein
referred to as "Delayed Delivery Contracts" and an Offering of Securities
pursuant to such contracts being herein referred to as a "Delayed Delivery
Offering"), we shall so advise you in the Invitation and shall advise you of
certain terms of the Delayed Delivery Contracts and the compensation to be
received in connection therewith. If the Underwriting Agreement (as hereinafter
defined) provides for the granting by any seller of Securities solely to cover
over-allotments (the "Over-Allotment Securities"), we shall notify you in the
Invitation of such option and of your maximum obligation upon exercise of such
option.
The Invitation may also contain provisions that amend or
supplement the terms and conditions of this Agreement as they apply to an
Offering. To the extent such supplementary terms and conditions are inconsistent
with any provision herein, such terms and conditions shall supersede any such
provision and you, by your Acceptance, shall be bound thereby. The terms
2
<PAGE>
and conditions of this Agreement, as so amended or supplemented, shall become
effective with respect to your participation in such Offering only if we have
received your Acceptance before the date and time specified in the Invitation
and have not received a subsequent written communication from you rejecting your
allotment, pursuant to the second preceding paragraph.
Except as otherwise indicated, the following provisions of
this Agreement shall apply separately to each Offering.
2. Underwriting Arrangements. In connection with each
Offering, one or more of the issuer, one or more shareholders of the issuer, or
any seller, guarantor or insurer of the Securities will enter into an
underwriting or purchase agreement and may enter into an associated terms
agreement or similar agreement (collectively, the "Underwriting Agreement") with
us acting either as sole representative or as lead representative of one or more
other representatives of the underwriters named in the Underwriting Agreement
(the "Underwriters"). We, as sole representative of the Underwriters or, we and
one or more other representatives of the Underwriters as are named in the
Invitation, as the case may be, are herein referred to as the "Representatives".
The Underwriting Agreement shall be in the form (with all such additions,
modifications and deletions as the Representatives shall deem appropriate) that
shall have been filed with, and be publicly available from, the Securities and
Exchange Commission (the "Commission") or such other regulatory authority as we
shall specify in the Invitation or that we shall send to you (or make available
for you review in our office) as soon as practicable.
By your Acceptance, you agree and authorize us to agree to
purchase on your behalf, in accordance with the terms of the Underwriting
Agreement, (a) the amount of the Securities set forth opposite your name in the
Underwriting Agreement (which amount may exceed the amount set forth in the
Invitation by not more than __% as result of an increase in the aggregate amount
of the Securities or a reallotment of the Securities among the Underwriters)
plus the amount of any Securities that you may become obligated to purchase,
other than the amount of any Over-Allotment Securities, pursuant to Section 5
hereof (collectively, your "Initial Commitment"), plus (b) the amount of any
Over-Allotment Securities that you may become obligated to purchase by reason of
the exercise of an option provided in the Underwriting Agreement (including any
such Securities purchased pursuant to Section 5 hereof), less (c) the amount of
any Securities contracted to be sold pursuant to any Delayed Delivery Contracts
("Contract Securities") allocated to you in accordance with the last paragraph
of Section 6 hereof. The Securities that, after adding any such increases to and
subtracting any such decrease from your Initial Commitment, you are obligated to
purchase pursuant to the Underwriting Agreement are herein referred to
collectively as "your Securities". The percentage that an Underwriter's Initial
Commitment bears to the aggregate Initial Commitments of all of the Underwriters
is hereinafter referred to as the "Initial Commitment Percentage" of such
Underwriter.
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Your Acceptance shall also constitute (i) your representation
that your commitment to purchase your Securities will not result in a violation
of the financial responsibility requirements of Rule 15c3-1 (or any successor
provision) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any similar requirements of the National Association of Securities
Dealers, Inc. ("NASD"), if you are a member, or of any securities exchange to
which you belong; (ii) your confirmation that the information that you have
given or are deemed to have given in response to the Master Underwriters'
Questionnaire, attached as Exhibit A hereto, is correct; and (iii) your consent
to the inclusion in any registration statement, prospectus or offering circular
(as hereinafter defined) in connection with an Offering, as such may be amended
or supplemented, of a reference to you as one of the Underwriters of the
Securities and of certain information that you have given or are deemed to have
given in response to the Master Underwriters' Questionnaire. You agree to notify
us immediately of any development before the termination of this Agreement with
respect to any Offering which makes untrue or incomplete any information that
you have given or are deemed to have given in response to the Master
Underwriters' Questionnaire, and you consent to the inclusion of the information
with respect to such development in such registration statement, prospectus or
offering circular.
In the event that the Securities include debt obligations
maturing serially, your Securities shall include, subject to any adjustments
provided for in the Underwriting Agreement or in the Invitation, a principal
amount of each series of such debt obligations that equals your Initial
Commitment Percentage of the aggregate principal amount of such series.
3. Offering Documents.
(a) Registered Offerings. In the case of an Offering
of Securities registered under the Securities Act (a "Registered Offering"), we
shall either provide you in the Invitation with the file number of the
registration statement filed with the Commission with respect to the Securities
or provide to you (or make available for your review in our office) as soon as
practicable a copy (which may be in electronic form) of such registration
statement or the latest amendment thereto which incorporates by reference the
original registration statement and earlier filed amendments. You shall
familiarize yourself with the terms of the Securities and the other terms of the
Offering reflected in the Invitation, such registration statement, any
prospectus subject to completion included in such registration statement (a
"preliminary prospectus"), any prospectus included in such registration
statement or otherwise filed with the Commission, or any amendment or supplement
to any of the foregoing. You understand that you will not be authorized by the
issuer or any seller, guarantor or insurer of the Securities to give any
information or to make any representation not contained in the registration
statement, a preliminary prospectus or the prospectus, as amended or
supplemented, in connection with the Offering of such Securities. You authorize
us, with the approval of counsel for the Underwriters, to approve on your behalf
any amendments or supplements to such registration statement, any such
preliminary prospectus or such prospectus. Your Acceptance shall constitute your
representation that the information to be set forth in such registration
statement, any such preliminary prospectus, such prospectus and any such
amendment or supplement is correct and not misleading insofar as it relates to
you. By your Acceptance you confirm that you have delivered and agree that you
will deliver all preliminary prospectuses and prospectuses required for
compliance with the provisions of Securities Act Release No. 4968 and Rule
15c2-8 (or any successor release or provision) under the Exchange
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Act and any applicable foreign laws (and any applicable rules and regulations
thereunder). By your Acceptance you agree to make a record of your distribution
of each preliminary prospectus and prospectus (including dates, numbers of
copies and persons to whom sent) and you shall, if requested by the
Representatives, furnish a copy of an amended or supplemented preliminary
prospectus or prospectus to each person to whom you have furnished a previous
preliminary prospectus or prospectus and, if also requested by the
Representatives, indicate to each such person the changes reflected in such
amended or supplemented preliminary prospectus or prospectus.
(b) Non-Registered Offerings. In the case of an
Offering other than a Registered Offering, we shall provide you in the
Invitation with information as to the availability through a specified
regulatory authority of a preliminary offering circular or other document
comparable to a preliminary prospectus in a Registered Offering (a "preliminary
offering circular") relating to such Offering, a proof (which may be in
electronic format) of an offering circular or other document comparable to a
prospectus in a Registered Offering (an "offering circular") relating to such
Offering, or such offering circular. Alternatively, we may provide to you (or
make available for your review in our office) as soon as practicable a copy of
such preliminary offering circular, proof of an offering circular or offering
circular. You shall familiarize yourself with the terms of the Securities and
the other terms of the Offering reflected in the Invitation or in any such
preliminary offering circular, proof of an offering circular or offering
circular. You understand that you will not be authorized by the issuer or any
seller, guarantor or insurer of the Securities to give any information or to
make any representation not contained in a preliminary offering circular, proof
of an offering circular or offering circular, as amended or supplemented, in
connection with the Offering of such Securities. You authorize us, with the
approval of counsel for the Underwriters, to approve on your behalf any
amendments or supplements to any such preliminary offering circular, proof of an
offering circular or offering circular. Your Acceptance shall constitute your
representation that the information to be set forth in any such preliminary
offering circular, proof of an offering circular or such offering circular is
correct and not misleading insofar as it relates to you. By your Acceptance you
confirm that you have delivered and you agree that you will deliver all
preliminary offering circulars and offering circulars required for compliance
with the applicable federal, state and foreign laws, and applicable rules and
regulations of any regulatory body promulgated under such laws, governing the
use and distribution of offering circulars by underwriters and, to the extent
consistent with such laws, rules and regulations, you confirm that you have
delivered and agree that you will deliver all preliminary offering circulars and
offering circulars that would be required if the provisions of Rule 15c2-8 (or
any successor provision) under the Exchange Act applied to such Offering. By
your Acceptance you agree to make a record of your distribution of each
preliminary offering circular, proof of an offering circular and offering
circular (including dates, numbers of copies and persons to whom sent) and you
shall, if requested by the Representatives, furnish a copy of an amended or
supplemented preliminary offering circular, proof of an offering circular or
offering circular and, if also requested by the Representatives, indicate to
each such person the changes reflected in such amended or supplemented
preliminary offering circular, proof of an offering circular or offering
circular.
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(c) Name and Address. Except as you otherwise notify
us in writing from time to time, your name as it should appear in the prospectus
or offering circular relating to an Offering and your address are as set forth
on the signature page hereof.
4. Authority of the Representatives. You authorize the
Representatives to execute and deliver the Underwriting Agreement on your behalf
and to agree to any variation of its terms except as to the purchase price of
your Securities (unless the offering price or prices of the Securities are to be
determined by Market Pricing) or, except as provided herein or in the
Underwriting Agreement, as to the amount of your Securities. If the offering
price or prices of the Securities are to be determined by Market Pricing, you
also authorize the Representatives to determine the initial offering price of
the Securities but not to change the manner in which the offering price or
prices are to be determined. You understand that the Representatives may change
the proposed composition of the syndicate of Underwriters.
You authorize us to exercise all the authority and discretion
vested in the Underwriters or in the Representatives by the provisions of the
Underwriting Agreement and to take all such actions as in our discretion may be
necessary or desirable to carry out the provisions of the Underwriting Agreement
and this Agreement. You understand that, except as otherwise specifically
indicated herein, all determinations made or other actions taken by us or by the
Representatives hereunder shall be made or taken in our sole discretion and
judgment or in the sole discretion and judgment of the Representatives, as the
case may be. You will be bound by all the terms of the Underwriting Agreement as
executed.
You authorize the Representatives to take such actions as may
be necessary or desirable to effect the sale and distribution of the Securities,
including the right to determine the terms of the Offering, the selling
concession to Selected Dealers and any reallowance to other dealers, the right
to exercise any option in the Underwriting Agreement relating to the purchase of
Over-Allotment Securities and the right to make any judgment relating to the
satisfaction of conditions to the obligations of the Underwriters under the
Underwriting Agreement (including the waiver of any such conditions or the
termination of the Underwriting Agreement.
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You agree to cooperate with the Representatives to the extent possible in order
to satisfy any undertakings the Representatives may make to any national
securities exchange in connection with the listing and distribution of the
Securities. You authorize the Representatives to file with any governmental
agency any reports required to be filed by the Representatives or the
Underwriters in connection with the transactions contemplated by the
Underwriting Agreement or this Agreement, and you shall furnish any information
in your possession that is needed for such reports.
If the Underwriters should be deemed to constitute a
partnership for federal income tax purposes, then you elect to be excluded from
the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue
Code of 1986 and agree not to take any position inconsistent with such election,
and you authorize the Representatives to execute and file on your behalf such
evidence of such election as may be required by the Internal Revenue Service.
If we are acting with other firms as Representatives, your
representations and agreements set forth herein shall also be for the benefit of
such other firms; provided, however, that it is expressly understood that any
action that you herein authorize the Representatives to take may be taken by us
on behalf of all of the Representatives.
You agree that a public advertisement of the Offering may be
made by the Representatives on behalf of the Underwriters on such date as the
Representatives shall determine. Your Acceptance shall constitute your
representation that you have not advertised the Offering and that you will not
do so until after the earlier of the first [Delivery] Date (as defined in the
Underwriting Agreement) or the first date on which the Representatives shall
have publicly advertised the Offering. You understand that any advertisement you
may then make shall be on your own responsibility and at your own expense and
risk.
5. Defaulting Underwriters. Until such time as the terms of
this Agreement shall cease to be applicable to an Offering, you authorize the
Representatives to arrange for the purchase by other persons, who may include
any of the Underwriters, of any Securities not taken up and paid for by any
Underwriter in default of its obligations under the Underwriting Agreement. If
such arrangements are made, the respective amounts of the Securities to be
purchased by the non-defaulting Underwriters and such other persons shall be
taken as the basis for all rights and obligations hereunder; but this shall not
in any way affect the liability of any defaulting Underwriter to the other
Underwriters for damages
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resulting from its default, nor shall any such default relieve any other
Underwriter of any of its obligations hereunder or under the Underwriting
Agreement, except as herein or therein provided.
In event of a default by an Underwriter in respect of its
obligations under the Underwriting Agreement to take up and pay for any
Securities agreed to be purchased by it thereunder or a failure by an
Underwriter to deliver any securities sold or over-allotted by the
Representatives for the account of such Underwriter pursuant to Section 10
hereof or to bear, subject to the provisions of Section 7(b) hereof, if
applicable, its Initial Commitment Percentage of expenses or liabilities
pursuant to Sections 12, 14 and 15 hereof, and to the extent that arrangements
shall not have been made by us for any other persons to assume the obligations
of such Underwriter, you agree (subject to any limitations contained in the
Underwriting Agreement) to assume your proportionate share, based upon the
percentage that the amount of the Securities set forth in the Underwriting
Agreement opposite your name bears to the aggregate amount of the Securities set
forth in the Underwriting Agreement opposite the names of all non-defaulting
Underwriters, of the obligations of such Underwriter without relieving such
Underwriter of its liability therefor.
6. Offerings. The Representatives shall notify you when the
initial public offering of the Securities is to be made and of the initial
public offering price or prices, if any. You hereby authorize the
Representatives to change the public offering price or prices, the selling
concession to Selected Dealers and reallowance to other dealers, and the other
terms of sale hereunder and under any agreements with Selected Dealers, by
reason of changes in general market conditions or otherwise. The public offering
price or prices at any time in effect are hereinafter referred to as the
"offering price or prices". If the offering price or prices of Securities are to
be determined by Market Pricing, the offering price or prices, the selling
concession and the reallowance with respect to such Securities shall refer to
such price or prices, selling concession and reallowance as determined by the
Representatives from time to time. You agree that any of the Securities released
to you for public offering and not reserved by the Representatives for sale to
dealers, including any firm also acting as an Underwriter, to be selected by the
Representatives (the "Selected Dealers") or to institutions and other retail
purchasers shall be promptly reoffered at the offering price or prices, and you
will not allow any discount therefrom except as otherwise provided herein.
You authorize the Representatives, for your account, to
reserve and offer for sale to Selected Dealers such of your Securities as the
Representatives may determine. Reservations for sales to Selected Dealers for
the accounts of the Underwriters need not be made in proportion to the
respective Initial Commitment Percentages of the Underwriters. Any Securities so
reserved for your account shall be made as nearly as practicable in the ratio
which the amount of your Securities reserved for sale to Selected Dealers bears
to the aggregate amount of Securities so reserved for the accounts of all
Underwriters, as calculated from day to day. Any such offering to Selected
Dealers may be made pursuant to the terms and conditions of Wit Capital
Corporation Master Selected Dealer Agreement (copies of which are available from
us upon request) or otherwise, as the Representatives may determine.
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You also authorize the Representatives, for your account, to
reserve and offer for sale to institutions and other retail purchasers such of
your Securities as the Representatives may determine. Except for any such sale
designated by a purchaser to be for the account of a particular Underwriter,
such reservations and sales for your account shall be made as nearly as
practicable in accordance with your Initial Commitment Percentage, unless you
agree to a smaller amount at the request of the Representatives.
You authorize the Representatives to make purchases and sales
of Securities from or to any Selected Dealer or Underwriter at the offering
price or prices less all or any part of the selling concession to Selected
Dealers set forth in the Invitation. With the consent of the Representatives,
any Underwriter may make purchases or sales of the Securities from or to any
Selected Dealer or Underwriter at the offering price or prices less all or any
part of such selling concession. Upon the request of the Representatives, you
will notify the Representatives of the identity of any dealer to whom you
allowed such a discount and any Underwriter or Selected Dealer from whom you
received such a discount.
If an Offering is subject to the By-Laws, rules and
regulations of the NASD, the provisions of this paragraph shall also apply.
Selling concessions to Selected Dealers and reallowances to other dealers may be
allowed only as consideration for services rendered in distribution to dealers
who are actually engaged in the investment banking or securities business, who
execute the written agreement prescribed by Section 24(c) of Article III of the
Rules of Fair Practice of the NASD and who are either members in good standing
of the NASD or are foreign banks, dealers or institutions not eligible for
membership in the NASD who agree to make no sales within the United States of
America, its territories or possessions or to persons who are citizens thereof
or residents therein and to comply with the NASD's Interpretation with Respect
to Free-Riding and Withholding in making sales outside the United States of
America. In connection with any purchase or sale of any of the Securities
wherein a selling concession, discount or other allowance is received or
granted, (a) each Underwriter agrees to comply with the provisions of Section 24
of Article III of the NASD's Rules of Fair Practice and (b) in the case of
Underwriters that are non-NASD member brokers or dealers in a foreign country,
each Underwriter also agrees to comply, as though such Underwriter were an NASD
member, with the provisions of Sections 8 and 36 thereof and to comply with
Section 25 thereof as that section applies to non-NASD member brokers or dealers
in a foreign country.
The Representatives shall notify each Underwriter promptly
upon the initial release of the Securities for public offering as to the amount
of Securities reserved for sale to Selected Dealers and institutions and other
retail purchasers, including, in the case of a Delayed Delivery Offering,
Securities reserved for sale to institutional investors who have entered or will
enter into Delayed Delivery Contracts. Securities not so reserved may be sold
directly by each Underwriter for its own account in conformity with the terms of
offering set forth in the prospectus or offering circular relating to such
Offering, except that from time to time the Representatives may add to the
Securities reserved for sale to Selected Dealers and institutions and other
retail purchasers any Securities retained and not sold by an Underwriter. You
agree to notify the Representatives from time to time, upon their request, of
the amount of your Securities retained by you for direct sale remaining unsold
and, upon request of the Representatives, to deliver to the Representatives for
your account, or sell to the Representatives for the account of one or more of
the Underwriters,
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such amount of unsold securities as the Representatives may designate at the
offering price less an amount determined by the Representatives not in excess of
the selling concession to Selected Dealers. The Representatives may repurchase
Securities from all Underwriters or Selected Dealers, for the account of one or
more of the Underwriters, at prices determined by the Representatives not in
excess of the offering price less the selling concession to Selected Dealers. If
all the Securities reserved for offering to Selected Dealers and institutions
and other retail purchasers are not sold by the Representatives promptly, any
Underwriter may from time to time, with the consent of the Representatives,
obtain a release of all or any portion of the Securities of such Underwriter
then remaining unsold and Securities so released shall thereafter be deemed not
to have been reserved. Securities of any Underwriter so reserved which remain
unsold or, if sold, have not been paid for at any time prior to the time that
the terms of this Agreement cease to apply to the Offering of such Securities
may, in the discretion of the Representatives or upon the request of such
Underwriter, be delivered to such Underwriter for carrying purposes or for sale
by such Underwriter, but such Securities shall remain subject to disposition by
the Representatives until delivered for sale by such Underwriter or the time
that the terms of this Agreement cease to apply to such Offering. To the extent
Securities are so delivered for sale by such Underwriter, the amount of
Securities then reserved for the account of such Underwriter shall be
correspondingly reduced. Securities delivered for carrying purposes only shall
be returned to the Representatives upon demand. If the aggregate amount of
Securities so reserved at the time that the terms of this Agreement cease to
apply to such Offering does not exceed 20% of the aggregate amount of
Securities, the Representatives may sell for the accounts of the several
Underwriters any such Securities so reserved, at such prices, on such terms and
in such manner as the Representatives may determine.
In the case of a Delayed Delivery Offering, you authorize the
Representatives to make all arrangements for the solicitation of offers to
purchase Securities from the seller or sellers pursuant to Delayed Delivery
Contracts and you agree that all such arrangements will be made only through the
Representatives, either directly or through Underwriters or Selected Dealers. To
the extent that the Representatives shall determine, Contract Securities that
have been directed by institutions or other retail purchasers to a particular
Underwriter or that were contracted for pursuant to arrangements made by a
particular Underwriter through the Representatives shall be allocated to such
Underwriter and all other Contract Securities shall be allocated to the accounts
of the respective Underwriters as nearly as practicable in accordance with their
respective Initial Commitment Percentages; provided, however, that the principal
amount of Contract Securities so allocated to any Underwriter shall not exceed
such Underwriter's Initial Commitment, and any Contract Securities that would
otherwise have been allocated to such Underwriter ("Excess Contract Securities")
shall be allocated among the other Underwriters in such manner as the
Representatives shall, in their discretion, determine to be equitable and
practicable. The Representatives may pay a commission to any Selected Dealer for
services rendered in respect of Contract Securities.
7. Compensation to Representatives and Selling Underwriters.
(a) Compensation to Representatives. As compensation
for the services of the Representatives, you agree to pay the Representatives,
and authorize the
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Representatives to charge your account with, an amount not in excess of the
management fee specified in the Invitation. Such fee shall not be reduced for
any Securities to be delivered pursuant to any Delayed Delivery Contracts. If we
are acting with other firms as Representatives, such compensation shall be
divided among the Representatives in such proportions as the Representatives may
determine.
(b) Compensation to Selling Underwriters. If the
Invitation states that the provisions of this Section 7(b) shall apply to the
Offering, as compensation for the services of those Underwriters which actually
sell for their own account some or all of the Securities, whether consisting of
Securities retained by or Securities released to any such Underwriter for direct
sale (each such Underwriter being herein referred to as a "Selling
Underwriter"), (i) you agree to pay the Selling Underwriters, and authorize the
Representatives to charge your account with, an amount not in excess of the
portion of the underwriting compensation specified in the Invitation as the
selling underwriters' fee (which shall be paid with respect to all of your
Securities, whether or not such Securities are ultimately sold by an
Underwriter, including you, or by Selected Dealers), and (ii) if you become a
Selling Underwriter with respect to the Offering, there shall be credited to
your account as compensation for such services your allocable portion of the
aggregate selling underwriters' fee, as described below. The account of each
Selling Underwriter shall be credited with an amount equal to the product of (x)
the excess, if any, of (A) the aggregate selling underwriters' fee over (B) the
total amount of General Expenses (as defined in Section 12 hereof) in connection
with the Offering, and (y) the percentage that the amount of Securities retained
by or released to such Selling Underwriter for direct sale bears to the
aggregate amount of Securities retained by or released to all of the
Underwriters for direct sale in the Offering (such percentage being referred to
herein as the "Selling Percentage"). With respect to any Delayed Delivery
Offering, the provisions of this Section 7(b) shall be amended as provided in
the Invitation.
The provisions of this Section 7(b) may only be made
applicable to Offerings of securities by closed-end management investment
companies.
8. Payment and Delivery for the Securities. At or before such
time, on such dates and at such places as specified in the Invitation, you agree
to deliver to us, unless otherwise specified in the Invitation, a certified or
official bank check or checks drawn on or by a New York Clearing House bank and
payable in next day funds to our order. Such payment shall be in an amount equal
to the initial offering price or prices plus any accrued interest, amortization
of original issue discount or accumulated dividends required to be paid to the
seller or sellers pursuant to the Underwriting Agreement, less the selling
concession to Selected Dealers, in respect of either your Securities or that
portion of your Securities retained by or released to you for direct sale, as
the Representatives shall direct. You authorize the Representatives to make
payment for your Securities against delivery to the Representatives of your
Securities (which, in the case of Securities that are debt obligations, may be
in temporary form), and the difference between the amount of such payment and
the amount of your funds delivered to us therefor shall be credited to your
account. You authorize the Representatives to accept delivery of your Securities
in definitive form upon exchange of any Securities in temporary form received by
the Representatives on the [Delivery] Date pursuant to the preceding sentence.
You further authorize
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the Representatives to make the payment referred to above with their own funds
on your behalf and to charge current interest rates thereon. In such an event,
you shall reimburse the Representatives promptly upon request.
You authorize the Representatives to hold any of your
Securities that have been sold or reserved for sale to Selected Dealers or to
institutions or other retail purchasers and to deliver such Securities against
your payment of an amount equal to the initial offering price or prices of such
Securities plus any accrued interest, amortization of original issue discount or
accumulated dividends as the Representatives determine, less the selling
concession to Selected Dealers in respect thereof. The Representatives may cause
some or all of your Securities so reserved to be delivered to the
Representatives registered in one or all of their names or in such other names
as the Representatives shall designate, but such registration shall be for
administrative convenience only and shall not affect your title to such
Securities or the severalty of the obligations of the Underwriters to the seller
or sellers. Any of your Securities not sold or reserved by the Representatives
as aforesaid shall be available for delivery to you at your office as soon as
practicable after such Securities have been delivered to the Representatives. At
such time as this Agreement shall cease to apply to an Offering or such earlier
time as the Representatives shall determine, the Representatives shall deliver
to you any of your Securities reserved for sale to Selected Dealers or
institutions or other retail purchasers but not sold and paid for, against
payment as aforesaid.
In the case of a Delayed Delivery Offering, the commission
payable by the seller or sellers in respect of Contract Securities allocated to
you pursuant to the last paragraph of Section 6 hereof shall be credited to your
account, after deducting any commissions paid by the Representatives to any
Selected Dealer for services rendered in respect of such Contract Securities,
and in addition you shall be treated as a Selected Dealer in respect of your
Excess Contract Securities, if any.
If the Underwriting Agreement for any Offering provides for
the payment of a commission or other compensation to the Underwriters, you
authorize the Representatives to receive such commission or other compensation
for your account.
Notwithstanding the foregoing provisions of this Section 8 and
provided that the Representatives are able to utilize the services and
facilities of The Depository Trust Company or any other depository or similar
facility, if transactions in the Securities can be settled through the
facilities of The Depository Trust Company or any other depository or similar
facility, payment for and delivery of your Securities may be made through such
facilities, if you are a member, unless you have otherwise notified us within
two days after the date the Securities are first released for public offering,
or, if you are not a member, settlement may be made through a correspondent who
is a member pursuant to instructions you may send to us on or before the third
business day preceding the applicable Closing Date.
9. Authority to Borrow. You authorize the Representatives to
the extent permitted by law, to arrange loans for your account, to execute and
deliver any notes or other instruments in connection therewith and to pledge as
security therefor all or any part of your Securities or of any securities
purchased for the accounts of the several Underwriters pursuant to Section 10
hereof, as the Representatives may deem necessary or advisable to carry out the
purchase, carrying and distribution of the Securities. You further authorize the
Representatives to
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advance their own funds on your behalf and to charge current interest rates
thereon, in which event you shall reimburse the Representatives promptly upon
request. The obligations of the Underwriters under loans arranged on their
behalf, including advances by the Representatives, shall be several in
proportion to their respective participations in such loans, and not joint. Any
lender is authorized to accept the instructions of the Representatives as to the
disposition of the proceeds of any such loans. The Representatives shall credit
you with the proceeds of any loans made for your account.
10. Over-Allotment; Stabilization. You authorize the
Representatives for the account of each Underwriter, prior to such time as this
Agreement shall cease to be applicable to an Offering, and for such longer
period as may be necessary in the judgment of the Representatives to cover any
short position incurred for the accounts of the several Underwriters pursuant to
this Agreement, (a) to over-allot in arranging for sales of Securities to
Selected Dealers and to institutions and other retail purchasers and, if
necessary, to purchase Securities or other securities of the issuer at such
prices as the Representatives may determine for the purpose of covering such
over-allotments and (b) for the purpose of stabilizing the market in the
Securities, to make purchases and sales of Securities or of any other securities
of the issuer or any guarantor or insurer of the Securities as the
Representatives may advise by the Invitation or otherwise, on the open market or
otherwise, for long or short account, on a when-issued basis or otherwise, at
such prices, in such amounts and in such manner as the Representatives may
determine; provided, however, that at no time shall your net commitment under
this Section 10, either for long or short account (your net commitment in the
case of a short account being computed on the assumption that all Over-Allotment
Securities, if any, are acquired), exceed 20% (or such other amount as may be
specified in the Invitation) of the aggregate initial offering price of your
Securities. Subsequent to receipt by us of the Acceptances of the Underwriters
of an Offering, such percentage may be increased in connection with such
Offering with the approval of a majority in interest of the Underwriters. Such
purchases, sales and over-allotments shall be made for the respective accounts
of the several Underwriters as nearly as practicable in accordance with their
respective Initial Commitment Percentages. It is understood that, in connection
with any particular Offering, the Representatives may make purchases of
securities of the issuer or any guarantor or insurer of the Securities for
stabilizing purposes before the time you become an Underwriter, and you agree
that any such securities so purchased shall be treated as having been purchased
for the respective accounts of the Underwriters pursuant to the foregoing
authorization. You agree to take up on demand at cost any securities so
purchased for your account and deliver on demand any securities so sold or
over-allotted for your account. You authorize the Representatives to sell for
the account of the Underwriters any securities purchased pursuant to this
Section 10, upon such terms as the Representatives may deem advisable, and any
Underwriter, including any of the Representatives, may purchase such securities.
You authorize the Representatives to charge the respective accounts of the
Underwriters with broker's commissions or dealer's mark-ups on purchases or
mark-downs on sales effected by the Representatives. If the Representatives
effect any stabilizing purchases pursuant to this Section, the Representatives
shall notify you promptly of the date and time of the first stabilizing purchase
and the date and time when stabilizing was terminated. You agree to transmit to
the Representatives for filing with the Commission any report required to be
made by you pursuant to the Exchange Act as a result of any transactions in
connection with any Offering. It is understood
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that no assurance is given by the Representatives or any other Underwriter that
the price of any securities of the issuer or any guarantor or insurer of the
Securities will be stabilized or that stabilizing, if commenced, will not be
discontinued at any time.
If pursuant to the provisions of the preceding paragraph and
prior to such time as the terms of this Agreement shall cease to be applicable
to an Offering (or prior to such earlier date as the Representatives may have
determined or such later date as may be necessary in the judgment of the
Representatives to cover any short position incurred for the accounts of the
several Underwriters pursuant to this Agreement) the Representatives purchase or
contract to purchase for the account of any Underwriter in the open market or
otherwise any Securities that were retained by, or released to, you for direct
sale, or any Securities issued in exchange for such Securities, you authorize
the Representatives either to charge your account with an amount equal to the
selling concession to Selected Dealers with respect thereto, which amount shall
be credited against the cost of such Securities, or to require you to repurchase
such Securities at a price equal to the total cost of such purchase, including
any accrued interest, amortization of original issue discount, accumulated
dividends, transfer taxes, broker's commissions or dealer's mark-ups. In lieu of
such action, the Representatives may sell for your account the Securities so
purchased and debit or credit your account for the loss or profit resulting from
such sale, after giving effect to the incurrence of any of the charges and
expenses referred to above.
You acknowledge that the Representatives do not intend to
effect over-allotments or engage in stabilizing transactions with respect to
Offerings designated as "Public Venture Capital Offerings," unless otherwise so
indicated in the Invitation.
11. Open Market Transactions. You represent and agree that in
each Offering you will comply with the provisions of Regulation M (or any
successor provision) under the Exchange Act with regard, among other things, to
trading by underwriters. By your Acceptance, you represent that you have not,
since you became a "prospective underwriter" of the Securities (as defined in
said Rule), participated in any transaction prohibited by said Rule and you will
comply with the provisions of said Rule applicable to the Offering. You agree
that for purposes of this paragraph, in addition to the Securities, other
securities specified in the Invitation shall be considered securities of the
same class and series as the Securities to which this Agreement relates unless
the Representatives shall determine otherwise and so inform you.
12. Allocation and Payment of Expenses. You authorize the
Representatives to charge your account, based upon your Initial Commitment
Percentage, of all expenses of a general nature incurred by the Representatives
in connection with the negotiation for and the purchase, carrying, marketing and
sale of the Securities (including without limitation any expenses incurred in
connection with, and any interest on, any amounts borrowed pursuant to Section 9
hereof) on behalf of the Underwriters and any losses or expenses incurred by the
Representatives as a result of or in connection with any over-allotment,
stabilization or other transactions effected pursuant to Section 10 hereof and,
in the case of a Delayed Delivery Offering, in connection with the solicitation
of offers to purchase Securities pursuant to Delayed Delivery Contracts (all
such expenses of a general nature being herein referred to collectively as
"General Expenses"); provided, however, that in no event shall General Expenses
be deemed to
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include any liabilities or expenses contemplated by Sections 14 and 15 hereof.
You authorize the Representatives to charge your account with any transfer taxes
on sales of Securities made for your account (which transfer taxes shall not be
deemed to constitute General Expenses). You agree that the Representatives, in
order to facilitate a secondary offering of equity securities, may agree to pay
any stock transfer tax, subject to the reimbursement by the sellers of
associated carrying costs if such tax payment is not rebated on the day of
payment and of any portion of such tax payment not rebated. In the event that
such a tax payment results in any expense to the Representatives, such expense
shall be deemed to constitute General Expenses for purposes of this paragraph.
Neither any statement by the Representatives of any credit or debit balance in
your account nor any reservation from distribution to cover possible additional
expenses relating to the Securities shall constitute any representation by the
Representatives as to the existence or nonexistence of possible unforeseen
expenses or liabilities of or charges against the several Underwriters.
Notwithstanding the foregoing, if the Invitation states that
the provisions of Section 7(b) hereof shall apply to the Offering, all General
Expenses in connection with the Offering shall first be charged against
available funds that would otherwise be paid or credited to the accounts of the
Selling Underwriters from the aggregate selling underwriters' fee pursuant to
Section 7(b) hereof, and, to the extent not satisfied from such funds, you will
be liable for your Initial Commitment Percentage of all such General Expenses.
As promptly as possible after such time as this Agreement
shall cease to apply to an Offering, the accounts arising pursuant hereto shall
be settled and paid, but the Representatives may reserve such amount as they
deem advisable for additional expenses. The Representatives' ascertainment of
all expenses and their apportionment thereof shall be conclusive. The
Representatives may at any time make partial distributions of credit balances or
call for payment of debit balances. Any of your funds in the hands of the
Representatives may be held with their general funds without accountability for
interest. Notwithstanding any settlement or settlements hereunder, you will
remain liable for any transfer taxes on transfers for your account and for your
Initial Commitment Percentage of all expenses and liabilities incurred by or for
the accounts of the Underwriters, including any expenses and liabilities
referred to in Sections 14 and 15 hereof, which shall be determined as provided
in this Section 12. If the Invitation states that the provisions of Section 7(b)
hereof shall apply to the Offering and if you are a Selling Underwriter with
respect to the Offering, notwithstanding any settlement or settlements
hereunder, you shall remain liable for your Selling Percentage of all General
Expenses in connection with the Offering chargeable to the selling underwriters'
fee hereunder and for your Initial Commitment Percentage of the balance of such
General Expenses in the event such expenses exceed the aggregate selling
underwriters' fee.
13. Termination; Amendments. (a) This Agreement may be
terminated by either party hereto upon five business days' written notice to the
other party; provided, however, that with respect to any Offering, if we receive
any such notice from you after your Acceptance, this Agreement shall remain in
full force and effect as to such Offering and shall terminate with respect to
such Offering in accordance with the provisions of paragraph (b) of this
Section.
(b) If we have received your Acceptance with respect
to an Offering,
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<PAGE>
unless this Agreement or any provision hereof is earlier terminated by us and
except as otherwise provided in the Invitation, the terms and conditions of this
Agreement shall cease to be applicable to your participation in such Offering at
the close of business on the forty-fifth day after the date the Securities are
first released for public offering, but may be extended by us by written
communication for a further period or periods not exceeding an aggregate of
forty-five days; provided, however, that the provisions of this Agreement that
contemplate obligations surviving the termination of its effectiveness and the
provisions of Sections 12, 14 and 15 hereof shall survive such termination with
respect to any Offering.
(c) This Agreement may be amended or supplemented by
us by written notice to you and without need for further action on your part
and, except for amendments or supplements set forth in the Invitation relating
to a particular Offering, any such amendment or supplement to this Agreement
shall be effective with respect to any Offering, effected after this Agreement
is so amended or supplemented. Each reference herein to "this Agreement" shall,
as appropriate, be to this Master Agreement Among Underwriters as so amended and
supplemented by the Invitation or otherwise.
14. Liability of Representatives and Underwriters. Neither as
Representatives nor individually shall the Representatives be under any
liability (except for their own want of good faith and for obligations expressly
assumed by them hereunder) for or in respect of the validity, value or delivery
of, or title to, any Securities or any securities issuable upon exercise,
conversion or exchange of any Securities; the form of, or the statements
contained in, or the validity of, in the case of a Registered Offering, the
registration statement, any preliminary prospectus, the prospectus, any
amendment or supplement to any of the foregoing or any materials incorporated by
reference in any of the foregoing or, in the case of an Offering other than a
Registered Offering, any preliminary offering circular, any proof of an offering
circular, any offering circular, any amendment or supplement to any of the
foregoing or any materials incorporated by reference in any of the foregoing,
or, in either case, any letters or instruments executed by or on behalf of the
issuer, any seller other than the issuer, any guarantor or insurer of the
Securities or any other party; the form or validity of any contract or agreement
under which any Securities may be issued or which governs the rights of holders
of any Securities; the form or validity of any Underwriting Agreement, any
Delayed Delivery Contract or this Agreement; the performance by the issuer, any
seller other than the issuer, any guarantor or insurer of the Securities and any
other parties of any agreement on its or their parts; the qualification for sale
in any jurisdiction of any Securities or securities issuable upon exercise,
conversion or exchange of any Securities or the legality for investment of the
Securities or such securities under the laws of any jurisdiction; or any matter
in connection with any of the foregoing; provided, however, that nothing in this
paragraph shall be deemed to relieve the Representatives from any liability
imposed by the Securities Act. The Representatives do not waive any right that
they may have under the Securities Act or the Exchange Act or the rules and
regulations promulgated thereunder or under state law.
Nothing contained herein or in any written communication from
us shall constitute the several Underwriters an association or partners with you
or each other or, except as herein expressly provided, render any Underwriter
liable for the obligations of any other Underwriter. The rights,
16
<PAGE>
obligations and liabilities of each of the Underwriters are several, in
accordance with their respective obligations, and not joint. Notwithstanding any
settlement of accounts under this Agreement, you agree to pay your Initial
Commitment Percentage of the amount of any claim, demand or liability that may
be asserted against and discharged by the Underwriters, or any of them, based on
the claim that the Underwriters constitute an association, unincorporated
business or other entity, and also to pay your Initial Commitment Percentage of
expenses approved by the Representatives and incurred by the Underwriters or any
of them, in contesting any such claims, demands or liabilities.
15. Indemnification and Contribution. (a) Each Underwriter
agrees to indemnify, hold harmless and reimburse each other Underwriter and each
person (other than the issuer), if any, who controls such other Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act to the extent, and upon the terms that such Underwriter agrees to
indemnify, hold harmless and reimburse the issuer, any seller other than the
issuer and certain other persons pursuant to the provisions of the Underwriting
Agreement. This indemnity agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of such other Underwriter
or controlling person.
Each Underwriter represents to each other Underwriter that the
information relating to such Underwriter that has been or may be furnished in
writing to the issuer by such Underwriter expressly for use, in the case of a
Registered Offering, in the registration statement, any preliminary prospectus,
any prospectus or any amendment or supplement to any of the foregoing with
respect to such Securities or, in the case of an Offering other than a
Registered Offering, any preliminary offering circular, proof of an offering
circular, offering circular or amendment or supplement to any of the foregoing
with respect to such Securities is correct in all material respects. This
representation shall remain in full force and effect regardless of any
investigation made by or on behalf of any such other Underwriter or controlling
person.
(b) Each Underwriter agrees to pay upon the
Representatives' request, as contribution, its Initial Commitment Percentage of
any losses, claims, damages or liabilities, joint or several, under the
Securities Act or otherwise, paid or incurred by any Underwriter (including the
Representatives, individually or as representatives of the Underwriters) to any
person other than an Underwriter (including amounts paid by an Underwriter as
contribution), arising out of or based upon (i) an untrue statement or alleged
untrue statement of a material fact contained in such registration statement or
any amendment thereto or arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) an untrue
statement or alleged untrue statement of a material fact contained in any such
preliminary prospectus, prospectus, preliminary offering circular, proof of an
offering circular, offering circular, amendment or supplement to any of the
foregoing, or any other selling or advertising material used with the consent of
the Representatives by the Underwriters in connection with the sale of the
Securities, or arising out of or based upon the omission or alleged omission to
state therein a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading and (iii)
any act or omission to act or any alleged act or omission to act by the
Representatives, individually or as representatives of the Underwriters, or by
the Underwriters, as a group but not individually, in connection with any
transaction contemplated by this Agreement or undertaken in preparing for the
purchase, sale and delivery of the Securities; and each Underwriter will pay its
Initial Commitment Percentage of any legal or other expenses reasonably incurred
by the Representatives, or with their consent, in connection with investigating
or defending any such loss, claim, damage or liability, or any action in respect
thereof. In determining the amount of any Underwriter's obligation under this
paragraph, appropriate adjustment may be made by the Representatives to reflect
any amounts received by any one or more Underwriters, pursuant to the
Underwriting Agreement or otherwise, in respect of the claim upon which such
obligation is based. In respect of any claim there shall be credited against the
amount of any Underwriter's obligation under this paragraph any loss, damage,
liability or expense that is paid or incurred by such Underwriter as a result of
such claim being asserted against it, and, if such loss, damage, liability or
expense is paid or incurred by such Underwriter subsequent to any payment by it
pursuant to this paragraph, appropriate provision shall be made to effect such
credit, by refund or otherwise. If any claim to which the provisions of this
paragraph would be applicable is asserted, the Representatives may take such
action in connection therewith as they deem necessary or desirable, including
retention of counsel for the Underwriters and separate counsel for any
particular Underwriter or group of Underwriters, and the fees and disbursements
of any counsel so retained by the Representatives shall be included in the
amounts of the Underwriters' obligations under this paragraph. The
Representatives may consent to being named as the representatives of a defendant
class of underwriters. Any Underwriter may elect to retain at its own expense
its own counsel and, on advice of such counsel and with the Representatives'
consent, may settle or consent to the settlement of any such claim. The
Representatives may settle or consent to the settlement of any such claim, on
advice of counsel retained by them, with the approval of a majority in interest
of the Underwriters. Whenever any Underwriter receives notice of the assertion
of any claim to which the provisions of this paragraph would be applicable, such
Underwriter shall give prompt notice thereof to the Representatives. Whenever
the Representatives receive notice of the assertion of any such claim, they
shall give prompt notice thereof to each Underwriter. The Representatives also
shall furnish each Underwriter with periodic reports, at such times as they deem
appropriate, as to the status of any such claim and the action taken by them in
connection therewith. In the event of the failure of any Underwriter to fulfill
its obligations under this paragraph, such obligations may be charged against
each non-defaulting Underwriter in the same proportion as the respective Initial
Commitment of such non-defaulting Underwriter bears to the aggregate Initial
Commitments of the non-defaulting Underwriters, without relieving such
defaulting Underwriter of its liability therefor. In determining the amount
payable pursuant to this paragraph, any loss, claim, damage, liability or
expense paid or incurred, and any amount received, by any person controlling any
Underwriter within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act shall be deemed to have been paid or incurred or received by
such Underwriter to the extent such amount has been paid or incurred or received
by reason of such control relationship. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
16. Title to Securities. The Securities purchased by or on
behalf of the respective Underwriters and any securities purchased pursuant to
Section 10 hereof by or on behalf of the respective Underwriters shall remain
the property of such Underwriters until sold,
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<PAGE>
and title to any such Securities or securities shall not in any event pass to
the Representatives by virtue of any of the provisions of this Agreement.
17. Legal Qualifications. It is understood that the
Representatives assume no responsibility with respect to the right of any
Underwriter or other person to offer or to sell Securities in any jurisdiction,
notwithstanding any "Blue Sky" memorandum or survey or any other information
that the Representatives may furnish as to the jurisdictions under the
securities laws of which it is believed the Securities may be sold. You
authorize the Representatives to file with the Department of State of the State
of New York a Further State Notice with respect to the Securities, if necessary.
If you propose to offer Securities outside the United States
of America, its territories or its possessions, you shall take, at your own
expense and risk, such action, if any, as may be necessary to comply with the
laws of each foreign jurisdiction in which you propose to offer Securities.
If the Representatives inform you that the NASD views the
Offering as subject to Schedule E to the By-Laws of the NASD, you agree that you
shall, to the extent required, offer the Securities in compliance with such
Schedule and the NASD's interpretation thereof.
If the Representatives inform you that the NASD views the
Securities as interests in a direct participation program, you agree that you
shall, to the extent required, offer the Securities in compliance with the
NASD's interpretation of Appendix F of its Rules of Fair Practice.
18. Successors and Assigns. This Agreement shall be binding
on, and inure to the benefit of, the parties hereto and the other persons
specified in Section 15 hereof, and the respective successors and assigns of
each of them.
19. APPLICABLE LAW. THIS AGREEMENT AND THE TERMS AND
CONDITIONS SET FORTH HEREIN WITH RESPECT TO ANY OFFERING, TOGETHER WITH SUCH
SUPPLEMENTARY TERMS AND CONDITIONS WITH RESPECT TO SUCH OFFERING AS MAY BE
CONTAINED IN THE INVITATION IN CONNECTION THEREWITH, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
20. Miscellaneous. Any notice from the Representatives or us
to you shall be deemed to have been duly given if conveyed by written
communication or telephone to you at the address set forth at the end of this
Agreement, or at such other address as you shall have advised us from time to
time in writing. Any notice from you to the Representatives or us shall be
deemed to have been duly given if conveyed to us by written communication to 826
Broadway, 6th Floor, New York, New York 10003, Attention: William Feeley; by
telephone to 212-253-4400; by facsimile to 212-253-4410; or by e-mail to
[email protected].
You represent that you are actually engaged in the investment
banking or securities business and that you are either a member in good standing
of the NASD or, if you are not such a member, you are a foreign bank, dealer or
institution not eligible for membership in the NASD
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<PAGE>
that agrees to make no sales within the United States of America, its
territories or possessions or to persons who are citizens thereof or residents
therein (except that you may participate in sales to Selected Dealers and to
institutions and other retail purchasers under Section 6 hereof) and to comply
with the NASD's interpretation with Respect to Free-Riding and Withholding in
making sales outside the United States of America.
In connection with any Registered Offering of Securities of an
issuer that was not, immediately prior to the filing of the registration
statement with respect to such Securities, subject to the requirements of
Section 13(a) or 15(d) of the Exchange Act, you agree that you will not sell any
of such Securities to any accounts over which you exercise discretionary
authority.
20
<PAGE>
Please confirm, by signing and returning this Agreement to us,
your acceptance of and agreement to the terms and conditions of this Agreement
(as supplemented and amended from time to time pursuant to Section 13 hereof),
together with and subject to any supplementary or alternative terms and
conditions contained in the Invitation and any other written communication from
us or the Representatives in connection with such Offering, all of which shall
constitute a binding agreement between you and the Representatives and among you
and the other Underwriters. Your Acceptance of an Invitation with respect to an
Offering shall constitute (a) confirmation that your representations and
warranties set forth in this Agreement are true and correct as of the times or
for the periods specified herein, (b) confirmation that your agreements set
forth in this Agreement have been and will be performed fully by you to the
extent and at the times required hereby and (c) acknowledgment of your
familiarity with the offering documents, as set forth in Section 3 hereof, with
respect to such Offering.
Very truly yours,
WIT CAPITAL CORPORATION
By:
-------------------------------------
Name:
Title:
CONFIRMED as of the date first written above:
- ------------------------------------------
(Name of Firm)
By:
---------------------------------------
Title:*
-----------------------------------
Address:
----------------------------------
----------------------------------
----------------------------------
Name as it should appear in any
prospectus, offering circular or
advertisement (if different from above):
- ------------------------------------------
Exhibit A
- --------------------------------
* If signer is not an officer or partner, please attach evidence of
authorization.
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MASTER UNDERWRITERS' QUESTIONNAIRE
Unless otherwise defined, capitalized terms used herein have
the meanings assigned thereto in the Master Agreement Among Underwriters dated
November __, 1997 between Wit Capital Corporation and you (as amended or
supplemented from time to time, the "Agreement"). Reference will be made to this
Master Underwriters' Questionnaire in each Invitation described in Section 1 of
the Agreement received by you from Wit Capital Corporation in connection with an
Offering of Securities in which Wit Capital Corporation is acting as sole or
lead representative of the several Underwriters. Your Acceptance of any such
Invitation should refer to this Master Underwriters' Questionnaire and should
set forth any exceptions to the following statements or state that there are no
such exceptions.
(1) Neither you nor any of your directors, officers or
partners has a material relationship (as "material" is defined in Rule
405 under the Securities Act) with the issuer of the Securities, its
parent (if any) or any guarantor, insurer or seller of the Securities.
(2) Neither you nor any of your directors, officers or
partners, separately or as a "group" (as that terms is used in Section
13(d)(3) of the Exchange Act), owns of record or beneficially
(determined in accordance with Rule 13d-3 under the Exchange Act) more
than five percent of any class of voting securities of the issuer, its
parent (if any), or any guarantor, insurer or seller of the Securities,
nor do you have any knowledge that more than five percent of any class
of voting securities of such issuer, parent, guarantor, insurer or
seller is held or to be held subject to any voting trust or other
similar agreement.
(3) You have not prepared any report or memorandum for
external use by the issuer or any Underwriter in connection with the
Offering or, if you have prepared any such report or memorandum, you
are furnishing to Wit Capital Corporation (a) three copies thereof and
(b) a statement as to the actual or proposed use, identifying each
class of persons (institutional clients, retail clients, etc.) who have
received or will receive the report or memorandum, the number of copies
distributed to each such class and the period of distribution.
(4) In the case of a Registered Offering for which the
registration statement is on Form S-1: You have not prepared any
engineering, management or similar report or memorandum relating to
broad aspects of the business, operations or products of the issuer,
its parent (if any), or any guarantor or insurer of the Securities
within the past twelve months (except for reports solely comprised of a
recommendation to buy, sell or hold the securities of the issuer, its
parent (if any), any guarantor or any insurer, unless such
recommendation has changed within the past six months) or, if any such
report or memorandum has been prepared, you are furnishing to Wit
Capital Corporation (a) three copies thereof and (b) a statement as to
the actual or proposed use, identifying each class of persons
(institutional clients, retail clients, etc.) who have received or will
receive the report or memorandum, the number of copies distributed to
each such class and the period of distribution.
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(5) If the Securities are to be issued under an indenture
qualified under the Trust Indenture Act of 1939, as amended:
(a) Neither you nor any of your directors, officers
or partners is an affiliate (as defined in Rule 0-2 or any
successor provision under such Act) of the trustee or trustees
under such indenture or their respective parents (if any), and
neither such trustees nor their respective parents (if any)
nor any of their respective directors or executive officers is
a director, officer, partner, employee, appointee or
representative of yours, as those terms are defined in such
Act or in the relevant instructions to Form T-1 thereunder;
(b) Neither you nor any of your directors, partners
or executive officers, separately or as a group, owns
beneficially more than one percent of any class of voting
securities of either of such trustees or their respective
parents (if any); and
(c) If you are a corporation, you do not have
outstanding nor have you assumed or guaranteed any securities
otherwise than in your corporate name, and neither of such
trustees nor their respective parents (if any) is a beneficial
owner or pledgee of any of such securities.
(6) Other than as stated or to be stated in the Agreement, the
Wit Capital Corporation Master Selected Dealer Agreement or the
proposed Underwriting Agreement, you do not know of or have reason to
believe that (a) there are any discounts or commissions to be allowed
or paid to underwriters or any other items that would be deemed by the
NASD to constitute underwriting compensation for purposes of the NASD's
Rules of Fair Practice, (b) there are any discounts or commissions to
be allowed or paid to dealers, including all cash, securities,
contracts or other considerations to be received by any dealer in
connection with the sale of the Securities, (c) there is an intention
to over-allot or (d) the price of any security may be stabilized to
facilitate the offering of the Securities.
(7) If the issuer is a public utility: You are not a "holding
company", a "subsidiary company", or an "affiliate" of a "holding
company" or a "public-utility company", each as defined in the Public
Utility Holding Company Act of 1935, as amended.
(8) If the Offering is subject to the By-Laws, rules and
regulations of the NASD: Neither you nor any of your directors,
officers, partners or "persons associated with" you (as defined in the
By-Laws of the NASD) nor, to your knowledge, any "related person" (as
defined in the By-Laws of the NASD, which definition includes counsel,
financial consultants and advisors, finders, members of the selling or
distribution group, and any other persons associated with or related to
any of the foregoing) or any broker-dealer (a) within the last eighteen
months has purchased in private transactions, or intends before, at or
within six months after the commencement of the public offering of the
Securities, to purchase in private transactions, any securities
(including warrants or
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options) of the issuer, its parent (if any), any guarantor or insurer
or any subsidiary of any of the foregoing or (b) within the last twelve
months had any dealings with the issuer, any guarantor or insurer of
the Securities or any subsidiary or controlling person of any of the
foregoing (other than with respect to the Agreement or the proposed
Underwriting Agreement) as to which documents or information are
required to be filed with the NASD pursuant to its Interpretation with
Respect to Review of Corporate Financing.
(9) You may, in accordance with and pursuant to the financial
responsibility requirements of Rule 15c3-1 (or any successor provision)
under the Exchange Act, agree to purchase your Securities.
(10) If the issuer of Securities offered in a Registered
Offering was not, immediately prior to the filing of the registration
statement with respect to such Securities, subject to the requirements
of Section (13a) or 15(d) of the Exchange Act: You will not sell
Securities to any accounts over which you exercise discretionary
authority.
24
EXHIBIT 1(c)
MASTER SELECTED DEALER AGREEMENT
December __, 1997
Dear Sirs:
On or after the date hereof we may invite you to participate
as a selected dealer in connection with one or more public offerings of
securities in which we are serving as sole or lead representative of the
underwriting syndicates or are otherwise responsible for the distribution of
securities to the public by means of offerings of securities for sale to
selected dealers. This Agreement will confirm our mutual agreement to the
following general terms and conditions applicable to your participation in any
such selected dealer group.
1. Applicability of this Agreement. From time to time on or
after the date hereof we may be responsible (acting for our own account or for
the account of an underwriting or similar group or syndicate) for managing or
otherwise implementing the sale to selected dealers ("Selected Dealers") of
securities offered publicly pursuant to a registration statement filed under the
Securities Act of 1933, as amended (the "Securities Act"), or offered pursuant
to an exemption from registration thereunder. The terms and conditions of this
Agreement shall be applicable to any such offering in which we have invited you
to participate as a Selected Dealer and have expressly informed you that the
terms and conditions of this Agreement apply. This Agreement shall not apply to
any offering of securities effected wholly outside the United States of America.
Any offering to which the terms and conditions of this Agreement apply is herein
referred to as an "Offering", and the securities offered in an Offering are
herein referred to as the "Securities" with respect to such Offering. In the
case of any Offering in which we are acting for the account of an underwriting
or similar group or syndicate ("Underwriters"), the terms and conditions of this
Agreement shall be for the benefit of, and binding upon, such Underwriters,
including, in the case of any Offering in which we are acting with others as
representatives of Underwriters, such other representatives. Some or all of the
Underwriters in any Offering may be included among the Selected Dealers.
The following provisions of this Agreement shall apply
separately to each Offering.
2. Conditions of Offering; Acceptance and Purchase. Any
Offering will be subject to delivery of the Securities and their acceptance by
us and any other Underwriters, will be subject to prior sale, to the approval of
all legal matters by counsel and the satisfaction of other conditions, and may
be made on the basis of a reservation of Securities or an allotment against
subscription. We reserve the right to reject any acceptance in whole or in part,
to make allotments and to close the subscription books at any time without
notice. You agree to act as principal in purchasing any Securities.
We shall invite you to participate in an Offering and in
connection therewith shall advise you of the particular method and supplementary
terms and conditions of the Offering (including the amount of Securities to be
allotted to you, the amount of Securities reserved for
<PAGE>
purchase by the Selected Dealers, the period of such reservation and the
information as to prices and offering date referred to in Section 3(c) hereof).
Such invitation and additional information, to the extent applicable and then
determined, shall be conveyed to you in a telegram, telex, facsimile
transmission or other written form (electronic or otherwise) of communication
(any communication in any such form being herein referred to as a "written
communication"). Such written communication will include instructions for
advising us of your acceptance of such invitation. Any such additional
information, to the extent applicable but not determined at the time such
invitation is conveyed to you, will be conveyed to you in a subsequent written
communication. To the extent such supplementary terms and conditions are
inconsistent with any provision herein, such terms and conditions shall
supersede any such provision, and you, by your acceptance, shall be bound
thereby. If we have received your acceptance, a subsequent written communication
from us shall state that you may reject your allotment of Securities by
notifying us prior to the time and in the manner specified in such written
communication. Unless otherwise indicated in any such written communication,
acceptances and other communications by you with respect to an Offering should
be sent to Wit Capital Corporation, 826 Broadway, 6th Floor, New York, New York
10003, Attention: William Feeley.
Unless you are notified otherwise by us, Securities purchased
by you shall be paid for on such date as we shall determine, on one day's prior
notice to you, by certified or official bank check or checks drawn on a New York
Clearing House bank and payable in next day funds, in an amount equal to the
Public Offering Price (as hereinafter defined) or, if we shall so advise you, at
such Public Offering Price less the Concession (as hereinafter defined), and
payable to or upon the order of Wit Capital Corporation, 826 Broadway, 6th
Floor, New York, New York 10003, against delivery of the Securities. If
Securities are purchased and paid for at such Public Offering Price, such
Concession will be paid after the termination of the provisions of Section 3(c)
hereof with respect to such Securities.
Unless you are notified otherwise by us, and provided that we
are able to utilize the services and facilities of The Depository Trust Company
or any other depository or similar facility, payment for and delivery of
Securities purchased by you shall be made through the facilities of The
Depositary Trust Company, if you are a member, unless you have otherwise
notified us within two days after the date the Securities are first released for
public offering or, if you are not a member, settlement may be made through a
correspondent who is a member pursuant to instructions you may send to us on or
before the third business day preceding the closing for the sale of the
Securities.
3. Offering Documents.
(a) Registered Offerings. In the case of an Offering
of Securities registered under the Securities Act (a "Registered Offering"), we
shall provide you with such number of copies of any prospectus subject to
completion (a "preliminary prospectus"), the prospectus and any amendment or
supplement to any of the foregoing as you may reasonably request for the
purposes contemplated by the Securities Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the applicable rules and regulations
of the Securities and Exchange Commission (the "Commission") thereunder. You
shall familiarize yourself with the terms of the Securities and the other terms
of the Offering reflected in any such preliminary prospectus, prospectus,
amendment or supplement. You agree that in purchasing Securities in a Registered
Offering you will rely upon no statements whatsoever, written or oral, other
than the
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statements in the prospectus delivered to you by us. You understand that you
will not be authorized by the issuer or any seller other than the issuer, any
guarantor or any insurer of Securities to give any information or to make any
representation not contained in a preliminary prospectus or the prospectus, as
amended or supplemented, in connection with the Offering of such Securities. You
represent and warrant that you are familiar with Securities Act Release No. 4968
and Rule 15c2-8 (or any successor release or provision) under the Exchange Act
and any applicable foreign laws (and any applicable rules and regulations
thereunder) and agree that you will deliver all preliminary prospectuses
required for compliance therewith. You agree to make a record of your
distribution of each preliminary prospectus and prospectus (including dates,
numbers of copies and persons to whom sent) and you shall, if requested by us,
furnish a copy of an amended or supplemented preliminary prospectus or
prospectus to each person to whom you have furnished a previous preliminary
prospectus or prospectus and, if also requested by us, indicate to each such
person the changes reflected in such amended or supplemented preliminary
prospectus or prospectus.
(b) Non-Registered Offerings. In the case of an
Offering other than a Registered Offering, we shall provide you with such number
of copies of any preliminary offering circular or other document comparable to a
preliminary prospectus in a Registered Offering (a "preliminary offering
circular") relating to such Offering, a proof of an offering circular or other
document comparable to a prospectus in a Registered Offering (an "offering
circular") relating to such Offering or such offering circular, as you may
reasonably request. You shall familiarize yourself with the terms of the
Securities and the other terms of the Offering reflected in any such preliminary
offering circular, as you may reasonably request. You shall familiarize yourself
with the terms of the Securities and the other terms of the Offering reflected
in any such preliminary offering circular, proof of an offering circular,
offering circular or any amendment or supplement to any of the foregoing. You
agree that in purchasing Securities pursuant to an offering circular you will
rely upon no statements whatsoever, written or oral, other than the statements
in the offering circular delivered to you by us. You understand that you will
not be authorized by the issuer or any seller other than the issuer, any
guarantor or any insurer of the Securities offered pursuant to the offering
circular to give any information or to make any representation not contained in
a preliminary offering circular, a proof of an offering circular or the offering
circular, as amended or supplemented, in connection with the sale of such
Securities. You agree that you will comply with the applicable federal, state
and foreign laws, and the applicable rules and regulations of any regulatory
body promulgated under such laws, governing the use and distribution of offering
circulars by brokers or dealers and, to the extent consistent with such laws,
rules and regulations, you agree that you will deliver all preliminary offering
circulars and offering circulars that would be required if the provisions of
Rule 15c2-8 (or any successor provision) under the Exchange Act applied to such
Offering. You agree to make a record of your distribution of each preliminary
offering circular, proof of an offering circular and offering circular
(including dates, numbers of copies and persons to whom sent) and you shall, if
requested by us, furnish a copy of an amended or supplemented preliminary
offering circular, proof of an offering circular or offering circular to each
person to whom you have furnished a previous preliminary offering circular,
proof of an offering circular or offering circular and, if also requested by us,
indicate to each such person the changes reflected in such amended or
supplemented preliminary offering circular, proof of an offering circular or
offering circular.
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(c) Offer and Sale to the Public. With respect to any
Offering of Securities, we shall inform you by a written communication of the
initial public offering price, if any, the selling concession to Selected
Dealers, the reallowance (if any) to other dealers and the time when you may
commence selling Securities to the public. After such public offering has
commenced, we may change the public offering price, the selling concession and
the reallowance. The offering price, selling concession and reallowance (if any)
at any time in effect with respect to an Offering are hereinafter referred to,
respectively, as the "Public Offering Price", the "Concession" and the
"Reallowance". With respect to each Offering of Securities, until the provisions
of this Section 3(c) shall be terminated pursuant to Section 4 hereof, you agree
to offer Securities to the public only at the Public Offering Price, except that
if a Reallowance is in effect, a reallowance from the Public Offering Price not
in excess of such Reallowance is in effect, a reallowance from the Public
Offering Price not in excess of such Reallowance may be allowed. If such
Offering is subject to the By-Laws, rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD"), such Reallowance may be
allowed only as consideration for services rendered in distribution to dealers
who are actually engaged in the investment banking or securities business, who
execute the written argument prescribed by Section 24(c) of Article III of the
Rules of Fair Practice of the NASD and who are either members in good standing
of the NASD or are foreign banks, dealers or institutions not eligible for
membership in the NASD who represent to you that they will promptly reoffer such
Securities at the Public Offering Price and will abide by the conditions with
respect to foreign banks, dealers and institutions set forth in Section 3(e)
hereof. Any dealer who is allowed any Reallowance hereby agrees that such amount
will be retained and not reallowed in whole or in part. Upon our request, you
will advise us of the identity of any dealer to whom you allowed a Reallowance
and any Underwriter or dealer from whom you received a Reallowance.
In connection with any Offering involving the public
distribution of the Securities through two or more underwriting syndicates, you
agree to be bound by, and all offers to sell and sales by you of Securities
shall be subject to, such limitations on offers to sell and sales of Securities
as we may advise you in a written communication, and you agree that any sales
made by you to other dealers shall be made only to such dealers as agree, in
their offers to sell and sales, to be bound by the same limitations.
(d) Over-allotment; Stabilization; Unsold Allotments.
We may, with respect to any Offering, be authorized (i) to over-allot in
arranging for sales of Securities to Selected Dealers and to institutions and
other retail purchasers and, if necessary, to purchase Securities or other
securities of the issuer at such prices as we may determine for the purpose of
covering such over-allotments and (ii) for the purpose of stabilizing the market
in the Securities, to make purchases and sales of Securities or of any other
securities of the issuer or any guarantor or insurer of the Securities as we may
advise you by written communication or otherwise, in the open market or
otherwise, for long or short account, on a when-issued basis or otherwise, at
such prices, in such amounts and in such manner as we may determine. You agree
that upon our request at any time and from time to time prior to the termination
of the provisions of Section 3(c) hereof with respect to any Offering, you will
report to us the amount of Securities purchased by you pursuant to such Offering
which then remain unsold by you and will, upon our request at any such time,
sell to us for our account or the account of one or more Underwriters such
amount of such unsold Securities as we may designate at the Public Offering
Price less an amount to be
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determined by us not in excess of the Concession. If, prior to the later of (i)
the termination of the provisions of Section 3(c) hereof with respect to any
Offering or (ii) the covering by us of any short position created by us in
connection with such Offering for our account or the account of one or more
Underwriters in the open market or otherwise any Securities purchased by you
under this Agreement as part of such Offering, you agree to pay us on demand an
amount equal to the Concession with respect to such Securities (unless you shall
have purchased such Securities pursuant to Section 2 hereof at the Public
Offering Price, in which case we shall not be obligated to pay such Concession
to you pursuant to Section 2), plus, in each case, transfer taxes, broker's
commissions or dealer's mark-ups, if any, and accrued interest, amortization of
original issue discount or accumulated dividends, if any, paid in connection
with such purchase or contract to purchase.
You acknowledge that we do not intend to effect
over-allotments or engage in stabilizing transactions with respect to Offerings
designated as "Public Venture Capital Offerings" unless otherwise so indicated
in the Invitation.
(e) NASD. The provisions of this Section 3(e) shall
apply to any Offering subject to the By-Laws, rules and regulations of the NASD.
You represent and warrant that you are a dealer
actually engaged in the investment banking or securities business and you are
either a member in good standing of the NASD or, if you are not such a member,
you are a foreign bank, dealer or institution not eligible for membership in the
NASD which agrees to make no sales within the United States of America, its
territories or possessions or to persons who are citizens thereof or residents
therein (other than through us) and to comply with all applicable rules of the
NASD, including the NASD's Interpretation and Respect to Free-Riding and
Withholding, in making sales outside the United States of America. You agree
that, in connection with any purchase or sale of any of the Securities wherein a
selling concession, discount or other allowance is received or granted, (i) you
will comply with the provisions of Section 24 of Article III of the NASD's Rules
of Fair Practice and (ii) if you are a non-NASD member broker or dealer in a
foreign country, you will also comply, (A) as though you were an NASD member,
with the provisions of Sections 8 and 36 thereof and (B) with Section 25 thereof
as that section applies to a non-NASD member broker or dealer in a foreign
country. You represent that you are fully familiar with the above provisions of
the Rules of Fair Practice of the NASD.
You represent, by your participation in an Offering,
that neither you nor any of your directors, officers, partners or "persons
associated with" you (as defined in the By-Laws of the NASD, which definition
includes counsel, financial consultants and advisors, finders, members of the
selling or distribution group, and any other persons associated with or related
to any of the foregoing) or any broker-dealer (i) within the last eighteen
months has purchased in private transactions, or intends before, at or within
six months after the commencement of the public offering of the Securities, to
purchase in private transactions, any securities (including warrants or options)
of the issuer, its parent (if any), any guarantor or insurer of the Securities
or any subsidiary of any of the foregoing or (ii) within the last twelve months
had any dealings with the issuer, any guarantor or insurer of the Securities,
any seller other than the foregoing or any subsidiary or controlling person of
any of the foregoing (other than in connection with the
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syndicate agreements relating to such Offering) as to which documents or
information are required to be filed with the NASD pursuant to its
Interpretation with Respect to Review of Corporate Financing.
If we inform you that the NASD views the Offering as
subject to Schedule E to the By-Laws of the NASD, you agree that you shall, to
the extent required, offer the Securities in compliance with such Schedule and
the NASD's interpretation thereof.
If we inform you that the NASD views the Securities
as interests in a direct participation program, you agree that you shall, to the
extent required, offer the Securities in compliance with the NASD's
interpretation of Appendix F of its Rules of Fair Practice.
(f) Relationship among Underwriters and Selected
Dealers. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to an Offering. We may buy
Securities from or sell Securities to any Underwriter or Selected Dealer and,
with our consent, the Underwriters (if any) and the Selected Dealers may
purchase Securities from and sell Securities to each other at the Public
Offering Price less all or any part of the Concession. You are not authorized to
act as agent for us or any Underwriter or the issuer, any seller other than the
issuer, or any guarantor or insurer of any Securities in offering Securities to
the public or otherwise.
Neither we nor any Underwriter shall be under any
obligation to you except for obligations assumed hereby or in any written
communication for us to you in connection with any Offering. Furthermore,
neither we nor any Underwriter shall be under any liability for or in respect of
the validity, value or delivery of or title to, any Securities or any securities
issuable upon exercise, conversion or exchange of any Securities; the form of,
or the statements contained in, or the validity of, in the case of a Registered
Offering, the registration statement, any preliminary prospectus, the
prospectus, any amendment or supplement to any of the foregoing or any materials
incorporated by reference in any of the foregoing or, in the case of an Offering
other than a Registered Offering, any preliminary offering circular, any proof
of an offering circular, any offering circular, any amendment or supplement to
any of the foregoing or any materials incorporated by reference in any of the
foregoing or, in either case, any letters or instruments executed by or on
behalf of the issuer, any seller other than the issuer, any guarantor or insurer
of the Securities or any other party; the form or validity of any contract or
agreement under which any Securities may be issued or which governs the rights
of holders of any Securities; the form or validity of any agreement for the
purchase of the Securities, any agreement among underwriters or any agreements
between or among underwriting syndicates; the performance by the issuer, any
seller other than the issuer, any guarantor or insurer of the Securities and any
other parties of any agreement on its or their parts; the qualification for sale
in any jurisdiction of any Securities or securities issuable upon exercise,
conversion or exchange of any Securities or the legality for investment of the
Securities or such securities under the laws of any jurisdiction; or any matter
in connection with any of the foregoing; provided, however, that nothing in this
paragraph shall be deemed to relieve us or any Underwriter from any liability
imposed by the Securities Act.
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Nothing contained herein or in any written
communication from us shall constitute the Selected Dealers an association or
partners with us or any Underwriter or with one another or, in the case of an
Offering involving the public distribution of the Securities through two or more
underwriting syndicates, with any underwriter or manager participating in any
such syndicate. If the Selected Dealers, among themselves or with the
Underwriters and/or such other underwriters or managers, should be deemed to
constitute a partnership for federal income tax purposes, then you elect to be
excluded from the application of Subchapter K, Chapter 1, Subtitle A of the
Internal Revenue Code of 1986 and agree not to take any position inconsistent
with that election. You authorize us, in our discretion, to execute and file on
your behalf such evidence of that election as may be required by the Internal
Revenue Service. In connection with any Offering you shall be liable for your
proportionate amount of any tax, claim, demand or liability that may be asserted
against you alone or against one or more Selected Dealers participating in such
Offering, or against us or the Underwriters and/or such other underwriters or
managers, if any, based upon the claim that this Selected Dealers, or any of
them, your proportionate share of any expense incurred in defending against any
such tax, claim, demand or liability.
(g) Legal Qualifications. It is understood that
neither we nor any Underwriter assumes any responsibility with respect to the
right of any Selected Dealer to offer or to sell Securities in any jurisdiction,
notwithstanding any "Blue Sky" memorandum or survey or any other information
that we or any other Underwriter may furnish as to the jurisdictions under the
securities laws of which it is believed the Securities may be sold. You
authorize us to file with the Department of State of the State of New York a
Further State Notice with respect to the Securities, if necessary.
If you propose to offer Securities outside of the
United States of America, its territories or its possessions, you will take, at
your own expense and risk, such action, if any, as may be necessary to comply
with the laws of each foreign jurisdiction in which you propose to offer
Securities.
(h) Compliance with Law. You agree that in selling
Securities pursuant to any Offering (which agreement shall also be for the
benefit of the issuer, any seller other than the issuer and any guarantor or
insurer of such Securities) you will comply with the applicable provisions of
the Securities Act and the Exchange Act, the applicable rules and regulations of
the Commission thereunder, the applicable rules and regulations of the NASD, the
applicable rules and regulations of any securities exchange or other
self-regulatory organization having jurisdiction over the Offering and the
applicable federal, state or foreign laws, rules and regulations specified in
Section 3 hereof.
You represent and agree that in connection with each
Offering to which this Agreement applies, you will comply with the provisions of
Regulation M (or any successor provision) under the Exchange Act, as amended or
interpreted from time to time by the Commission. You represent that you are
fully familiar with the provisions of said Rule.
4. Termination. This Agreement may be terminated by either
party hereto upon five business days' written notice to the other party;
provided, however, that with respect to any Offering, if we receive any such
notice from you after you have agreed to participate as a
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Selected Dealer in any Offering, this Agreement shall remain in full force and
effect as to such Offering and shall terminate with respect to such Offering in
accordance with the provisions of the following paragraph.
Unless this Agreement or any provision hereof is earlier
terminated by us, and except as we may advise you in a written communication,
the terms and conditions of this Agreement will cease to be applicable to your
participation in an Offering at the close of business of the forty-fifth day
after the date the Securities are first released for public offering, but in our
discretion may be extended by us by written communication for a further period
or periods not exceeding an aggregate of forty-five days; provided, however,
that the provisions of this Agreement that contemplate obligations surviving the
termination of its effectiveness shall survive such termination with respect to
any Offering.
5. Amendments. This Agreement may be amended or supplemented
by us by written notice to you and without need for further action on your part
and, except for amendments or supplements set forth in a written communication
to you relating solely to a particular Offering, any such amendment or
supplement to this Agreement shall be effective with respect to any Offering
effected after this Agreement is so amended or supplemented. Each reference
herein to "this Agreement" shall, as appropriate, be to this Master Selected
Dealer Agreement as so amended or supplemented.
6. Successors and Assigns. This Agreement shall be binding on,
and inure to the benefit of, the parties hereto and the other persons specified
in Sections 1 and 3 hereof, and the respective successors and assigns of each of
them.
7. APPLICABLE LAW. THIS AGREEMENT AND THE TERMS AND CONDITIONS
SET FORTH HEREIN WITH RESPECT TO ANY OFFERING, TOGETHER WITH SUCH SUPPLEMENTARY
TERMS AND CONDITIONS WITH RESPECT TO SUCH OFFERING AS MAY BE CONTAINED IN ANY
WRITTEN COMMUNICATION TO YOU IN CONNECTION THEREWITH, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
8. Notices. Any notice from us to you shall be deemed to have
been duly given if conveyed to you by written communication or telephone at the
address set forth at the end of this Agreement, or at such other address as you
shall have advised us in writing. Any notice from you to us shall be deemed to
have been duly given if conveyed to us by written communication to 826 Broadway,
6th Floor, New York, New York 10003, Attention: William Feeley; by telephone to
212-253-4400; by facsimile to 212-253-4410; or by e-mail to
[email protected].
Please confirm, by signing and returning this Agreement to us,
your acceptance of and agreement to the terms and conditions of this Agreement
(as amended and supplemented from time to time pursuant to Section 5 hereof),
together with and subject to any supplementary or alternative terms and
conditions contained in any written communication from us in connection with any
Offering, all of which shall constitute a binding agreement between you and us,
individually or as representative of any Underwriters. Your subscription to, or
your acceptance of any reservation of, any Securities pursuant to an Offering
shall constitute (i) confirmation that
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your representations and warranties set forth in this Agreement are true and
correct as of the times or for the periods specified herein, (ii) confirmation
that your agreements set forth in this Agreement have been and will be fully
performed by you to the extent and at the times required hereby and (iii)
acknowledgment that you have requested and received from us sufficient copies of
the prospectus or offering circular, as the case may be, with respect to such
Offering in order to comply with your undertakings in Section 3(a) or 3(b)
hereof.
Very truly yours,
WIT CAPITAL CORPORATION
By:
------------------------------------
Name:
Title:
CONFIRMED as of the date
first written above:
- --------------------------------------
(Name of Dealer)
By:
-----------------------------------
Title*:
------------------------------
Address:
-----------------------------
-----------------------------
-----------------------------
-----------------------------
- ------------------------
* If signer is not an officer or partner, please attach evidence of
authorization.
9
EXHIBIT 3(c)
FORM OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
SANDBOX ENTERTAINMENT CORPORATION
Pursuant to the General Corporation Law
of the State of Delaware
Sandbox Entertainment Corporation was originally incorporated in Delaware
under the name Sandbox Entertainment Corporation by filing its original
Certificate of Incorporation with the Delaware Secretary of State on April 18,
1996, which was thereafter amended by that certain Certificate of Amendment to
Certificate of Incorporation filed with the Delaware Secretary of State on April
22, 1997. This Restated Certificate of Incorporation ("Certificate") restates,
integrates and further amends the Corporation's prior Certificate of
Incorporation and was duly adopted by the Corporation's Board of Directors with
the approval of the stockholders in accordance with Delaware General Corporation
Law Sections 242 and 245.
ARTICLE I
The name of the Corporation shall be Sandbox Entertainment Corporation.
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle 19801. The name of the Corporation's registered
agent is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
The aggregate number of shares that the Corporation shall have authority
to issue is Thirteen Million (13,000,000) divided into Ten Million (10,000,000)
shares of Common Stock, each with par value of $.001 ("Common Stock"), and
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Three Million (3,000,000) shares of Preferred Stock, each with par value of
$.001 ("Preferred Stock"). Effective as of the date of filing of this
Certificate with the Delaware Secretary of State, each share of Common Stock and
Preferred Stock then outstanding shall be deemed to be divided into 0.1666667
shares of Common Stock or Preferred Stock, as the case may be, rounded up to the
nearest whole share.
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Authority is
hereby expressly granted to the Board of Directors from time to time to issue
the Preferred Stock in one or more series, and in connection with the creation
of any such series, by resolution or resolutions providing for the issue of the
shares thereof, to determine and fix such voting powers, full or limited, or no
voting powers, and such designations, preferences and relative participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by The General Corporation Law of Delaware. Without limiting
the generality of the foregoing, except as otherwise provided herein or in the
resolutions providing for the issuance of any series of Preferred Stock, the
resolutions providing for issuance of any series of Preferred Stock may provide
that such series shall be superior or rank equally or be junior to the Preferred
Stock of any other series to the extent permitted by law.
Each holder of Common Stock and Preferred Stock, other than the holders of
record of the Common Stock and the Preferred Stock immediately prior to the
filing of this Restated Certificate of Incorporation with the Delaware Secretary
of State, may, subject to the rules and regulations promulgated by the
Securities and Exchange Commission, revocably consent to receive all stockholder
reports and communications, including but not limited to all prospectuses,
quarterly and annual reports and proxy statements, by delivery of such materials
to such holder's last known mailing address or electronic mail address, at the
Corporation's discretion, listed on the Corporation's records, or by delivery of
a notice to such mailing address or electronic mailing address, at the
Corporation's discretion, which directs such holder to a specific Web address
where such materials can be found, read and printed.
ARTICLE V
Six Hundred Thousand (600,000) shares of the authorized and unissued
Preferred Stock are hereby designated Series A Preferred Stock ("Series A
Preferred Stock") with the following rights and limitations.
1. Definitions. For purposes of this Article V, the following definitions
shall apply:
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(a) "Company" shall mean the Corporation.
(b) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities (other than shares of Series A
Preferred Stock) convertible into or exchangeable for Common Stock.
(c) "Employee Sale" shall mean the sale or grant of any right to
purchase (including any option or warrant) shares of Common Stock to any
employee, officer or director of, or consultant to, the Company pursuant to any
employee, officer, director or consultant plan or agreement adopted or approved
by the Board of Directors of the Company, and any exercise of any such right.
Employee Sale shall also mean the sale or grant of any right to purchase
(including any option or warrant) shares of Common Stock or Preferred Stock to
any bank, equipment lessor or other similar financial institution, and not to a
related party, if and to the extent that the transaction in which such sale or
grant is to be made is approved by the Company's Board of Directors.
(d) "Liquidation Preference" shall mean Four Dollars and Eighty
Cents ($4.80) per share for the Series A Preferred Stock.
(e) "Options" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire Common Stock or Convertible Securities.
(f) "Original Issue Date" shall mean February 13, 1996 for the
Series A Preferred Stock..
(g) "Original Issue Price" shall mean Four Dollars and Eighty Cents
($4.80) per share for the Series A Preferred Stock.
2. Dividends.
(a) Dividend Preference. The holders of outstanding shares of Series
A Preferred Stock shall be entitled to receive dividends, out of any assets at
the time legally available therefore, prior and in preference to any declaration
or payment of any dividend (payable other than in Common Stock of this
Corporation) on the Common Stock of this Corporation, at the rate of nine
percent (9%) of the Original Issue Price per share per annum or, if greater (as
determined on an as-converted basis for the Series A Preferred Stock), an amount
equal to that paid on the outstanding shares of Common Stock of this
Corporation, when, as and if declared by the Board of Directors, provided,
however, that (i) the Board of Directors is under no obligation to pay dividends
to such holders, (ii) such dividends, if any, shall be noncumulative and (iii)
in no event shall any dividend be declared or paid with respect to the Series A
Preferred Stock until after the second (2nd) anniversary of the date that this
Restated Certificate of Incorporation is filed with the Delaware Secretary of
State. No rights shall accrue to the holders of the Series A Preferred Stock if
dividends are not declared in any prior year. Such dividends may be payable
quarterly or otherwise as the Board of Directors may from time to time
determine. If and to the extent that
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the Board of Directors of the Company shall declare and set aside for payment
any other and further amount of cash or property as a distribution, such
distribution shall be made with equal priority to the Common Stock and the
Series A Preferred Stock, with each share of Series A Preferred Stock being
treated for such purpose as if it had been converted into Common Stock at the
then-effective Series A Conversion Rate (as defined below). For such purpose,
all shares of Series A Preferred Stock held by each holder of Series A Preferred
Stock shall be aggregated, and any resulting fractional share of Common Stock
shall be disregarded.
(b) Priority of Dividends. The Company shall make no Distribution
(as defined below) to the holders of shares of Common Stock in any fiscal year
unless and until dividends shall have been paid, or declared and set apart, upon
all shares of Series A Preferred Stock.
(c) Distribution. As used in this section, "Distribution" means the
transfer of cash or property without consideration, whether by way of dividend
or otherwise (except a dividend in shares of the Company) or the purchase of
shares of the Company (other than in connection with the repurchase of shares of
Common Stock issued to or held by employees, consultants, officers and directors
upon termination of their employment or services pursuant to agreements
providing for the right of said repurchase) for cash or property.
(d) Consent to Certain Distributions. The holders of outstanding
shares of Series A Preferred Stock shall be deemed to have consented to all
distributions or payments to existing or terminated employees, consultants,
officers and directors of the Company in connection with the termination of
employment by or services to the Company and relating to the repurchase of
shares of capital stock issued to or held by such individuals pursuant to
agreements with the Company for such repurchases.
3. Liquidation Rights.
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary, the
holders of the Series A Preferred Stock shall be entitled to receive, out of the
assets of the Company, the Liquidation Preference specified for each share of
Series A Preferred Stock then held by them (subject to appropriate adjustment in
the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) plus an amount equal to all declared and
unpaid dividends thereon, if any, to the date that payment is made, before any
payment shall be made or any assets distributed to the holders of Common Stock.
(b) Priority. If upon the liquidation, dissolution or winding up of
the Company, the assets to be distributed among the holders of the Series A
Preferred Stock are insufficient to permit the payment to such holders of the
full Liquidation Preference for their shares, then the entire assets of the
Company legally available for distribution shall be distributed with equal
priority and pro rata among the holders of the Series A Preferred Stock and the
holders of any other series of Preferred Stock entitled to participate pari
passu with the holders of the Series A Preferred Stock, in proportion to the
numbers of shares of Preferred Stock held by them multiplied by the Liquidation
Preference for such shares of Preferred Stock.
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Remaining Assets. After the payment to the holders of Series A
Preferred Stock of the full Liquidation Preference specified herein, and any
other preferential amounts with respect to any other series of Preferred Stock,
any remaining assets of the Company shall be distributed ratably to the holders
then outstanding Common Stock, Series A Preferred Stock and any other series of
Preferred Stock designated as participating with respect to the remaining assets
on liquidation, with each share of Preferred Stock being treated for such
purpose as if it had been converted into Common Stock at the then effective
Series A Conversion Rate (as defined below) or designated conversion rate for
any other series of Preferred Stock. For such purpose, all shares of Preferred
Stock held by each participating holder of Preferred Stock shall be aggregated,
and any resulting fractional share of Common Stock shall be disregarded.
4. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Series A Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share at the office of the Corporation or any transfer agent
for the Series A Preferred Stock, into that number of fully-paid and
nonassessable shares of Common Stock that is equal to Four Dollars and Eighty
Cents ($4.80) divided by the appropriate Series A Conversion Price (as
hereinafter defined). The Series A Conversion Price for the Series A Preferred
Stock shall be Four Dollars and Eighty Cents ($4.80) and shall be subject to
adjustment as provided herein. (The number of shares of Common Stock into which
each share of Series A Preferred Stock may be converted is hereinafter referred
to as the "Series A Conversion Rate.") Upon any decrease or increase in the
Series A Conversion Price or the Series A Conversion Rate, as described in this
Section 4, the Series A Conversion Rate or Series A Conversion Price, as the
case may be, shall be appropriately increased or decreased.
(b) Automatic Conversion. Each share of Series A Preferred Stock
shall automatically be converted into shares of Common Stock at the
then-effective Series A Conversion Rate for such share immediately upon the
consummation of a firmly underwritten public offering on Form S-1 (or successor
form) that gives the Company a market valuation of at least $25 million and
results in proceeds to the Company in the public offering of at least $5 million
(net of underwriting discounts and commissions and offering expenses) (a
"Qualifying Public Offering").
(c) Mechanics of Conversion. No fractional shares of Common Stock
shall be issued upon conversion of Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of Directors
of the Corporation. Before any holder of Series A Preferred Stock shall be
entitled to convert the same into full shares of Common Stock, and to receive
certificates therefor, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same; provided,
however, that in the event of an automatic conversion pursuant to paragraph 4(b)
above, the outstanding shares of Series A Preferred Stock shall be converted
automatically without any further action by the holders of such
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shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided further, however,
that the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such automatic conversion unless either the
certificates evidencing such shares of Series A Preferred Stock are delivered to
the Corporation or its transfer agent as provided above, or the holder notifies
the Corporation or its transfer agent that such certificates have been lost,
stolen or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates.
The Corporation shall, as soon as practicable after such delivery, or
after such agreement and indemnification, issue and deliver at such office to
such holder of Series A Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he shall be entitled as aforesaid and
a check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock, plus any declared
and unpaid dividends on the converted Series A Preferred Stock. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date; provided,
however, that if the conversion is in connection with an underwritten offer of
securities registered pursuant to the Securities Act of 1933, as amended, the
conversion may, at the option of any holder tendering Series A Preferred Stock
for conversion, be conditioned upon the closing of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series A Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock until immediately
prior to the closing of the sale of such securities.
(d) Adjustments to Series A Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this paragraph 4(d),
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(d)(iii), deemed to be issued) by the Corporation after
the Original Issue Date, other than:
(1) shares of Common Stock issued or issuable upon
conversion of shares of Series A Preferred Stock;
(2) shares of Common Stock issued or issuable in an
Employee Sale;
(3) shares of Common Stock issued or issuable as a
dividend or distribution on Series A Preferred Stock or pursuant to any event
for which adjustment is made pursuant to paragraph 4(d)(vi), (vii) or (viii)
hereof,
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(ii) No Adjustment of Series A Conversion Price. No adjustment
in the Series A Conversion Price of a particular share of Series A Preferred
Stock shall be made in respect of the issuance of Additional Shares of Common
unless the consideration per share for an Additional Share of Common issued or
deemed to be issued by the Corporation is less than or equal to the Series A
Conversion Price in effect on the date of, and immediately prior to such issue,
for such share of Series A Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common.
(1) Options and Convertible Securities. In the event the
Corporation at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
contained therein for a subsequent adjustment of such number) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities or exercise of such Options, shall be deemed to be Additional Shares
of Common issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common shall not be deemed to have been issued unless
the consideration per share (determined pursuant to paragraph 4(d)(v) hereof) of
such Additional Shares of Common would be less than the Series A Conversion
Price in effect on the date of and immediately prior to such issue, or such
record date, as the case may be, and provided further that in any such case in
which Additional Shares of Common are deemed to be issued:
(a) no further adjustment in the Series A
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase in
the consideration payable to the Corporation, or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Series A Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(c) no readjustment pursuant to clause (b) above
shall have the effect of increasing the Series A Conversion Price to an amount
which exceeds the lower of (i) the Series A Conversion Price on the original
adjustment date, or (ii) the Series A Conversion Price that would have resulted
from any issuance of Additional Shares of Common between the original adjustment
date and such readjustment date;
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(d) upon the expiration of any such Options or the
conversion or exchange rights of such Convertible Securities which shall not
have been exercised, the Series A Conversion Prices computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto) and
any subsequent adjustments based thereon shall, upon such expiration, be
recomputed as if:
(i) in the case of Convertible Securities or
Options for Common Stock, the only Additional Shares of Common issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of such exercised Options plus the consideration
actually received by the Corporation upon such exercise or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
deemed to have been then issued was the consideration actually received by the
Corporation for the issue of such exercised Options, plus the consideration
deemed to have been received by the Corporation (determined pursuant to
paragraph 4(d)(v)) upon the issue of the Convertible Securities with respect to
which such Options were actually exercised, and
(e) if such record date shall have been fixed and
such Options or Convertible Securities are not issued on the date fixed
therefor, the adjustment previously made in the Series A Conversion Prices which
became effective on such record date shall be canceled as of the close of
business on such record date, and thereafter the Series A Conversion Prices
shall be adjusted pursuant to this paragraph 4(d)(iii) as of the actual date of
their issuance.
(2) Stock Dividends. In the event the Corporation at any
time or from time to time after the Original Issue Date shall declare or pay any
dividend on the Common Stock payable in Common Stock, and with respect to which
no similar Common Stock dividend is to be distributed to holders of Series A
Preferred Stock, then and in any such event, Additional Shares of Common shall
be deemed to have been issued immediately after the close of business on the
record date for the determination of holders of any class of securities entitled
to receive such dividend.
(iv) Adjustment of Series A Conversion Price Upon Issuance of
Additional Shares of Common. In the event this Corporation shall issue
Additional Shares of Common (including Additional Shares of Common deemed to be
issued pursuant to paragraph 4(d)(iii)) without consideration or for a
consideration per share less than the applicable Series A Conversion Price in
effect on the date of and immediately prior to such issue, then and in such
event, the applicable Series A Conversion Price shall be reduced, concurrently
with such issue, to
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a price (calculated to the nearest cent) determined by multiplying such Series A
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the total number of Additional Shares of Common so issued
would purchase at such Series A Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common so issued; and
provided further that, for the purposes of this paragraph 4(d)(iv), all shares
of Common Stock issuable upon exercise, conversion or exchange of outstanding
Options, Preferred Stock and Convertible Securities, as the case may be, shall
be deemed to be outstanding Common Stock, and immediately after any Additional
Shares of Common are deemed issued pursuant to paragraph 4(d)(iii), such
Additional Shares of Common shall be deemed to be outstanding.
(v) Determination of Consideration. For purposes of this
subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(a) insofar as it consists of cash, be computed at
the aggregate amount of cash received by the Corporation excluding amounts paid
or payable for accrued interest or accrued dividends;
(b) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board; and
(c) in the event Additional Shares of Common are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a) and (b) above, as
determined in good faith by the Board.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares of
Common deemed to have been issued pursuant to paragraph 4(d)(iii)(1), relating
to Options and Convertible Securities, shall be determined by dividing
(a) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
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(b) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(3) Stock Dividends. Any Additional Shares of Common
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.
(vi) Adjustments for Subdivisions or Combinations of Common.
In the event the outstanding shares of Common Stock shall be subdivided (by
stock split or otherwise than by payment of a dividend in Common Stock), into a
greater number of shares of Common Stock, the Series A Conversion Price in
effect immediately prior to such subdivision shall, concurrently with the
effectiveness of such subdivision, be proportionately decreased. In the event
the outstanding shares of Common Stock shall be combined (by reclassification or
otherwise) into a lesser number of shares of Common Stock, the Series A
Conversion Price in effect immediately prior to such combination shall,
concurrently with the effectiveness of such combination, be proportionately
increased.
(vii) Adjustments for Other Distributions. In the event the
Corporation at any time or from time to time makes or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Series A Preferred Stock
then converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including the
date of conversion, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the holders of the
Series A Preferred Stock.
(viii) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series A
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the Series A Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Series A Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock immediately before that change.
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(e) No Impairment. The Corporation will not, by amendment of its
certificate of incorporation or through any reorganization, transfer of assets,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this Section (4) and
in the taking of all such action as may be necessary or appropriate in order to
protect the Series A Conversion Rights of the holders of the Series A Preferred
Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of any Series A Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment
or readjustment in accordance with the terms hereof and furnish to each holder
of Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series A Conversion Price at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.
(g) Notices of Record Date. In the event that this Corporation shall
propose at any time:
(i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of
its Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge with or into any other Corporation, or sell,
lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Series A Preferred Stock at least 20 days' prior written notice
of the date on which a record shall be taken for such event (and specifying the
date on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (iii) and
(iv) above.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to he holders of Series A Preferred Stock at the address for
each such holder as shown on the books of this Corporation.
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(h) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
5. Voting. Except as otherwise expressly provided herein or as required by
law, the holders of Preferred Stock and the holders of Common Stock shall vote
together and not as separate classes.
(a) Series A Preferred Stock. Each holder of shares of Series A
Preferred Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series A Preferred Stock held
by such holder of Preferred Stock could then be converted. The holders of shares
of the Series A Preferred Stock shall be entitled to vote on all matters on
which the Common Stock shall be entitled to vote, unless otherwise required by
applicable law. The holders of the Series A Preferred Stock shall be entitled to
notice of any shareholders' meeting in accordance with the Bylaws of the
Company. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series A Preferred Stock held by each holder could be
converted), shall be disregarded.
(b) Common Stock. Each holder of shares of Common Stock shall be
entitled to one vote for each share thereof held.
(c) Election of Directors. The holders of the Series A Preferred
Stock, voting together as a single class, shall be entitled to elect one
director. Except as otherwise provided in a certificate of designation for
another series of Preferred Stock, all other directors, and any vacancies on the
Board of Directors, shall be filled by vote of the holders of the Common Stock
and the Series A Preferred Stock, voting together as a single class.
6. Amendments and Changes.
(a) No Series Voting. Other than as provided by law, there shall be
no series voting.
(b) Approval by Class. As long as any of the Series A Preferred
Stock shall be issued and outstanding, the Company shall not, without first
obtaining the approval (by vote or consent as provided by law) of the holders of
two-thirds (66-2/3%) of the total number of shares of the Series A Preferred
Stock then outstanding:
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(i) alter or change the rights, preferences or privileges of
the holders of Preferred Stock materially or adversely;
(ii) amend or repeal any provision of, or add any provision
to, the Company's Certificate of Incorporation or Bylaws;
(iii) increase the authorized number of shares of Preferred
Stock;
(iv) authorize, create or issue shares of any class or series
of stock having any preference or priority equal or superior to the Series A
Preferred Stock with respect to voting, redemption, dividends, or upon
liquidation; or
(v) amend this Section 6(b).
(c) Consent of Class. Consent of the holders of at least two-thirds
of all outstanding Series A Preferred Stock shall be required for
(i) any merger, consolidation, or other corporate
reorganization in which the shareholders of the Corporation do not own a
majority of the outstanding shares of the surviving corporation; or
(ii) any transaction or series of related transactions in
which in excess of 50% of the Corporation's voting power is transferred or in
which all or substantially all of the assets of the Corporation are sold.
7. Notices. Any notice required by the provisions of this Article V to be
given to the holders of Series A Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the books of the Company.
ARTICLE VI
The business and affairs of this Corporation shall be conducted by a Board
of Directors, the size of which shall be as established from time to time as set
forth in the Corporation's Bylaws.
ARTICLE VII
The known place of business of the Corporation is as follows: 2231 East
Camelback Road, Suite 324, Phoenix, Arizona 85016. Said place of business shall
be subject to change hereafter in accordance with applicable law.
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ARTICLE VIII
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however that nothing contained herein shall
eliminate or limit the liability of a director of the Corporation to the extent
provided by applicable laws (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law, (iii)
for authorizing the payment of an unlawful dividend or the an unlawful
repurchase of stock pursuant to Section 174 of the General Corporation Law of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. The limitation of liability provided herein shall
continue after a director has ceased to occupy such position as to acts or
omissions occurring during such director's term or terms of office.
No repeal or modification of the foregoing paragraph by the stockholders
of this Corporation shall adversely affect any right or protection of a director
existing at the time of such repeal or modification.
ARTICLE IX
The Corporation shall indemnify any person against expenses, including
without limitation, attorneys' fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by reason of the fact that he or
she is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, in all circumstances in
which, and to the extent that, such indemnification is permitted and provided
for by the laws of the State of Delaware as then in effect.
No repeal or modification of the foregoing paragraph by the stockholders
of this Corporation shall adversely affect any right or protection of a director
or officer existing at the time of such repeal or modification.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
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ARTICLE XI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors of this corporation is expressly authorized to make, alter, amend,
rescind or repeal the bylaws of the corporation.
ARTICLE XII
Elections of directors need not be by written ballot except and to the
extent provided in the bylaws of the Corporation.
ARTICLE XIII
The Corporation reserves the right to repeal, alter, amend or rescind any
provision contained in this Certificate, in the manner now or hereafter
prescribed by statute, and all rights conferred on stockholders herein are
granted subject to this reservation.
ARTICLE XIV
The Corporation shall not be subject to the provisions of Section 203 of
the Delaware General Corporation Law.
The undersigned, being the President of the Corporation, does hereby
declare and certify that this is his act and deed and the facts herein stated
are true, and accordingly have hereunto set his hand this ____ day of ________,
1997.
By:
------------------------------------
Chad M. Little, President
15
EXHIBIT 4(bb)
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
THIS AGREEMENT is made and entered into as of the 13th day of July,
1995, by and among TRACER DESIGN, INC., an Arizona corporation (the
"Corporation"), CHAD M. LITTLE ("Little"), LONNIE A. WHITTINGTON
("Whittington"), JAMES A. LAYNE ("Layne") and GLENN GOMEZ ("Gomez", and together
with Little, Whittington and Layne sometimes will be referred to individually as
"Stockholder" and collectively as "Stockholders").
WITNESSETH:
WHEREAS, the Corporation and Little, Whittington and Layne
(collectively, the "Original Stockholders") are parties to a Stockholders'
Agreement dated as of February 25, 1992 (the "Original Stockholders'
Agreement").
WHEREAS, Glenn Gomez ("Gomez") has acquired stock of the Corporation
concurrently with the execution of this Agreement. As a condition precedent to
the issuance of stock to Gomez, the Corporation has required that Gomez become a
party to the Original Stockholders' Agreement.
WHEREAS, the Corporation and the Shareholders desire that the Original
Stockholders' Agreement be amended in certain respects.
WHEREAS, the Class A Common Stock (the "Stock") of the Corporation is
the sole class of capital stock issued by the Corporation and presently
outstanding, and the Stockholders are the sole owners of Stock.
WHEREAS, the Two Hundred Fifty-Five Thousand One Hundred Two (255,102)
issued and outstanding shares of the Stock of the Corporation (the "Shares") are
held by the Stockholders, as their sole and separate property, as follows:
Stockholder No. of Shares
Chad M. Little 127,500
Lonnie A. Whittington 61,250
James A. Layne 61,250
Glenn Gomez 5,102
WHEREAS, the Stockholders and the Corporation wish to restrict stock
ownership to parties with whom they mutually choose to deal, to assure the
continued ease of administration of the Corporation's business and to make
certain agreements with each other regarding the Shares.
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WHEREAS, the Stockholders wish to provide a smooth transition in
control of the Corporation upon the death or disability of any Stockholder.
WHEREAS, the Stockholders wish to provide a means of resolving disputes
between minority Stockholders and the Corporation's management.
WHEREAS, the parties hereto desire to promote their individual
interests and the interests of the Corporation by imposing certain restrictions
and obligations on the Stockholders, the Corporation, and the Shares.
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants hereinafter contained, and for other good and lawful consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. Endorsement of Stock. Upon the execution of this Agreement, the
certificates representing the Shares shall be surrendered to the Secretary of
the Corporation and endorsed as follows:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
STOCKHOLDERS' AGREEMENT TO WHICH THE CORPORATION IS A PARTY, AND NONE OF SUCH
SHARES, OR ANY INTEREST THEREIN, SHALL BE TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF EXCEPT AS PROVIDED IN SUCH AGREEMENT. A COPY OF THE
STOCKHOLDERS' AGREEMENT IS ON FILE IN THE OFFICE OF THE CORPORATION AND WILL BE
MADE AVAILABLE FOR INSPECTION TO ANY PROPERLY INTERESTED PERSON WITHOUT CHARGE
WITHIN FIVE (5) WORKING DAYS AFTER THE CORPORATION'S RECEIPT OF A WRITTEN
REQUEST.
A copy of this Agreement, together with any amendments thereto, shall
remain on file with the Secretary of the Corporation and shall be available for
inspection to any properly interested person without charge within five (5)
working days after the Corporation's receipt of a written request therefor.
Subject to the terms of this Agreement, the Stockholders shall be
entitled to exercise all rights of ownership in the Shares.
No shares of any class of stock of the Corporation, other than the
Stock, are presently issued and outstanding. If the Corporation issues any
shares of any other class of stock or additional shares of Stock, the
Corporation shall cause all shares so issued to bear the above endorsement, and
to be subject to all the terms and conditions of this Agreement, and such shares
shall for all purposes be deemed "Shares" hereunder. Each person receiving such
issued shares shall automatically be deemed a "Stockholder" hereunder, and in
furtherance thereof, each such
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person shall execute and deliver to the parties hereto an agreement in writing
to be bound by this Agreement.
2. Restrictions on Transfer or Encumbrance. Except as otherwise set
forth in this Agreement, no Stockholder shall, without the prior written consent
of all other Stockholders, transfer, or permit the transfer of, all or any part
of the Shares, or any interest therein, whether legal or beneficial, now owned
or hereafter acquired by such Stockholder. Any attempted transaction not in
compliance with this section 2 shall be void. As used in this Agreement, the
verb "transfer," in whatever form, number or tense, shall mean, as the case may
be, to pledge, encumber or in any manner use as collateral, to transfer, or to
sell or otherwise to dispose of, or suffer disposition or encumbrance,
voluntarily or involuntarily, and includes, without limitation, division of
marital property by voluntary agreement or in connection with a divorce decree,
dissolution of marriage or other equitable division of community property or
other property held by husband and wife. The term "marital property" as used in
this Agreement includes without limitation community property. With respect to
any Stockholder that is a corporation, partnership, trust or other entity, the
occurrence of a change in control of such Stockholder, whether through sale,
exchange, merger, voting trust, or other arrangement or transaction, with
respect to the securities of such entity, or the sale or other transfer of all
or substantially all of the assets of such entity, shall be deemed to be an
involuntary transfer of all the Shares held by such Stockholder. "Control" for
purposes of this Agreement means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by contract or
otherwise.
3. Exceptions.
(a) Family Transfers. Notwithstanding any other provision
herein to the contrary, without obtaining the consent of any Stockholder or of
the Corporation and upon prior written notice to each of the other Stockholders
and to the Corporation, an individual Stockholder may transfer any and all
Shares owned by him or her to his or her issue or to any revocable or
irrevocable trust of which the Stockholder, or his or her issue, or any of the
foregoing, are the sole beneficiaries and a trust Stockholder may transfer any
and all shares owned by it to any of the trust beneficiaries; provided, however,
that such transfer shall be for no or minimal consideration, that all Shares so
transferred shall remain subject to all the terms and conditions of this
Agreement, that each transferee shall be deemed a Stockholder hereunder, and
that each transferee shall first agree in writing to be bound by this Agreement.
(b) Transfers Among Original Stockholders. Notwithstanding any
other provision herein to the contrary, without obtaining the consent of any
Stockholder or of the Corporation and upon prior written notice to each of the
other Stockholders and to the Corporation, each Original Stockholder may
transfer some or all of his shares to any other Original Stockholder.
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(c) Cross Purchase Agreement. The Original Stockholders are
parties to a Cross Purchase Agreement among the Original Stockholders and Andrew
E. Todd, as trustee, dated as of March 1, 1994 (the "Cross Purchase Agreement"),
a copy of which is attached to this Agreement as Exhibit "A". Notwithstanding
any other provision herein to the contrary, without obtaining the consent of any
Stockholder or of the Corporation and upon prior written notice to each of the
other Stockholders and to the Corporation, each of the Original Stockholders can
comply with its obligations under the Cross Purchase Agreement.
(d) Corporate Redemptions. Notwithstanding any other provision
herein to the contrary, an offer by the Corporation to redeem Shares shall not
be "a bona fide offer from a third party" within the meaning of section 4
hereof, unless the price for such redemption offer exceeds the Fair Market Value
as defined in section 12 hereof.
4. Offering Notice; Non-Cash Consideration; Involuntary Transfer Date;
Sole and Separate Property. Each Stockholder hereby covenants, during the term
of this Agreement, not to transfer, or permit the transfer of, any Shares
(including any Shares previously transferred to such Stockholder pursuant to
section 3(a) or 3(b) hereof), or any interest therein, whether legal or
beneficial, without first offering to transfer the same to or for the benefit of
the Corporation or the Stockholders as provided in section 5.
(a) The Offering Notice. Any Stockholder (the "Selling
Stockholder") having received a bona fide offer from a third party, including
another Stockholder, and desiring to accept the offer, or desiring to transfer
any Shares to a third party, shall before accepting the offer or proposing the
transfer submit the offer or proposal in writing to each of the other
Stockholders (individually called "Optionee" and collectively called
"Optionees") and to the Corporation. The offer or proposal (the "Offering
Notice") shall identify the number of Shares and the interest therein that the
Selling Stockholder proposes to transfer (the "Offered Shares" ), and shall set
forth the consideration for which the Offered Shares are proposed to be
transferred (including assigning a cash value to each element of any proposed
non-cash consideration), and all terms of payment (the "Price and Payment
Terms"), the identity and the address of the third party (the "Proposed
Purchaser" ), and all other terms and conditions of the proposed transaction.
(b) Non-Cash Consideration. In the event the Offering Notice
sets forth a cash value for non-cash consideration, the Corporation and each
Optionee shall have ten (10) days, beginning with the day following receipt of
the Offering Notice by the Corporation and all Optionees, to make written, good
faith objections to the cash value specified for all or any part of the non-cash
consideration. If the Corporation or any Optionee objects to the cash value
specified in the Offering Notice for all or any part of the non-cash
consideration, each objecting party shall notify the Selling Stockholder, the
Secretary of the Corporation, and the other Optionees, as the case may be, in
writing setting forth the cash value he or it would assign to the disputed
non-cash consideration and the reason(s) therefor. If after ten (10) days,
beginning with the day following receipt of each such notice of objection by the
Selling Stockholder, the Corporation and all Optionees, there remains any
objection to the cash value of any item of non-cash consideration,
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the dispute over the cash value of such items shall be submitted for arbitration
pursuant to section 18(o) hereof.
(c) Involuntary Transfer Date. Any Stockholder who becomes
aware (i) that there is a reasonable possibility Shares held by such Stockholder
or any other Stockholder may be transferred involuntarily in the reasonably
foreseeable future or (ii) that, with respect to a Stockholder holding any or
all of his or her Shares as marital property, a division of marital property of
such Stockholder and his or her spouse pursuant to a divorce decree, dissolution
of marriage or equitable division of marital property is reasonably imminent,
shall provide written notice to the Corporation and all other Stockholders
describing in reasonable detail the known circumstances concerning the possible
transfer or division of marital property and thereafter keep the Corporation and
other Stockholders reasonably informed with respect to the potential transfer or
division. The date upon which an involuntary transfer becomes effective, or a
decree, order or definitive agreement in respect of a division of marital
property pursuant to which Shares are awarded or granted to the spouse of a
Stockholder to be held as such spouse's separate property becomes effective,
shall be an "Involuntary Transfer Date" for purposes of this Agreement. In the
event of the occurrence of an Involuntary Transfer Date, any person or entity,
other than a spouse who was a Stockholder immediately before the Involuntary
Transfer Date, who receives Shares as a result of the transfer that occurred on
the Involuntary Transfer Date shall be deemed to be a "Selling Stockholder" for
purposes of this Agreement, such Shares shall be deemed to be "Offered Shares",
and upon receipt of notice of such event, the Corporation shall send written
notice of such event identifying the number of Shares and the interest therein
held by the Selling Stockholder to all "Optionees," who shall consist for this
purpose of all Stockholders other than the Selling Stockholder and the
Stockholder, if any, from whom the Selling Stockholder acquired the Shares, and
such notice shall be deemed to be an "Offering Notice." Such Optionees and the
Corporation shall have the right to purchase such Shares pursuant to section 5.
(d) Sole and Separate Property. Each Stockholder expressly
represents and warrants that all of the Shares held by him are held as his
individual sole and separate property and his spouse, if any, has no interest
therein. Each Stockholder covenants and agrees that he will at all times
maintain all of his Shares as his sole and separate property and will take all
actions necessary to ensure the effectiveness of this agreement including
without limitation obtaining disclaimers and/or prenuptial agreements from any
spouse. It is the parties' intention and agreement, upon which they are relying
in entering into this Agreement, that a divorce or legal separation of any of
them who are individuals and their respective spouses shall not interfere in the
operation of the Corporation and the business relationships among the
Stockholders. To effectuate this intent, each individual Stockholder agrees that
in the event of a property division incident to his or her divorce or legal
separation, such Stockholder shall petition the court or tribunal having
jurisdiction of the matter to award the whole of the Shares in kind to such
Stockholder consistent with his holding such Shares as his sole and separate
property. The parties further recognize that a court or tribunal may choose not
to make an award as contemplated by the preceding sentence and therefore have
provided the Corporation and other Stockholders the
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option to acquire any Shares, however held, on the terms and conditions set
forth in this Agreement.
5. Options to Purchase.
(a) First Option. The Corporation shall have an option,
continuing for thirty (30) days, beginning with the day following receipt of the
Offering Notice, to elect to acquire all or any part of the Offered Shares for
the Price and Payment Terms. Such election shall be made, with due regard to
A.R.S. ss.10-047, or any successor statute, by a majority of the Board of
Directors of the Corporation, unless the proposed transaction includes a loan or
advance of credit to or for a director of the Corporation, in which event such
election shall be made by holders of a majority of the Stock. If the Corporation
elects to acquire all of the Offered Shares, the Secretary of the Corporation
shall, no later than the last day of the Corporation's thirty (30) day option
period, notify the Selling Stockholder and Optionees of its decision in writing.
(As used in this section and hereinafter in this Agreement, the verb "acquire,"
in whatever form, number or tense, shall mean, as the case may be, to take as
security or as collateral, to accept a transfer, to purchase, or otherwise to
acquire.)
(b) Second Option. If the Corporation elects not to exercise
its option under the preceding subsection or elects to acquire less than all the
Offered Shares, the Secretary of the Corporation shall, no later than the last
day of the Corporation's thirty (30) day option period, notify the Selling
Stockholder and Optionees of its decision in writing. Each Optionee then shall
have an option, continuing for a period of thirty (30) days, beginning with the
day following receipt of such notice by all Optionees, to acquire, for the Price
and Payment Terms, all or any part of the Offered Shares (including fractional
Shares) not acquired by the Corporation in the same ratio as the total number of
shares of the Corporation's capital stock owned by such Optionee bears to the
total number of shares of the capital stock of the Corporation then outstanding
and owned (whether or not subject to a pledge or other encumbrance) by all
Optionees. Any Optionee desiring to acquire all or any part of the Offered
Shares not acquired by the Corporation shall deliver to the Secretary of the
Corporation within said thirty (30) day period a written election so to acquire
the Offered Shares or a specified portion thereof up to his proportionate share.
(c) Subsequent Options. If any Optionee does not elect to
acquire his or its proportionate share, the Secretary of the Corporation shall
give written notice thereof to all Optionees who elected to exercise their
options (the "Exercising Optionees"), no later than five (5) days following the
last day of the option period of the last Optionee to receive notice. Each
Exercising Optionee shall then have a further option, continuing for five (5)
days, beginning with the day following receipt of such notice by all Exercising
Optionees, to elect to acquire the still unsold Offered Shares in the same ratio
that the total number of shares of the Corporation's capital stock owned by him
or it bears to the total number of shares of the capital stock of the
Corporation then outstanding and owned by all Exercising Optionees. Any
Exercising Optionee desiring to acquire all or any part of the Offered Shares
not acquired by the Corporation or by any
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Optionee shall deliver a written election as in section 5(b) during said five
(5) day period. Such notices and options shall continue to be given in the same
manner and for the same periods until election(s) to acquire all of the Offered
Shares are made, or until no Exercising Optionee is willing to exercise his or
its option to acquire the remaining Offered Shares. Only an Exercising Optionee
who shall have fully exercised his or its last option under this section 5(c)
shall be deemed to be an Exercising Optionee for purposes of notice and exercise
of the next subsequent option, if any, under this section 5(c).
(d) Certain Procedures for Options. If the death or
dissolution of a Stockholder should occur during any of the above option periods
or if any option pursuant to section 8 hereof shall be open during any option
period under this section 5, any and all option periods under this section 5
shall be tolled until all options under section 8 have been exercised or
terminated. For the purposes of determining the ratios of acquisition pursuant
to section 5(b) and/or section 5(c), an Optionee shall be deemed not to own any
of the Offered Shares owned, acquired or agreed to be acquired by him, and such
Shares shall be deemed to be owned by the Selling Stockholder. The Optionee
shall be deemed to own any shares acquired pursuant to section 8 during a tolled
option period. While any option pursuant to this section 5 is pending, if a
subsequent Offering Notice is submitted pursuant to section 4, all options
relating to such subsequent Offering Notice shall be tolled until all options
relating to the preceding Offering Notice have been exercised and consummated,
or terminated. Any shares acquired by stockholders pursuant to a preceding
Offering Notice and any shares acquired by a Proposed Purchaser pursuant to a
preceding Offering Notice shall be taken into consideration in determining the
ratios of acquisition for a subsequent Offering Notice. If the Corporation or
any Stockholder does not give timely notice of his or its election to exercise
any option under this section 5, such Stockholder shall be deemed to have
elected not to exercise that option.
6. Failure to Acquire All Offered Shares. If the Corporation and
Optionees collectively do not elect pursuant to section 5 or section 10, as
applicable, to acquire all the Offered Shares, then, as applicable, (i) the
Selling Stockholder may complete the transaction with the Proposed Purchaser, no
later than the thirtieth (30th) day following the last day of the last option
period provided for herein, for the consideration per Offered Share, for all,
but not less than the Offered Shares (including those Shares, if any, elected to
be acquired by the Corporation and/or other Stockholders pursuant to section 5
and/or section 11 hereof), and upon all the terms and conditions set forth in
the Offering Notice, or (ii) with respect to Offered Shares acquired upon an
Involuntary Transfer Date, the Corporation shall record the Selling Stockholder
as the owner of record of such Shares. The Offered Shares shall for all purposes
remain subject to this Agreement and the Proposed Purchaser, any person taking
the Shares as collateral pursuant to a pledge or other encumbrance, or any
person holding such Shares on account of the occurrence of an Involuntary
Transfer Date shall, upon completion of the transaction, immediately and
automatically be deemed a Stockholder hereunder and shall be bound by this
Agreement. If requested by the Corporation or any Stockholder, any such
transferee shall, as a condition to transfer, agree in writing to be bound by
the terms of this Agreement, including, in the case of a person taking Shares as
collateral, the requirement that he or it provide notice of default and/or
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foreclosure to the Stockholders and the Corporation pursuant to sections 4 and
10 herein. A person taking the Shares as collateral pursuant to a pledge or
other encumbrance shall not have the right to exercise any option under sections
s or 8 by virtue of his so holding such shares as collateral or following
foreclosure. If the transaction with the Proposed Purchaser is not consummated
by such thirtieth (30th) day pursuant to the exact terms and conditions set
forth in the Offering Notice, then the option transactions shall not be
consummated and all the provisions of this Agreement shall be deemed to apply
again to all the Offered Shares.
7. Election to Acquire Offered Shares. If the Corporation and/or the
Optionees elect to acquire all the Offered Shares pursuant to section 5, the
Corporation and each Exercising Optionee shall be obligated to consummate his or
its election to acquire the Offered Shares pursuant to such election(s) no later
than thirty (30) days following the expiration of the last option in the case of
an acquisition under section 5 hereof (the "Closing"). The price to acquire each
Offered Share shall be the price set forth in the Offering Notice (computed on
the basis of the cash value of all consideration as determined under section 4),
unless no price is set forth in the Offering Notice, in which case the price
shall be the Fair Market Value as defined in section 11 hereof. Notwithstanding
the payment terms set forth in the Offering Notice, said price may be paid by
the Corporation and/or each Exercising Optionee, as it or he, in its or his sole
discretion elects, as follows:
(a) cash in full, payable at the time of the Closing; or
(b) (except in the event the Selling Stockholder proposes only
to pledge, encumber or otherwise use the Offered Shares as collateral) an
initial payment in cash at the closing of twenty percent (20%) of said price,
with the balance payable in not more than four (4) equal annual installments of
principal and interest, the number of which shall be determined by the
Corporation or the Exercising Optionee, as the case may be. The balance shall be
evidenced by a promissory note bearing interest at the higher of (1) one
percentage point (1%) over the prevailing prime interest rate charged by Bank
One Arizona, N.A. (or its successor in interest) as of the date of Closing,
adjusted on a daily basis, or (2) the minimum rate that may be charged without
incurring imputed interest or original issue discount under sections 483(b) or
1272- 1274A of the Internal Revenue Code, as amended. The Selling Stockholder
shall retain a security interest in the Offered Shares subject to the exercised
option as security for performance of the Corporation's and/or the Exercising
Optionee's obligations under the promissory note, and the Exercising Optionee
and/or Corporation agree to execute and deliver such instruments (including
share certificates) and documents as shall be necessary to create and perfect
such security interest; or
(c) With respect to a transfer that is not described in
section 4(b) and not consummated on the terms described in section 7(a), upon
the terms set forth in the Offering Notice. When the Offering Notice pertains to
an offer to lend funds to the Selling Stockholder, secured by Shares of the
Corporation, the Exercising Optionee's sole option shall be to elect to lend the
funds on the terms set forth in the Offering Notice.
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8. Options Upon Death, Disability or Dissolution of Stockholder. In the
event of the death, disability or dissolution of a Stockholder, the Corporation
and the other Stockholders shall have the option to purchase the Shares held by
the deceased, disabled or dissolved Stockholder (including any Shares
transferred by him or it pursuant to section 3(a) or 3(b) hereof) as follows
(provided, however, that if the Cross Purchase Agreement applies to the event,
the terms of the Cross Purchase Agreement shall take precedence over the terms
of this Agreement):
(a) First Option. The Corporation shall have an option,
continuing for sixty (60) days, beginning with the day following the death,
disability or dissolution of the Stockholder, to elect to acquire all or any
part of the Shares owned by the deceased, disabled or dissolved Stockholder
(including any Shares transferred by him or it pursuant to section 3(a) or 3(b)
hereof)("Offered Shares") on the terms set forth in section 9 hereof. If the
Corporation elects to acquire any or all of said Offered Shares, the secretary
of the Corporation shall, no later than the last day of the Corporation's
sixty-day option period, notify all the parties to this Agreement of its
decision in writing.
(b) Second Option. If the Corporation elects not to exercise
its option under the preceding subsection or elects to acquire less than all the
Offered Shares, the Secretary of the Corporation shall, no later than the last
day of the Corporation's sixty (60) day option period, notify the other parties
to the Agreement of its decision in writing. Each of the other Stockholders
(individually called "Optionee" and collectively called "Optionees") shall then
have an option to acquire all or any part of the Offered Shares on the terms set
forth in section 10 hereof in the same ratio as the total number of Shares of
the capital stock of the Corporation then outstanding and owned by such Optionee
bears to the total number of shares of the capital stock of the Corporation then
outstanding and owned (whether or not subject to a pledge or other encumbrance)
by all Optionees. The option shall continue for thirty (30) days, beginning with
the day following receipt of written notice from the Corporation of its election
not to acquire all of the Offered Shares or if the Corporation fails to give
such notice, beginning with the sixty-first (61st) day after the death,
disability or dissolution of the Stockholder. Any Optionee desiring to acquire
all or any part of the Offered Shares shall deliver to the Secretary of the
Corporation within said thirty (30) day period a written election so to acquire
the Offered Shares or a specified portion thereof up to his proportionate share.
If any Optionee does not elect to acquire his or its proportionate share, the
Secretary of the Corporation shall give written notice thereof to all Optionees
who elected to exercise their options (the "Exercising Optionees"), no later
than five (S) days following the last day of the option period of the last
Optionee to receive notice. Each Exercising Optionee shall then have a further
option, continuing for five (5) days, beginning with the day following receipt
of such notice by all Exercising Optionees, to elect to acquire the still unsold
Offered Shares in the same ratio that the total number of shares of the
Corporation's capital stock owned by him or it bears to the total number of
shares of the capital stock of the Corporation then outstanding and owned by all
Exercising Optionees. Any Exercising Optionee desiring to acquire all or any
part of the Offered Shares not acquired by any Optionee shall deliver to the
Secretary of the Corporation within said five (5) day period a written election
so to acquire. Such notices and options shall continue to be given in the same
manner and for the same periods
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until election(s) to acquire all of the Offered Shares are made, or until no
Exercising Optionee is willing to exercise his option to acquire the remaining
Offered Shares. Only an Exercising Optionee who shall have fully exercised his
last option under this section 8(b) shall be deemed to be an Exercising Optionee
for purposes of notice and exercise of the next subsequent option, if any, under
this section 8(b). For the purposes of determining the ratios of acquisition
pursuant to this section 8(b), an Optionee shall be deemed not to own any of the
Offered Shares owned, acquired or agreed to be acquired by him, and such Shares
shall be deemed to be owned by the deceased, disabled or dissolved Stockholder.
If any option as to the Shares of a deceased, disabled or dissolved Stockholder
is pending under this section 8 when notice of the death, disability or
dissolution of another Stockholder is received by the Stockholders, all options
pursuant to this section 8 as to the Shares of the second deceased, disabled or
dissolved Stockholder shall be tolled until all options as to the Shares of the
first deceased, disabled or dissolved Stockholder have been exercised and
consummated, or terminated. If any Stockholder does not give timely notice of
his election to exercise any option under this section 8(b), he shall be deemed
to have elected not to exercise that option.
(c) Definition of Disability. "Disability" or "disabled" means
that a Stockholder (l) is under a legal decree of incapacity or disability
pursuant to title 14 of Arizona Revised Statutes or other applicable law (the
date of such decree being deemed to be the date on which such disability
occurred for purposes of this Agreement), or (2) submits any claim for
disability insurance benefits or for early distribution of the amounts from a
qualified pension or profit-sharing plan maintained by the Corporation on
account of disability (the date of the earliest of such claims shall be the date
on which such disability shall be deemed to have occurred), or (3) is determined
to be disabled pursuant to a determination, made pursuant to the provisions of
this section as specified below, that the Stockholder, because of a medically
determinable disease, injury, or other mental or physical condition or
disability, is unable to perform substantially all of his or her regular duties,
and that such disability is determined or reasonably expected to last at least
six (6) months, based on then-available medical information. The determination
will be based on the written opinion of a majority of a three-physician panel
consisting of the following: one physician shall be the physician regularly
attending the Stockholder whose disability is in question (the "Attending
Physician"); one physician shall be selected by a majority of the other
Stockholders; and the third shall be selected by the aforesaid two physicians.
The expenses of the physicians shall be borne by the Corporation. In conjunction
with this section, each Stockholder hereby consents to examination by the three
physicians, to furnish any medical information requested by any examining
physician, and to waive any applicable physician-patient privilege that may
arise because of such examination. All physicians except the Attending Physician
selected hereunder must be board-certified in the specialty most closely related
to the nature of the Disability alleged to exist.
9. Option Terms. If any party elects to exercise its option pursuant to
section 8 of this Agreement, the purchaser pursuant to such election(s) shall
consummate the purchase no later than the thirtieth (30th) day following the
last day of the last option period provided for herein. Notwithstanding any
provision herein to the contrary, if the Corporation or any Stockholder
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exercises an option to acquire Shares pursuant to section 8 of this Agreement,
it or he shall be obligated to consummate such acquisition even if options are
not exercised with respect to all the Shares subject to such options. Whether or
not transferred hereunder, all Shares of the deceased, disabled, dissolved or
terminated Stockholder shall remain subject to all the terms and conditions of
this Agreement. For purchases and sales pursuant to section 8 of this Agreement
the purchase and sale price per share shall be the Fair Market Value as defined
in section 11, payable in the manner specified in section 7(a) or 7(b), as the
purchasing party in its sole discretion elects.
10. Default on Pledge. Notwithstanding anything to the contrary
appearing in this Agreement, (i) if any Stockholder owning Shares held by any
person (including the Corporation or any Stockholder) as collateral (whether by
written consent of all the Stockholders or under section 6, 7 or 9 hereof)
pursuant to a pledge or other encumbrance shall be in default under the terms of
his or its agreement with said person and shall have failed timely to effect any
cure thereunder, or (ii) if any person holding any of the Shares as collateral
(whether by written consent of all the Stockholders or under section 6, 7 or 9
hereof) pursuant to a pledge or other encumbrance shall seek to foreclose upon
his or its interest in such Shares, or any part thereof, to any third party (in
which cases section 4 would apply), then in either event the person holding the
Shares shall be deemed to be the Selling Stockholder under sections 4 and 5 and
to have received, and to desire to accept, a bona fide offer from a third party
Proposed Purchaser to acquire his or its Shares, or part thereof, at the Fair
Market Value (as determined under section 11 hereof); provided, however, that,
if in connection with foreclosing (whether by public sale or otherwise) upon his
or its interest in said Shares, or any part thereof, said person receives a bona
fide offer from a third party (including the Corporation or a Stockholder) and
desires to accept same, said person shall submit an Offering Notice and
otherwise comply with section 4 hereof. Failure by the Corporation or any
Stockholder to exercise an option respecting any Shares under part (i) of this
section 10 shall not relieve a person holding such Shares from his or its
obligations under part (ii) of this section 10. If, pursuant to this section 10,
the Corporation or any Stockholder exercises an option to acquire Shares at the
Fair Market Value, it or he shall be obligated to consummate such acquisition
even if options are not exercised with respect to all the Shares deemed subject
to acquisition at the Fair Market Value. Whether or not transferred hereunder,
all the Shares so deemed subject to acquisition shall remain subject to all the
terms and conditions of this Agreement.
11. Fair Market Value. The Fair Market Value of a share of the Stock
shall mean that value which is determined pursuant to this section 11. The Fair
Market Value may be mutually agreed upon by the selling and acquiring parties of
the shares of Stock. If the parties cannot mutually agree upon the Fair Market
Value of a share of Stock, or upon the appointment of a single arbiter who shall
determine the Fair Market Value pursuant to this section 11, within ten (10)
days after delivery of a written notice of exercise of a purchase right or
obligation under this Agreement, then the Fair Market Value of a share of Stock
shall be equal to the fair market value of such share as determined as of the
date of such notice pursuant to arbitration in accordance with section 18(o). In
determining the Fair Market Value, all relevant factors shall be taken into
account.
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12. Limitation on Corporate Acquisition. Notwithstanding any other
provisions herein to the contrary, it is understood and agreed that the
Corporation may (and shall only be obligated to) acquire Stock as provided
herein only to the extent that it shall have funds legally available therefor
under the applicable provisions of the Arizona Revised Statutes then in effect.
To the extent the Corporation is unable, because of such legal restrictions, to
acquire Shares it otherwise has the right to acquire under this Agreement, it
may, but shall not be obligated to, assign such rights to any one or more of the
Stockholders or to third persons.
13. Termination. This Agreement shall terminate upon the occurrence of
either of the following events:
(a) Bankruptcy of the Corporation; or
(b) Voluntary agreement of the Corporation and all
Stockholders (excluding Stockholders not entitled to exercise rights as
Optionees under section 5 or 8 hereof).
"Bankruptcy" shall mean the occurrence of any of the following events
with respect to the Corporation: if (l) it is dissolved; (2) it becomes
insolvent or fails or is unable or admits in writing its inability generally to
pay its debts as they become due; (3) it makes a general assignment, arrangement
or composition with or for the benefit of its creditors; (4) it institutes or
has instituted against it a proceeding seeking relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or a petition
is presented for the winding-up or liquidation of the Corporation and, in the
case of any such proceeding or petition instituted or presented against it, such
proceeding or petition (A) results in a judgment of insolvency or bankruptcy or
the entry of an order for relief or the making of an order for the winding-up or
liquidation of the Corporation or (B) is not dismissed, discharged, stayed or
restrained in each case within 60 days of the institution or presentation
thereof; (5) it has a resolution passed for its winding-up or liquidation; (6)
it seeks or becomes subject to the appointment of an administrator, receiver,
trustee, custodian or other similar official for it or for all or substantially
all its assets (regardless of how brief such appointment may be, or whether any
obligations are promptly assumed by another entity or whether any other event
described in this clause (6) has occurred and is continuing); (7) any event
occurs with respect to the Corporation which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events specified in clauses
(l) to (6) inclusive; or (8) the Corporation takes any action in furtherance of,
or indicating its consent to, approval of, or acquiescence in, any of the
foregoing acts.
14. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their heirs, legal representatives, successors
and assigns; provided, however, that except as otherwise expressly provided in
this Agreement, no Stockholder shall assign any rights, obligations or interest
hereunder without the prior written consent of all other Stockholders (excluding
Stockholders not entitled to exercise rights as Optionees under section 5 or 8
hereof). Each individual Stockholder in furtherance hereof shall require in his
Will that his executor or personal representative perform such Stockholder's
obligations under this Agreement and execute
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all documents necessary to effect the purposes of this Agreement. The failure so
to provide by Will shall not affect the rights of any other Stockholder or the
obligations of any estate as provided in this Agreement.
15. Amendment. This Agreement may only be amended by a written
agreement approved by the Board of Directors of the Corporation and all the
Stockholders (excluding Stockholders not entitled to exercise rights as
Optionees under section 5 and 8 hereof). Any agreement so approved shall be
executed by the Corporation and the approving Stockholders and filed with the
corporate records.
16. Agreement Drafted by Corporation's Attorney. The Stockholders each
acknowledge that the Corporation's counsel, OSBORN MALEDON, P.A. prepared this
Agreement on behalf of and in the course of its representation of the
Corporation, as directed by its Board of Directors, and that:
A. SUCH STOCKHOLDER HAS BEEN ADVISED THAT A CONFLICT OF
INTEREST MAY EXIST BETWEEN HIS OR HER INTERESTS AND THOSE OF THE CORPORATION AND
THE OTHER STOCKHOLDERS, AND
B. SUCH STOCKHOLDER HAS BEEN ADVISED BY THE CORPORATION'S
COUNSEL THAT THIS AGREEMENT MAY HAVE TAX CONSEQUENCES, AND
C. SUCH STOCKHOLDER HAS RECEIVED NO REPRESENTATIONS FROM THE
CORPORATION'S COUNSEL ABOUT THE TAX CONSEQUENCES OF THIS AGREEMENT, AND
D. SUCH STOCKHOLDER HAS BEEN ADVISED BY THE CORPORATION'S
COUNSEL TO SEEK THE ADVICE OF INDEPENDENT COUNSEL WITH RESPECT TO ALL ASPECTS OF
THIS AGREEMENT INCLUDING WITHOUT LIMITATION TAX CONSEQUENCES, AND
E. SUCH STOCKHOLDER HAS HAD THE OPPORTUNITY TO SEEK THE ADVICE
OF INDEPENDENT COUNSEL.
17. General. Except to the extent inconsistent with the express
language of the foregoing provisions of this Agreement, the following provisions
shall govern the interpretation, application, construction and enforcement of
this Agreement.
(a) Notices. Any notice to any party under this Agreement
shall be in writing, shall be effective on the earlier of (i) the date when
received by such party, or (ii) the date which is three days after mailing
(postage prepaid) by certified or registered mail, return receipt requested,
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to the address of such party set forth herein, or to such other address as shall
have previously been specified in writing by such party to all parties hereto in
accordance with this section.
(b) Additional Acts and Documents. Each party hereto agrees to
do all such things and take all such actions, and to make, execute and deliver
such other documents and instruments, as shall be reasonably requested to carry
out the provisions, intent and purpose of this Agreement.
(c) Authority. Each of the parties hereto represents and
warrants to each other party hereto that this Agreement has been duly authorized
by all necessary action and that this Agreement constitutes and will constitute
a binding obligation of each such party.
(d) Attorney Fees. If suit is brought or an attorney is
retained by any party to this Agreement to enforce the terms of this Agreement
or to collect any moneys due hereunder, or to collect money damages for breach
hereof, or in connection with any arbitration or action arising out of this
Agreement, the prevailing party shall be entitled to recover, in addition to any
other remedy, reimbursement for reasonable attorney fees, court costs,
arbitration costs, costs of investigation and other related expenses incurred in
connection therewith.
(e) Counterparts. This Agreement may be executed in any number
of counterparts, all such counterparts shall be deemed to constitute one and the
same instrument, and each of said counterparts shall be deemed an original
hereof.
(f) Time. Time is of the essence of this Agreement and each
and every provision hereof. Any extension of time granted for the performance of
any duty under this Agreement shall not be considered an extension of time for
the performance of any other duty under this Agreement.
(g) Waiver. Failure of any party to exercise any right or
option arising out of a breach of this Agreement shall not be deemed a waiver of
any right or option with respect to any subsequent or different breach, or the
continuance of any existing breach.
(h) Integration Clause: Oral Modification. This Agreement
represents the entire agreement of the parties with respect to the subject
matter hereof, and all agreements entered into prior hereto are revoked and
superseded by this Agreement, and no representations, warranties, inducements or
oral agreements have been made by any of the parties except as expressly set
forth herein, or in other contemporaneous written agreements.
(i) Captions. Captions and section headings used herein are
for convenience only, are not a part of this Agreement, shall not be deemed to
limit or alter any provisions hereof, and shall not be deemed relevant in
construing this Agreement.
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(j) Governing Law. This Agreement shall be deemed to be made
under, and shall be construed in accordance with and shall be governed by, the
laws of the State of Arizona. Each party expressly and irrevocably consents to
the jurisdiction of the Superior Court, Maricopa County, Arizona.
(k) Indemnity. Each party to this Agreement agrees to
indemnify each other party, and hold it harmless, for, from and against all
claims, damages, costs and expenses (including reasonable attorney fees)
attributable, directly or indirectly, to the breach by such indemnifying party
of any obligation hereunder.
(l) Interpretations. To the extent permitted by the context in
which used, (i) words in the singular number shall include the plural, (ii)
words in the masculine gender shall include the feminine and neuter, and vice
versa, and (iii) references to "persons" or "parties" in this Agreement shall be
deemed to refer to natural persons, corporations, general partnerships, limited
partnerships, trusts and all other entities.
(m) Interest on Overdue Amounts. To the extent any amount
becomes due and owing hereunder, the party to whom such amount is payable shall
be entitled to receive, in addition to such amount, interest thereon at the
higher of 12% per annum or the rate specified in section 7(b) hereof, from and
after the date on which notice of delinquency is given to the party or parties
owing the amount so due.
(n) Specific Performance. In addition to such other remedies
as may be available under applicable law, the parties acknowledge that the
remedies of specific performance and/or injunctive relief shall be available and
proper in the event any party fails or refuses to perform its duties hereunder.
(o) Arbitration. In the event any dispute or controversy
arising out of this Agreement cannot be settled by the parties, such controversy
or dispute shall be submitted to arbitration in Phoenix, Arizona, and for this
purpose each party hereby expressly consents to arbitration in such place. In
the event the parties cannot mutually agree upon an arbitrator and procedure to
settle their dispute or controversy within fifteen (15) days after written
demand by one of the parties for arbitration, then the dispute or controversy
shall be arbitrated by a single arbitrator pursuant to the then-existing rules
and regulations of the American Arbitration Association governing commercial
transactions. The decision of the arbitrator shall be binding upon the parties
hereto for all purposes, and judgment to enforce any such binding decision may
be entered in Superior Court, Maricopa County, Arizona (and for this purpose
each party hereby expressly and irrevocably consents to the jurisdiction of said
court). At the request of either party, arbitration proceedings shall be
conducted in the utmost secrecy. In such case, all documents, testimony and
records shall be received, heard and maintained by the arbitrator in secrecy,
available for inspection only by either party and by their attorneys and experts
who shall agree, in advance and in writing, to receive all such information in
secrecy. In all other respects, the arbitration shall be conducted pursuant to
the Uniform Arbitration Act as adopted in regulations
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of the American Arbitration Association governing commercial transactions to the
extent such rules and regulations are not inconsistent with such Act or this
Agreement. Nothing in the foregoing shall prohibit any party from seeking or
obtaining any form of interim relief, equitable or otherwise, from a court of
competent jurisdiction as necessary to protect its interests.
(p) Exhibits. Any Exhibit attached hereto shall be deemed to
have been incorporated herein by this reference, with the same force and effect
as if fully set forth in the body hereof.
(q) Invalidity. Notwithstanding any other term or provision of
this Agreement, if any right or interest created by or in connection with this
Agreement would be invalid or unenforceable if not subject to the terms
contained in this sentence, such interest or right shall terminate twenty (20)
years after the date of death of the last to die of the parties and the children
of the parties living at the time of creation of such right or interest.
(r) Severability. If any provision of this Agreement is
declared void or unenforceable, such provision shall be deemed severed from this
Agreement, which shall otherwise remain in full force and effect.
(s) Business Day; Time for Performance. Any reference in this
Agreement to "business day" shall refer to a Monday, Tuesday, Wednesday,
Thursday or Friday on which a majority of the banks (by number) having their
principal executive offices in Phoenix, Arizona are generally open for business
in that City. If the date on which an act specified to occur or be performed
under this Agreement shall not be a business day, or if the last day on which an
election, notice or other act can be made or accomplished under this Agreement
shall not be a business day, then the same shall be timely if it occurs or is
performed, made or accomplished on the next following business day.
18. Covenants to Maintain "S" Corporation Status. The Shareholders
having all consented to have the Corporation elect to be treated as an S
corporation under Subchapter S of the Internal Revenue Code of 1986, as amended
(the "Code"), agree that in order to preserve such election, none of them or
their successors or assigns shall transfer any shares of the Corporation or any
interest therein to any person or organization or take any other action, or fail
to take any action if the effect of such transfer or other action or nonaction
(in the opinion of counsel to the Corporation) may be to disqualify the
Corporation from treatment as an S corporation under the requirements of such
Subchapter S of the Code, as from time to time amended (including without
limitation, those requirements contained in current Section 1361 of the Code).
Any transfer in violation of this Section 18 shall be void and of no effect.
This Section 18 may be amended only with the consent of all shareholders of the
Corporation.
19. Limited Voting Agreement. To provide an orderly transition, Layne,
Little and Whittington hereby agree that in event of the death or disability of
Little triggering the provisions of section 8 of this Agreement occurring at a
time when Layne, Little and Whittington have the
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power to elect all of the directors of the Company, until the Shares held by
Little have been disposed of in accordance with the terms of this Agreement, all
of their respective Shares shall be voted to set the size of the Board of
Directors of the Corporation at three (3) and to elect Layne and Whittington as
two of the directors and such third person as Layne and Whittington shall select
as the third director. Upon application of the provisions of section 8 and the
transfer of the Shares held by Little, the limited voting agreement in this
section 19 shall be of no further force or effect and the shareholders of the
Corporation shall then immediately proceed to the election of a new Board of
Directors in accordance with their Share interest in the Corporation.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day, month and year first written above.
TRACER DESIGN, INC., an Arizona
corporation
By /s/ CHAD M. LITTLE
-------------------------------------
Its President
"Corporation"
ATTEST:
/s/ JAMES A. LAYNE
- --------------------------------
Secretary
/s/ CHAD M. LITTLE
----------------------------------------
CHAD M. LITTLE
/s/ LONNIE A. WHITTINGTON
----------------------------------------
LONNIE A. WHITTINGTON
/s/ JAMES A. LAYNE
----------------------------------------
JAMES A. LAYNE
/s/ GLENN GOMEZ
----------------------------------------
GLENN GOMEZ
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DISCLAIMER OF SPOUSES
I, MICHELE WHITTINGTON, the wife of LONNIE A. WHITTINGTON, a party
hereto, do hereby disclaim any and all interest whatsoever in the Shares of
LONNIE A. WHITTINGTON in Tracer Design, Inc., including without limitation any
of the Shares, which are and shall remain the sole and separate property of
Lonnie A. Whittington.
DATED as of July 13, 1995.
/s/ MICHELE WHITTINGTON
----------------------------------------
MICHELE WHITTINGTON
I, BRENDA H. GOMEZ, the wife of GLENN GOMEZ, a party hereto, do hereby
disclaim any and all interest whatsoever in the Shares of GLENN GOMEZ in Tracer
Design, Inc., including without limitation any of the Shares, which are and
shall remain the sole and separate property of Glenn Gomez.
DATED as of July 13, 1995.
/s/ BRENDA H. GOMEZ
----------------------------------------
BRENDA H. GOMEZ
I, RONNA LAYNE, the wife of JAMES A. LAYNE, a party hereto, do hereby
disclaim any and all interest whatsoever in the Shares of JAMES A. LAYNE in
Tracer Design, Inc., including without limitation any of the Shares, which are
and shall remain the sole and separate property of James A. Layne.
DATED as of July 13, 1995.
/s/ RONNA LAYNE
----------------------------------------
RONNA LAYNE
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EXHIBIT "A"
Cross Purchase Agreement
CHAD M. LITTLE, LONNIE A. WHITTINGTON, and JAMES A. LAYNE (hereinafter
referred to as "Stockholders," or individually as "Stockholder"), each owning
capital stock in TRACER DESIGN, INC., (hereinafter referred to as
"Corporation"), and ANDREW E. TODD, (later referred to as "Trustee") hereby
agree for themselves, their heirs, successors, and personal representatives, as
follows as of this 1st day of March, 1994.
PURPOSE
The purpose of this agreement is to provide for the purchase by each
Stockholder of the other's corporate interest (as reflected in this agreement,
or alternatively, in the Schedule of Value attached hereto) upon the death of
any Stockholder, and to facilitate payment of the purchase price in the event of
any optional purchase with respect to the withdrawal or retirement of a
Stockholder. Each Stockholder agrees to endorse his stock certificates to
reflect that they are subject to this agreement, and to transfer custody to the
Trustee hereunder. To facilitate such purchase and sale, Trustee accepts
appointment and agrees to perform the duties herein specified. The Stockholders
and the Corporation have previously entered into a Stockholders' Agreement dated
as of February 25, 1992 (the "Stockholders' Agreement"). The parties agree that
this Cross Purchase Agreement shall apply in lieu of Section 8 of the
Stockholders' Agreement with respect to the death of a Stockholder, but
otherwise the Stockholders' Agreement shall remain in full force and effect.
AGREEMENT TO BUY AND SELL UPON THE DEATH OF THE STOCKHOLDER
Upon the death of a Stockholder, that Stockholder's personal
representative shall sell, and the surviving Stockholders shall buy, all of the
deceased Stockholder's stock in the Corporation. The price will equal the value
as provided in Article III below or as set forth on the attached Schedule of
Value, as amended from time to time. The deceased Stockholder's estate and the
surviving Stockholders shall execute and deliver such instruments as may be
necessary to complete the sale and purchase hereunder. Any stock subsequently
acquired by a Stockholder shall likewise be subject to purchase and sale under
the terms of this agreement.
VALUATION AND PURCHASE PRICE
The outstanding capital stock of Corporation consists of 10,000 shares,
which are held and owned by the Stockholders as follows:
NAME SHARES AGGREGATE VALUE PERCENTAGE INTEREST
Chad M. Little 5100 $500,000 51%
Lonnie A. Whittington 2450 $240,196 24.5%
James A. Layne 2450 $240,196 24.5%
In arriving at the stock values ascribed above, the parties have
determined the current market value of all Corporation assets, making such
adjustments for tax-depreciated assets and undervalued or overvalued assets as
is required to more clearly reflect current market values, and adding thereto a
value ascribed and mutually agreed to by the parties for goodwill. Such value
may be changed from time to time by the parties hereto by endorsement opposite
their signatures in the "Schedule Of Value" attached; provided, however, that if
the parties neglect to revalue the Corporation for a period in excess of one
year,
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the Corporation's independent accounting firm ("CPA") is directed to apply the
same valuation procedure, measuring adjusted asset values and goodwill as of the
last day of the month proceeding the death, retirement or withdrawal of
Stockholder to make its best good faith determination of value.
The retiring or withdrawing Stockholder (or, in the event of death, the
Stockholder's personal representative) and the surviving or remaining
Stockholder may nevertheless mutually elect to accept the last valuation made as
controlling for purchase and sale purposes.
INSURANCE FUNDING
To provide cash to purchase the stock of a deceased Stockholder,
Trustee shall apply, as owner and beneficiary, for a life insurance policy upon
the life of each Stockholder, in an amount equal to the purchase price-valuation
established under Article III, but not less than the amounts set forth below.
Such policies purchased to date or any policies hereafter acquired shall be
listed on the attached "Schedule of Life Insurance."
Trustee will hold title to policies on each Stockholder's life, and
correspondingly, each Stockholder obtains equitable title to the insurance on
each other Stockholder's life in the following amounts:
INSURED POLICY AMOUNT STOCKHOLDER'S EQUITABLE INTEREST
Name Interest
CHAD M. LITTLE $750,000 CHAD M. LITTLE 51%
LONNIE A. WHITTINGTON $500,000 LONNIE A. WHITTINGTON 24.5%
JAMES A. LAYNE $500,000 JAMES A. LAYNE 24.5%
Within 30 days prior to each policy anniversary each Stockholder shall
transfer to the Corporation (with notice of such transfer being simultaneously
sent to the Trustee) sufficient cash for premiums necessary to maintain his
equitable interest on each policy or policies on his co-Stockholders, as
provided above, and shall provide the insured Stockholder evidence of such
transfers. Where the "split dollar" technique is employed, the Corporation shall
timely pay its premium share under the arrangement. The Corporation shall
immediately thereafter remit such cash premium contribution(s) to the insurer.
In the event a Stockholder fails to transfer such cash premiums within such
period, the insured Stockholder may pay the premium to the insurer, and such
premium advances shall be added to the purchase price of his stock interest.
While this agreement remains in force, the Trustee shall provide written notice
to the Stockholders of his intent to exercise any of the policy rights, options,
or privileges.
TERMS OF PAYMENT UPON DEATH
Upon the death of a Stockholder, the Trustee shall promptly make claim
for the death proceeds of any life insurance policies insuring the life of a
deceased Stockholder. Where it becomes necessary for Trustee to institute a
cause of action to recover the proceeds, the surviving Stockholders agree to
advance and guarantee the Trustee his reasonable expenses, including attorneys
fees and costs. If the insurance proceeds are equal to or in excess of the then
current purchase price, the Trustee shall pay over the full purchase price to
the deceased Stockholder's estate, in cash. The excess proceeds, if any, shall
then be distributed to the Corporation free of any obligations under this
agreement.
If the insurance proceeds are less than the then current purchase price
determined pursuant to Article III, said proceeds, and an additional amount
contributed by the surviving Stockholders equal to the difference between said
proceeds and the purchase price, shall be paid by the Trustee to the deceased
Stockholder's estate, provided, however, that the surviving Stockholder shall
have the option to pay such
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balance in cash, or by promissory notes, as provided in Section 7(a), (b) and
(c) of the Stockholders' Agreement.
The deceased Stockholder's personal representative shall thereupon
deliver to the Trustee any assignments, bill of sale, or other necessary legal
evidence of title as required to transfer to the surviving Stockholders all the
deceased Stockholder's right, title and interest to the stock of the
Corporation. The deceased Stockholder's personal representative shall have the
right to rescind this agreement in the event the surviving Stockholders fail to
perform under the purchase terms above, or to execute such promissory notes and
provide the requested security for any portion of the purchase price not
received in cash.
LIFETIME OR RETIREMENT SALE; RESTRICTIONS ON ENCUMBRANCE
In the event a Stockholder desires to sell his corporate interest
during his lifetime, or upon retirement, he shall be precluded from selling or
offering to sell his stock to any other person or institution, except in
compliance with the Stockholders' Agreement. In the event the remaining
Stockholders elect to purchase the retiring or withdrawing Stockholder's
interest pursuant to the Stockholders' Agreement, such purchase shall be made on
an installment sale basis. The remaining Stockholders shall direct the Trustee
to exercise any available life insurance policy options to borrow or withdraw
policy cash values, and to make an initial down payment in cash of twenty
percent (20%) of the purchase price as determined under Section 7(b) of the
Stockholders' Agreement. The remaining balance shall be paid pursuant to Section
7(b) of the Stockholders' Agreement, commencing with the annual anniversary of
the initial down payment as described above, using the same policy cash value
sources, if any, and otherwise by payments from the purchasing Stockholders.
DISABILITY BUY SELL
The parties acknowledge that they are not presently providing for
insurance to fund cross purchases in the event of a Stockholder disability. They
shall continue to give consideration to doing so, and shall amend this Agreement
appropriately in the event they elect to make provision for such a buy-out.
DISPOSITION OF LIFE OR DISABILITY POLICIES ON TERMINATION OF AGREEMENT
In the event this agreement is terminated under any of the provisions
of Article XIV, the insured Stockholder shall have the option, exercisable
within thirty (30) days of such event, to purchase from the Trustee the life
insurance policy insuring his life for a price equal to the policy's
interpolated terminal reserve value (plus any unearned premium and dividends, or
cash accumulations, if any, and less any policy indebtedness or cash
withdrawals), if any, by giving written notice within such period to the
Trustee. In a similar fashion, and upon the same conditions as above, each
Stockholder may purchase any disability policies insuring his life from the
Trustee for a price equal to the unearned premiums thereunder. Upon a
Stockholder's exercise of this policy purchase option, the Trustee shall
distribute to each policy-owning Stockholder his equitable share of such sale
proceeds.
Conversely, if a Stockholder fails to exercise these policy purchase
options within the prescribed 30-day period, the Trustee shall surrender the
policies for cash and distribute to each policy-owning Stockholder his equitable
share of such sale proceeds.
TRUSTEE DUTIES
1. Stock Certificates
The Corporation's law firm shall receive and hold the stock
certificates of all Stockholders who are party to this agreement. Upon the
death, disability or retirement sale of a Stockholder's interest and full
payment of the purchase price under the terms of this agreement or the
Stockholders' Agreement, as
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applicable, the Trustee will obtain such certificates from the Corporation's law
firm and submit the purchased Stockholder's share certificates to the
Corporation for reissue to the remaining Stockholders according to their newly
acquired legal interest. Upon the happening of any event specified in Article
XIV, Trustee shall request the law firm to distribute to each Stockholder, or
his personal representative, his respective stock certificates.
2. Life and Disability Insurance
Trustee shall perform all acts necessary to obtain the life insurance
described in Article VI, as well as any disability policies purchased under the
provisions of Article VII. Trustee shall hold and maintain such policies in
force. In meeting premium requirements, the Trustee shall, within 60 days of a
policy anniversary, provide notice to each Stockholder of his share of premium
contributions on his co- stockholders. In the event the "split dollar" technique
is employed in the purchase of life insurance, such notice shall be provided to
both the Stockholders and the Corporation, reflecting the respective premium
contributions of each party.
Upon the death of a Stockholder, the Trustee shall make claim for and
collect the proceeds of insurance upon the life of the deceased Stockholder, and
distribute such proceeds to the deceased Stockholder's estate, as directed by
the surviving Stockholders, under the purchase terms of Article V.
Upon a lifetime or retirement sale of a Stockholder's interest, the
Trustee shall, at the direction of the remaining Stockholders, apply life
insurance policy cash withdrawals or policy loans, if any, together with any
other funds made available by the remaining Stockholders, to the lifetime
installment purchase obligation described in Article VI.
3. Termination of Agreement
Upon the termination of this agreement under any of the terms set forth
under Article XIV the Trustee shall immediately determine the "interpolated
terminal reserve value" (as defined at Article VIII) of each policy insuring the
life of a Stockholder hereunder. Similarly, Trustee shall determine the unearned
premium value of each disability policy, if any, insuring the Stockholders
herein. The Trustee shall thereafter provide notice to each respective insured
Stockholder of such values, and for a 30-day period after such notice, offer to
transfer such policy to the insured in consideration of payment in cash of such
value. Proceeds from such sale shall be distributed to the policy-owning
Stockholders, as their equitable interests dictate.
If the insured Stockholder elects not to purchase the policy or
policies insuring his life within such 30-day period, the Trustee shall
surrender the policy or policies to the insurer thereof, and thereafter
distribute to each Stockholder cash representing his equitable interest therein.
4. Removal or Resignation of Trustee
Upon 30 days' notice to the Stockholders, the Trustee may resign as
Trustee. Conversely, Stockholders may remove or replace Trustee and appoint a
new Trustee upon giving 30 days' notice to the present Trustee. If the Trustee
is removed or resigns his term, Trustee shall deliver over to the Stockholders
all stock certificates and insurance policies held under the terms of this
agreement, together with any other documents he may hold. Any successor Trustee
thereafter named by the Stockholders shall have all the duties and powers herein
conferred to the original Trustee.
5. Trustee Compensation
Trustee's compensation for the performance of the administrative tasks
required hereunder shall be as mutually agreed upon by the Trustee and the
Stockholders.
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6. Trust Liability
Trustee shall not be liable for any damages sustained by the
Stockholders for any acts or omissions under this agreement, other than those
caused by his own willful misconduct or bad faith.
INSURER'S DUTIES
An insurer's duties, liabilities, and rights under any policy subject
to this agreement shall be governed solely by the policy itself, without any
regard whatsoever to the terms and provisions of this agreement.
REMEDIES FOR FAILURE TO PERFORM
If any party to this agreement defaults or fails to complete his
obligations under this contract, then the other parties may, at their individual
option, seek damages for such default or breach, or obtain specific performance
of the agreement, from a court of competent jurisdiction.
If any action is brought to enforce this contract, or any provision
thereof, the prevailing party, whether plaintiff or defendant, shall be entitled
to recover reasonable attorney fees, plus costs of suit.
NOTICE
All notices, including offers or acceptances, shall be deemed received,
if provided in writing and delivered in person to the other party, upon actual
receipt, or three (3) days after mailing by certified or registered mail to the
last known address of that party.
AMENDMENT OR ALTERATION
This agreement may be altered or amended in whole or in part at any
time by filing with this agreement a written instrument setting forth such
changes, signed by all parties to this agreement.
TERMINATION
This agreement shall terminate upon the occurrence of any of the
following events:
1. Cessation of the business;
2. Bankruptcy or receivership of Corporation;
3. Mutual agreement of the Stockholders;
4. Failure of the Stockholder to provide for any remaining
purchase balance as required under Articles VI and VIII;
5. Termination of the Stockholders' Agreement.
GOVERNING LAW: EFFECT OF HEADINGS
1. This Agreement shall be governed by the laws of the State of
Arizona.
2. All Article headings set forth in this agreement are intended
for convenience only, and shall not control or affect the meaning, construction
or intent of this agreement, or of any provision thereof.
23
<PAGE>
IN WITNESS WHEREOF, the Stockholders and Trustee have read and signed
this agreement this 1st day of March, 1994.
WITNESSES:
/s/ Etta Gussow /s/ Chad M. Little
- ----------------------------------- ----------------------------------------
Chad M. Little
/s/ Lonnie A. Whittington
----------------------------------------
Lonnie A. Whittington
/s/ James A. Layne
----------------------------------------
James A. Layne
/s/ Andrew E. Todd
----------------------------------------
Andrew E. Todd, as Trustee
24
<PAGE>
CONSENT OF SPOUSES
I, the undersigned spouse of Stockholder JAMES A. LAYNE hereby certify
that I have read the foregoing Cross Purchase Agreement, that I understand the
terms thereof; that I have been advised of my property rights therein; and that
I agree to be bound by the agreement and to sell any interest I may have under
the provisions thereof in accordance therewith.
WITNESS:
/s/ JAMES A. LAYNE /s/ RONNA LAYNE
- ----------------------------------- ----------------------------------------
JAMES A. LAYNE SPOUSE OF STOCKHOLDER
I, the undersigned spouse of Stockholder LONNIE WHITTINGTON hereby
certify that I have read the foregoing Cross Purchase Agreement, that I
understand the terms thereof; that I have been advised of my property rights
therein; and that I agree to be bound by the agreement and to sell any interest
I may have under the provisions thereof in accordance therewith.
WITNESS:
/s/ LONNIE WHITTINGTON /s/ MICHELLE WHITTINGTON
- ----------------------------------- ----------------------------------------
LONNIE WHITTINGTON SPOUSE OF STOCKHOLDER
25
<PAGE>
SCHEDULE OF VALUE
The revised value of the Corporation, as provided in Article III, is as
follows:
Effective Date: Agreed Value Parties' Signatures
- ------------------------- ------------------- ------------------------------
STOCKHOLDER
------------------------------
STOCKHOLDER
------------------------------
STOCKHOLDER
26
<PAGE>
SCHEDULE OF LIFE INSURANCE POLICIES
INSURANCE COMPANY POLICY DATE POLICY NO. FACE AMOUNT
Chubb 3/28/94 1/5/95 000868872 $350,000
12/31/94 656009592 $400,000
Chubb 3/28/94 1/5/95 000864660 $300,000
12/31/95 656009594 $200,000
Chubb 3/28/94 1/5/95 000864659 $400,000
12/31/95 656009593 $100,000
27
<PAGE>
SCHEDULE OF DISABILITY INSURANCE POLICIES
INSURANCE COMPANY POLICY DATE POLICY NO. MONTHLY BENEFIT
$
- --------------------- --------------- -------------- -------------------
$
- --------------------- --------------- -------------- -------------------
$
- --------------------- --------------- -------------- -------------------
28
<PAGE>
ACCEPTANCE AND AMENDMENT
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned hereby agrees that the
undersigned and all shares of Common Stock now or hereafter held by him shall be
subject to and governed by that certain Amended and Restated Stockholders'
Agreement dated as of July 13, 1995, by and among Tracer Design, Inc.
("Tracer"), Chad M. Little, Lonnie A. Whittington, James A. Layne and Glenn
Gomez (the "Stockholders' Agreement"), and that the same is hereby amended to
provide that, except as otherwise determined by the Board of Directors of
Tracer, in its discretion, the following issuances of capital stock of Tracer
Design, Inc. shall not be subject to the Stockholders' Agreement: (1) any
Preferred Stock (or any capital stock issued in respect of Preferred Stock,
e.g., upon conversion); (2) securities issued pursuant to the acquisition of
another corporation by Tracer by merger, purchase of substantially all of the
assets or shares, or other reorganization whereby Tracer or its shareholders own
not less than a majority of the voting power of the surviving or successor
corporation; (3) shares of Tracer's Common Stock or related options convertible
into or exercisable for such Common Stock issued to employees, officers and
directors (who are not already parties to the Stockholders' Agreement) of, and
consultants, customers, and vendors to, Tracer; and (4) shares of Tracer's
Common Stock or related options convertible into or exercisable for such Common
Stock issued to any bank, equipment lessor or other similar financial
institution or corporate strategic partner.
This Acceptance and Amendment may be signed in counterparts and each
counterpart shall be deemed to be an original hereof.
Dated as of February 5, 1996.
/s/ Chad M. Little /s/ Glenn Gomez
- ----------------------------------- ----------------------------------------
Chad M. Little Glenn Gomez
/s/ Lonnie a. Whittington /s/ James A. Layne
- ----------------------------------- ----------------------------------------
Lonnie A. Whittington James A. Layne
Tracer Design, Inc. hereby agrees that that certain Amended and Restated
Stockholders' Agreement dated as of July 13, 1995, by and among Tracer Design,
Inc., Chad M. Little, Lonnie A. Whittington, James A. Layne and Glenn Gomez (the
"Stockholders' Agreement"), is hereby amended as set forth above.
By /s/ Chad M. Little
------------------------------------
Chad M. Little, President
29
<PAGE>
February 2, 1996
VIA FEDERAL EXPRESS
Mr. and Mrs. R. Jon Kailey
3923 Hunters Rock
San Antonio, Texas 78230
Dear Mr. and Mrs. Kailey:
As I have indicated to you, Tracer Design, Inc. ("Tracer") has signed a
term sheet with Wasatch Venture Corporation for the purposes of raising
$350,000. A copy of the term sheet is enclosed for your reference. We anticipate
the definitive documents will be executed and the transaction closed next week
(the week of February 5), and there are several matters with respect to which we
need your assistance.
First, in order to issue the Series A Preferred Stock required by
Wasatch, Tracer will have to amend its Articles of Incorporation substantially.
To do so requires a shareholder vote, which we can accomplish pursuant to a
document called a "Unanimous Consent of Shareholders", provided all shareholders
sign it and return it to us. Early the week of the 5th (hopefully on Monday) we
will be faxing to you a copy of the proposed form of Amended and Restated
Articles of Incorporation, along with a copy of the Unanimous Consent of
Shareholders. We will be asking you to review those documents and sign the
Unanimous Consent and immediately fax back to us a copy of the signature page.
Second, for informational purposes, we just want to let you know that
in connection with the closing of the Wasatch transaction, Tracer will be
adopting a two-for-one stock split. As a result, you will then hold 11,112
shares of Common Stock of Tracer.
Third, as you will note from the term sheet, the purchase price of the
shares Wasatch has agreed to purchase is $5.00 per share. Although it is not
under any legal obligation to do so, and provided you agree that all your shares
in Tracer (including those to be discussed hereafter) will be subject to that
certain Amended and Restated Stockholders' Agreement dated as of July 13, 1995
(the "Stockholders' Agreement"), Tracer will issue to you, if the Wasatch
transaction closes, an additional 8,890 shares of Common Stock of Tracer
(against execution by you of a standard form investment letter regarding
securities laws compliance), which will give you a total holding of 20,002
shares at an average price of $5.00. A copy of the Stockholders' Agreement is
enclosed, along with the form of Acceptance and Amendment being signed now in
order to amend
30
<PAGE>
Mr. and Mrs. R. Jon Kailey
February 2, 1996
Page Two
the Stockholders' Agreement as described therein. Note that the Preferred Stock,
and certain other issuances (like in connection with acquisitions or
employee-related stock grants) will not be subject to the Stockholders'
Agreement, but Lonnie, Jim and I are subject to it, as is Glenn Gomez and all of
the shares of the warrant holders, should they exercise their warrants. The
issuance of the additional shares to you will be a one-time issuance, and Tracer
will not have any obligation to make any further adjustment in the number of
your shares, whether or not the Wasatch deal closes.
Time is of the essence. If you agree as set forth in paragraph "Third"
above, please so indicate by signing the attached acceptance and faxing it on
Monday the 5th to our counsel, Tom Curzon, at (fax) 602-640-6067. We appreciate
your consideration and cooperation.
Sincerely,
/s/ Chad M. Little
----------------------------------------
Chad M. Little
President
31
<PAGE>
ACCEPTANCE AND AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned hereby agree that the undersigned
and all shares of Common Stock now or hereafter held by them shall be subject to
and governed by that certain Amended and Restated Stockholders' Agreement dated
as of July 13, 1995, by and among Tracer Design, Inc., Chad M. Little, Lonnie A.
Whittington, James A. Layne and Glenn Gomez (the "Stockholders' Agreement"), as
being amended in accordance with the attached "Acceptance and Amendment" as
though the undersigned were signatories thereto.
Dated: February 5, 1996.
/s/ R. John Kailey
----------------------------------------
R. Jon Kailey
/s/ Kristin Lavender Kailey
----------------------------------------
Kristin Lavender Kailey
Attachment: Form of Acceptance and Amendment dated as of February 5, 1996,
by Tracer Design, Inc., Glenn Gomez, Chad Little, Lonnie
Whittington and James Layne.
32
<PAGE>
ACCEPTANCE AND AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned hereby agree that the undersigned
and all shares of Common Stock now or hereafter held by them shall be subject to
and governed by that certain Amended and Restated Stockholders' Agreement dated
as of July 13, 1995, by and among Tracer Design, Inc., Chad M. Little, Lonnie A.
Whittington, James A. Layne and Glenn Gomez (the "Stockholders' Agreement"), as
being amended in accordance with the attached "Acceptance and Amendment" as
though the undersigned were signatories thereto.
Dated: May 30, 1996.
/s/ Frank X. Helstab
----------------------------------------
Frank X. Helstab
Attachment: Form of Acceptance and Amendment dated as of February 5, 1996,
by Tracer Design, Inc., Glenn Gomez, Chad Little, Lonnie
Whittington and James Layne.
33
<PAGE>
February 2, 1996
VIA FEDERAL EXPRESS
Mr. Glenn Gomez
1950 Stemmons, Suite 3054
Dallas, Texas 75207
Dear Glenn:
As I have indicated to you, Tracer Design, Inc. ("Tracer") has signed a
term sheet with Wasatch Venture Corporation for the purposes of raising
$350,000. A copy of the term sheet is enclosed for your reference. We anticipate
the definitive documents will be executed and the transaction closed next week
(the week of February 5), and there are several matters with respect to which we
need your assistance.
First, in order to issue the Series A Preferred Stock required by
Wasatch, Tracer will have to amend its Articles of Incorporation substantially.
To do so requires a shareholder vote, which we can accomplish pursuant to a
document called a "Unanimous Consent of Shareholders", provided all shareholders
sign it and return it to us. Early the week of the 5th (hopefully on Monday) we
will be faxing to you a copy of the proposed form of Amended and Restated
Articles of Incorporation, along with a copy of the Unanimous Consent of
Shareholders. We will be asking you to review those documents and sign the
Unanimous Consent and immediately fax back to us a copy of the signature page.
Second, for informational purposes, we just want to let you know that
in connection with the closing of the Wasatch transaction, Tracer will be
adopting a two-for-one stock split. As a result, you will then hold 10,204
shares of Common Stock of Tracer.
Third, as you will note from the term sheet, the purchase price of the
shares Wasatch has agreed to purchase is $5.00 per share. Although it is not
under any legal obligation to do so, and provided you agree to the amendment of
that certain Amended and Restated Stockholders' Agreement dated as of July 13,
1995 (the "Stockholders' Agreement"), Tracer will issue to you, if the Wasatch
transaction closes, an additional 26,530 shares of Common Stock of Tracer
(against execution by you of a standard form investment letter regarding
securities laws compliance), which will give you a total holding of 36,734
shares at an average price of $5.00. The issuance of the additional shares to
you will be a one-time issuance, and Tracer will not have any obligation to make
any further adjustment in the number of your shares, whether or not the Wasatch
deal closes. A copy of the Stockholders' Agreement is enclosed. Note that your
current shares are already subject to that Agreement, as will the additional
shares described in this paragraph. The
34
<PAGE>
Mr. Glenn Gomez
February 2, 1996
Page Two
Acceptance and Amendment amends the Stockholders' Agreement in order to provide
that Preferred Stock and certain other issuances (as described in the Acceptance
and Amendment) will not be subject to the Stockholders' Agreement, except as
otherwise required by the Board of Directors. This is necessary in light of the
Wasatch transaction and to give the Board needed flexibility as we go forward.
Time is of the essence. If you agree as set forth in paragraph "Third"
above, please so indicate by signing the attached Acceptance and Amendment and
faxing it on Monday the 5th to our counsel, Tom Curzon, at (fax) 602-640-6067.
We appreciate your consideration and cooperation.
Sincerely,
/s/ Chad M. Little
----------------------------------------
Chad M. Little
President
35
Exhibit 5
[Osborn Maledon letterhead]
_________________, 199_
Sandbox Entertainment Corporation
2231 East Camelback Road
Suite 324
Phoenix, AZ 85016
Gentlemen:
We refer to the Registration Statement of Sandbox Entertainment
Corporation (the "Registrant") on Form SB-2 to be filed with the Securities and
Exchange Commission for the purpose of registering under the Securities Act of
1933, as amended, ______ shares of Series B Preferred Stock, $.001 par value
(the Series B Preferred Stock") and ________ shares of the Registrant's Common
Stock, $.001 par value, into which the Series B Preferred Stock is convertible
(the "Conversion Shares").
We are familiar with the proceedings to date with respect to such
proposed sale and have examined such records, documents and matters of law and
satisfied ourselves as to such matters of fact as we have considered relevant
for the purposes of this opinion.
Based upon the foregoing, it is our opinion that the ________ shares of
Series B Preferred Stock and the ________ Conversion Shares to be issued
pursuant to the Registration Statement have been duly authorized and, when
issued by the Company and paid for in the manner described in the Registration
Statement, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and the reference to this Firm under the heading "Certain
Legal Matters" in the Prospectus constituting part of the Registration
Statement.
Very truly yours,
EXHIBIT 10(mm)
WARRANT AGREEMENT (the "Agreement") dated as of ____________,
1997 between Sandbox Entertainment Corporation, a Delaware corporation (the
"Company"), and Wit Capital Corporation and any co-managing underwriter as
described on Schedule 1 hereto (hereinafter referred to as the "Underwriters").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company proposes to issue to the Underwriters
_______ warrants (the "Warrants") to purchase up to an aggregate of ______
shares of Series B Convertible Preferred Stock, par value $0.001 per share (the
"Series B Preferred Stock"), of the Company (the "Warrant Shares"); and
WHEREAS, the Underwriters have agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated ___________, 1997
between the Underwriters and the Company, to act as the underwriters in
connection with the Company's proposed offering (the "Offering") of _______
shares of Series B Preferred Stock (the "Offering Shares") at an initial
offering price of $___ per Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriters and/or officers of the
Underwriters, in consideration for, and as part of the Underwriters'
compensation in connection with, the Underwriters acting as the Underwriters
pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Underwriters or their designees to the Company of ten dollars ($10.00),
the agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant.
------
The Underwriters, and/or their designees who are officers of
the Underwriters, are hereby granted the right to purchase, at any time on or
after the date hereof until 5:00 P.M., New York time, on ______________, 2002,
which shall be the date five years after the effective date of the registration
statement (the "Effective Date") on Form SB-2 pursuant to which the Offering
Shares shall be registered (the "Warrant Exercise Term"), up to ________ fully
paid and non-assessable Warrant Shares at an initial exercise price (subject to
adjustment as provided in Articles 6 and 8 hereof) of $_____(1) per Warrant
Share upon exercise of the Warrants.
2. Warrant Certificates.
---------------------
- --------------------
(1) to be 110% of the initial offering price.
<PAGE>
The warrant certificates delivered and to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be in the form set
forth in Exhibit A attached hereto and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrant.
--------------------
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $[110% of per share offering price] per Warrant Share
purchased, payable in cash or by check to the order of the Company, or any
combination of cash or check, subject to adjustment as provided in Article 8
hereof. Upon surrender of the Warrant Certificate with the annexed Form of
Election to Purchase, duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Shares purchased at the Company's
principal offices in Phoenix, Arizona (currently located at 2231 E. Camelback,
Suite 324, Phoenix, Arizona), the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the Warrant Shares so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder hereof, in whole or in part (but not as to fractional Warrant Shares). In
the case of the purchase of less than all the Warrant Shares purchasable under
any Warrant Certificate, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares purchasable thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at its option, exchange the Warrants
represented by such Holder's Warrant Certificate, in whole or in part (a
"Warrant Exchange"), into the number of Warrant Shares determined in accordance
with this Section 3.2, by surrendering such Warrant Certificate at the principal
office of the Company or at the office of its transfer agent, accompanied by a
notice stating such Holder's intent to effect such exchange, the number of
Warrant Shares to be exchanged and the date on which the Holder requests that
such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange
shall take place on the date specified in the Notice of Exchange or, if later,
the date the Notice of Exchange is received by the Company (the "Exchange
Date"). Certificates for the Warrant Shares issuable upon such Warrant Exchange
and, if applicable, a new Warrant Certificate of like tenor evidencing the
Warrant Shares which were subject to the surrendered Warrant Certificate and not
included in the Warrant Exchange, shall be issued as of the Exchange Date and
delivered to the Holder within three (3) days following the Exchange Date. In
connection with any Warrant Exchange, the Holder's Warrant Certificate shall
represent the right to subscribe for and acquire the number of Warrant Shares
(rounded to the next highest integer) equal to (A) the number of Warrant Shares
specified by the Holder in its Notice of Exchange (the "Total Share Number")
less (B) the number of Warrant Shares equal to the quotient obtained by dividing
(i) the product of the Total Share Number and the existing Exercise Price (as
hereinafter defined) by (ii) the current Market Price (as hereinafter defined)
of an Offering Share. "Market Price" at any date shall be deemed to be the last
reported sale price, or, in case no such reported sale takes place on such day,
the average of the last reported sale prices for the last three trading days,
the closing bid price as furnished by the National Market System, the closing
bid price as furnished by the National Association of Securities Dealers, Inc.
through NASDAQ or a similar organization if NASDAQ is no longer
2
<PAGE>
reporting such information; provided, however, that if the Offering Shares are
not traded in such manner that the foregoing prices are available for the period
required, the Market Price shall be the fair market value of the Offering Shares
as determined by a majority of the independent members of the Board of Directors
of the Company, acting in good faith.
4. Issuance of Certificates.
-------------------------
Upon the exercise of the Warrants, the issuance of
certificates for the Warrant Shares purchased shall be made forthwith (and in
any event within three business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Article 5 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Warrant Shares shall be executed on behalf of the Company by the manual or
facsimile signature of the present or any future Chairman of the Board of
Directors or President or Vice President of the Company under its corporate seal
reproduced thereon, attested to by the manual or facsimile signature of the
present or any future Secretary or Assistant Secretary of the Company. Warrant
Certificates shall be dated the date of execution by the Company upon initial
issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Warrant Shares purchased shall bear a legend
substantially similar to the following:
"The securities represented by this
certificate and the other securities issuable upon
conversion thereof have not been registered under the
Securities Act of 1933, as amended (the "Act"), and
may not be offered or sold except (i) pursuant to an
effective registration statement under the Act, (ii)
to the extent applicable, pursuant to Rule 144 under
the Act (or any similar rule under such Act relating
to the disposition of securities), or (iii) upon the
delivery by the holder to the Company of an opinion
of counsel, reasonably satisfactory to counsel to the
Company, stating that an exemption from registration
under such Act is available."
5. Restriction on Exercise and Transfer of Warrants.
-------------------------------------------------
The Holder of a Warrant Certificate, by its acceptance
thereof, covenants and agrees that the Warrants and Warrant Shares are being
acquired as an investment and not with a view to the distribution thereof, and
that the Warrants may not be exercised, sold, transferred,
3
<PAGE>
assigned, hypothecated or otherwise disposed of, in whole or in part, for the
later of a period of one (1) year from the Effective Date or the "Restricted
Period", as defined in the Certificate of Designation for the Series B Preferred
Stock. Thereafter, the Warrants may be sold, transferred, hypothecated or
otherwise disposed of: (i) to officers of the Underwriters who are also
shareholders of the Underwriters; (ii) by will and pursuant to the laws of
descent and distribution; or (iii) by operation of law.
6. Initial and Adjusted Exercise Price. The Warrant's initial
exercise price per Warrant Share shall be the amount equal to [one hundred ten
percent (110%) of the per share offering price of the Series B Preferred Stock]
(the "Exercise Price"). The adjusted Exercise Price per Warrant Share shall be
the price which shall result from time to time from any and all adjustments of
the initial exercise price in accordance with the provisions of Article 8
thereof. The term "Exercise Price" herein shall mean the initial exercise price
or the adjusted exercise price, depending upon the context.
7. Registration Rights.
--------------------
7.1. Registration Under the Securities Act of 1933.
Neither the Warrants nor the Warrant Shares have been registered for purposes of
public distribution under the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Warrant Shares, and any
shares of common stock (the "Common Stock") or other securities issued upon
conversion of such Warrant Shares or any stock split or stock dividend in
respect of such Warrant Shares; provided, however, that with respect to any
particular Registrable Security, such security shall cease to be a Registrable
Security when, as of the date of determination, (i) it has been effectively
registered under the Act and disposed of pursuant thereto, (ii) registration
under the Act is no longer required for subsequent public distribution of such
security, or (iii) it has ceased to be outstanding. The term "Registrable
Securities" means any and/or all of the securities falling within the foregoing
definition of a "Registrable Security." In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of "Registrable Security" as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during
the seven years following the Effective Date, the Company proposes to prepare
and file any registration statement covering Common Stock (in any such case,
other than in connection with a merger, acquisition or pursuant to Form S-8 or
successor form) (for purposes of this Article 7, the "Registration Statement"),
it will give written notice of its intention to do so by registered mail
("Notice"), at least thirty (30) business days prior to the filing of each such
Registration Statement, to all holders of Registrable Securities. Upon the
written request of the majority of such holders ("Requesting Holder(s)"), made
within twenty (20) business days after receipt of the Notice, that the Company
include any of the Requesting Holder's Registrable Securities in the proposed
Registration Statement, the Company shall, as to each such Requesting Holder,
use its best efforts to effect the registration under the Act of the Registrable
Securities which it has been so requested to register ("Piggyback
Registration"), at the Company's sole cost and expense and at no cost or expense
to
4
<PAGE>
the Requesting Holders. Nothing contained in this Agreement shall be construed
as providing the Requesting Holders with the right of demand registration in
respect of the Registrable Securities.
If the managing underwriter for a firm commitment
underwritten registration advises the Company and the Requesting Holder(s) that,
in the underwriter's opinion, the total amount of securities proposed to be sold
in such registration exceeds the amount of securities that can be sold in such
an offering without negatively affecting the offering or its price, then the
number of outstanding shares of Common Stock proposed to be included in such
offering by persons other than the Company and/or a stockholder exercising
so-called "demand" registration rights (but including the Requesting Holder(s))
shall be reduced pro rata among the holders of all such Common Stock.
Notwithstanding the provisions of this Section 7.3,
the Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.3 (irrespective of whether any written request
for inclusion of such securities shall have already 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.
7.4. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) The Company shall furnish to each holder
of Registrable Securities included in any registration under Section
7.3 such number of prospectuses as shall be reasonably requested.
(b) The Company shall pay all costs, fees
and expenses in connection with all Registration Statements filed
pursuant to Section 7.3 hereof (excluding underwriting discounts and
fees, commissions and transfer taxes) including, without limitation,
the reasonable fees and disbursements for one counsel for all
non-Company sellers as a group, the Company's legal and accounting
fees, printing expenses, and blue sky fees and expenses.
(c) The Company will use reasonable efforts
in qualifying or registering the Registrable Securities included in a
Registration Statement, for offering and sale under the securities or
blue sky laws of such states as are requested by the holders of such
securities.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration
Statement and any Underwriter or person deemed to be an underwriter
under the Act and each person, if any, who controls such holder or
Underwriter or person deemed to be an underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended ("Exchange Act"), against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to
which any of them may become subject under the Act, the Exchange Act
5
<PAGE>
or otherwise, arising from such registration statement to the same
extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify and to provide for just and equitable
contribution to the Underwriters as set forth in Section 8 of the
Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement and its successors and
assigns, shall severally, and not jointly, indemnify, the Company, its
officers and directors and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may
become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such holder, or its
successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions
pursuant to which the Underwriters have agreed to indemnify and to
provide for just and equitable contribution to the Company as set forth
in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any holder to exercise his Warrants
prior to the initial filing of any registration statement or the
effectiveness thereof.
(g) If the Company shall fail to comply with
the provisions of this Section 7, the Company shall, in addition to any
other equitable or other relief available to the holders of Registrable
Securities, be liable for any or all damages sustained by the holders
of Registrable Securities, requesting registration of their Registrable
Securities.
(h) The Company shall deliver promptly to
each holder in connection with Registrable Securities being registered
pursuant to Section 7.3 hereof and requesting the correspondence and
memoranda described in this Section 7.4(h) copies of correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with
respect to the Registration Statement and permit such holder to do such
investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as
it deems reasonably necessary to comply with applicable securities
laws. Such investigation shall include access to books, records and
properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as such holder shall
reasonably request.
(j) Upon the written request therefor by
such holder, the Company shall include in the Registration Statement
covering any of the Registrable Securities any other securities of the
Company held by such holder as of the date of filing of such
Registration Statement, including, without limitation, restricted
shares of Common Stock, options, warrants or any other securities
convertible into shares of Common Stock.
<PAGE>
7.5. Covenants of Holders of Registrable Securities
(a) Each Holder of Registrable Securities
agrees in connection with any registration of the Company's securities (other
than a registration of securities in a Rule 145 transaction or with respect to
an employee benefit plan) that, upon request of the Company or the underwriters
managing any underwritten offering of the Company's securities, not to sell,
make any short sale of, loan, grant any option for the purchase of, pledge,
hypothecate, or otherwise dispose of any Registrable Securities (other than
those included in the registration) or other capital stock of the Company or
securities exchangeable or convertible into capital stock of the Company without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed 180 days from the date of the final
prospectus used in such registration) as may be requested by the Company or such
managing underwriters, provided, that the officers, directors, and affiliates of
the directors of the Company who own stock of the Company also agree to such
restrictions. For the purposes of this agreement, "affiliate" shall be defined,
with respect to any specified person or entity, as a person or entity that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the person or entity specified.
The certificates for the Warrant Shares shall contain, for so long as such
market standoff provision remains in place, a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS ON TRANSFER INCLUDING A MARKET STANDOFF
AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL SHAREHOLDER
THAT PROHIBITS SALE OR TRANSFER OF SUCH SHARES FOR A PERIOD OF
UP TO 180 DAYS FOLLOWING THE DATE OF THE FINAL PROSPECTUS FOR
CERTAIN REGISTERED OFFERINGS OF THE ISSUER'S COMMON STOCK. A
COPY OF THE AGREEMENT IS ON FILE WITH THE SECRETARY OF THE
ISSUER.
8. Adjustments of Exercise Price and Number of Securities.
-------------------------------------------------------
The following adjustments refer to the Exercise Price and the
number of Warrant Shares purchasable upon exercise of the Warrants.
8.1. Computation of Adjusted Price. In case the
Company shall at any time after the date hereof pay a dividend in shares of
Series B Preferred Stock or make a distribution in shares of Series B Preferred
Stock, then upon such dividend or distribution the Exercise Price in effect
immediately prior to such dividend or distribution shall forthwith be reduced to
a price determined by dividing:
(a) an amount equal to the total number of
shares of Series B Preferred Stock outstanding immediately prior to
such dividend or distribution multiplied by the Exercise Price in
effect immediately prior to such dividend or distribution, by
(b) the total number of shares of Series B
Preferred Stock outstanding immediately after such issuance or sale.
7
<PAGE>
8.2. Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Series B
Preferred Stock, the Exercise Price shall forthwith be proportionately decreased
in the case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Article 8,
the number of Warrant Shares issuable upon the exercise of the Warrants shall be
adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares issuable upon exercise of the Warrants immediately prior to such
adjustment and dividing the product so obtained by the adjusted Exercise Price.
8.4. Reclassification, Consolidation, Merger, etc. In
case of any reclassification or change of the outstanding shares of Series B
Preferred Stock (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), or in
the case of any consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of Series B Preferred
Stock, except a change as a result of a subdivision or combination of such
shares or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation of the property of the Company as an entirety,
the Holders shall thereafter have the right to purchase the kind and number of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holders were the owners of the Warrant Shares immediately prior to any such
events, at a price equal to the product of (x) the number of shares of Series B
Preferred Stock issuable upon exercise of the Holders' Warrants and (y) the
exercise prices in effect for the Warrants immediately prior to the record date
for such reclassification, change, consolidation, merger, sale or conveyance as
if such Holders had exercised the Warrants
8.5. Adjustments of Conversion Price of the Series B
Preferred Stock and Number of Shares of Common Stock Issuable Upon Exercise of
Warrant Shares. With respect to any Warrant Shares, whether or not the Warrants
have been exercised, the conversion price per share of Common Stock and the
number of shares of Common Stock issuable upon conversion of the Warrant Shares
shall each be automatically adjusted in accordance with Section 5(d) of the
Certificate of Designation for the Series B Preferred Stock, upon the occurrence
of any of the events described therein. Thereafter, until the next such
adjustment or until otherwise adjusted in accordance with this Section 8,
Warrant Shares shall be convertible into Common Stock at such adjusted
conversion price and for such adjusted number of shares of Common Stock.
8.6. Determination of Outstanding Shares of Series B
Preferred Stock and Common Stock. The number of shares of Series B Preferred
Stock and Common Stock at any one time outstanding shall include the aggregate
number of shares issued or issuable upon the exercise of the Warrants and upon
the conversion of the Warrant Shares.
8
<PAGE>
8.7. Dividends and Other Distributions with Respect
to Outstanding Securities. In the event that the Company shall at any time prior
to the exercise of all Warrants declare a dividend (other than a dividend
consisting solely of shares of Series B Preferred Stock or a cash dividend or
distribution) or otherwise distribute to its shareholders any assets, property,
rights, evidences of indebtedness, securities (other than shares of Series B
Preferred Stock), whether issued by the Company or by another person or entity,
or any other thing of value, the Holders of the unexercised Warrants shall
thereafter be entitled, in addition to the shares of Series B Preferred Stock or
other securities receivable upon the exercise thereof, to receive, upon the
exercise of such Warrants, the same property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been
entitled to receive at the time of such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this Subsection 8.7.
8.8. Subscription Rights for Shares of Series B
Preferred Stock or Other Securities. In the case that the Company or an
affiliate of the Company shall at any time after the date hereof and prior to
the exercise of all the Warrants issue any rights to subscribe for shares of
Series B Preferred Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company, the Holders of the unexercised
Warrants shall be entitled, in addition to the shares of Series B Preferred
Stock or other securities receivable upon the exercise of the Warrants, to
receive such rights at the time such rights are distributed to the other
shareholders of the Company.
8.9. Automatic Conversion. Upon the occurrence of an
automatic conversion of shares of Series B Preferred Stock into Common Stock
pursuant to Section 5(b) of the Certificate of Designation for the Series B
Preferred Stock, the Warrants then outstanding shall thereafter be exercisable
with respect to the number of shares of Common Stock into which the Series B
Preferred Stock issuable upon exercise of such Warrants shall then be
convertible, and the provisions of this Article 8 shall thereafter apply to the
Common Stock issuable upon exercise of the Warrants.
9. Exchange and Replacement of Warrant Certificates.
-------------------------------------------------
Each Warrant Certificate is exchangeable without expense, upon
the surrender hereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
9
<PAGE>
10. Fractional Interests.
---------------------
No fractional shares of Series B Preferred Stock shall be
issued upon exercise of the Warrants. In lieu of any fractional shares to which
the Holder would otherwise be entitled, the Corporation shall pay cash equal to
such fraction multiplied by the then fair market value of such fractional shares
as determined by the Board of Directors of the Company.
11. Reservation and Listing of Securities.
--------------------------------------
The Company shall at all times reserve and keep available out
of its authorized shares of Series B Preferred Stock, solely for the purpose of
issuance upon the exercise of the Warrants, such number of shares of Series B
Preferred Stock as shall be issuable upon the exercise thereof and such number
of shares of Common Stock issuable upon conversion of such Series B Preferred
Stock. The Company covenants and agrees that, upon exercise of the Warrants and
payment of the Exercise Price therefor, all Warrant Shares issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any shareholder. The Company further
covenants and agrees that upon conversion of the shares of Series B Preferred
Stock issuable upon exercise of the Warrants, the Common Stock issuable upon
such conversion shall be duly and validly issued, fully paid, non-assessable and
not subject to the preemptive rights of any shareholder.
12. Notices to Warrant Holders.
---------------------------
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders of
its shares of Series B Preferred Stock or Common Stock for the purpose
of entitling them to receive a dividend or distribution payable
otherwise than in cash; or
(b) the Company shall offer to all the holders of its
Series B Preferred Stock or Common Stock any additional shares of
capital stock of the Company or securities convertible into or
exchangeable for shares of capital stock of the Company, or any option,
right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a
sale of all or substantially all of its property, assets and business
as an entirety shall be proposed; or
(d) reclassification or change of the outstanding
shares of Series B Preferred Stock or Common Stock (other than a change
in par
10
<PAGE>
value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), consolidation of the Company
with, or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the surviving
corporation and which does not result in any reclassification or change
of the outstanding shares of Series B Preferred Stock or Common Stock,
except a change as a result of a subdivision or combination of such
shares or a change in par value, as aforesaid), or a sale or conveyance
to another corporation of the property of the Company as an entirety is
proposed; or
(e) the Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of Series B
Preferred Stock or Common Stock or any other securities of the Company
or of such affiliates to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the shareholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, options or
warrants, or entitled to vote on such proposed dissolution, liquidation, winding
up or sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in connection
with the declaration or payment of any such dividend or distribution, or the
issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. Notices.
--------
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered by facsimile, or e-mail, or mailed by registered or certified mail,
return receipt requested:
(a) If to a registered Holder of the Warrants, to Wit
Capital Corporation, 826 Broadway, New York, New York 10013, Attention:
David Blumberg (Facsimile: 212-253-4410) (E-mail Address:
[email protected]); or
(b) If to the Company, to the address of the Company
set forth in the Registration Statement, Attention:_____________ (Fax:
________________) (E-mail Address: __________________).
14. Entire Agreement; Supplements and Amendments.
---------------------------------------------
This Agreement constitutes the sole and entire agreement of
the parties with respect to the subject matter hereof. The Company and the
Underwriters may from time to time supplement or amend this Agreement in order
to cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or
11
<PAGE>
to make any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriters may deem necessary or desirable.
15. Successors.
-----------
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
16. Termination.
------------
This Agreement shall terminate at the close of business on
___________, 2002. Notwithstanding the foregoing, this Agreement will terminate
on any earlier date when all Warrants have been exercised and all Registrable
Securities have been resold to the public.
17. Governing Law.
--------------
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of Delaware
and for all purposes shall be construed in accordance with the laws of said
State.
18. Benefits of This Agreement.
---------------------------
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company, the Underwriters and any other
Holder any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole and exclusive benefit of the Company, the
Underwriters and any other Holder.
19. Counterparts.
-------------
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] SANDBOX ENTERTAINMENT CORPORATION
By:
------------------------------------
Name:
Title:
Attest:
- --------------------------
WIT CAPITAL CORPORATION
By:
------------------------------------
Name:
Title:
13
EXHIBIT (10nn)
SETTLEMENT AGREEMENT
This Settlement Agreement is made as of November 25, 1997, by and
between the parties (the "Parties") listed below.
Parties:
- --------
1. Sandbox Entertainment Corporation, a Delaware corporation
("Sandbox").
2. Kathryn W. Kolbe and Kolbe Corp., an Arizona corporation
(collectively "Kolbe").
Recitals:
- ---------
1. Kolbe are parties to litigation entitled Kathryn W. Kolbe, et. al.
v. John T. Furey, et. al., No. CIV 95-1861 PHX RCB, pending in the United States
District Court for the District of Arizona ("the Litigation"). Kolbe have
threatened to add Sandbox as a defendant in the Litigation and have prepared a
draft of a proposed First Amended Complaint which names Sandbox as a defendant,
a copy of which is attached hereto as Exhibit A.
2. The Parties now desire to resolve and settle the claims Kolbe have
threatened to assert against Sandbox in the Litigation, to avoid the expense,
inconvenience and distraction of litigation, to compromise and resolve their
claims and differences, and to effect a release of the claims Kolbe have
threatened to assert against Sandbox.
Agreement:
- ----------
1. Upon the execution of this Settlement Agreement, Sandbox shall
execute and deliver to Kolbe a promissory note in form attached hereto as
Exhibit B (the "Promissory Note").
2. Unless and until Sandbox defaults upon the Promissory Note according
to its terms, Kolbe shall take no efforts to add Sandbox as a defendant to the
Litigation, nor shall Kolbe assert claims or institute litigation against
Sandbox arising out of or relating to the events, occurrences,
<PAGE>
transactions, actions, claims, or causes of action which are the subject of the
Litigation or of the proposed First Amended Complaint.
3. For good and valuable consideration, receipt of which is hereby
acknowledged, Kolbe release and discharge Sandbox, its officers, directors,
shareholders, agents, employees, attorneys, successors and assigns from any and
all claims or causes of action, in law or in equity, demands, liabilities,
losses, damages, costs, expenses, compensation, and all other damages and
liabilities of any kind or nature whatsoever, direct or indirect, whether or not
now known, suspected, or claimed, that Kolbe ever had, now has, or may have in
the future because of any matter, act, occurrence, or transaction occurring at
any time prior to the execution of this Settlement Agreement and which arises
out of or relate to the events, occurrences, transactions, and actions which are
the subject of the Litigation or of the proposed First Amended Complaint. This
release shall become effective immediately upon (but not before) payment in full
of all sums then owed to Kolbe pursuant to the Promissory Note, whether before
or after the due date thereof.
4. The Parties agree that (a) neither this Settlement Agreement nor any
act under it constitutes nor shall be construed to constitute an admission of
liability or fault of any kind by Sandbox or any representative thereof, and (b)
this Settlement Agreement is made solely to terminate the disputes between the
Parties and to avoid the future expense and distraction of litigation.
5. Kolbe represent and warrant that they have not heretofore assigned
or transferred, or otherwise conveyed, and will not assign, transfer, or
otherwise convey any claim or cause of action which is a subject of the release
contained in Paragraph 3 of this Settlement Agreement.
6. This Settlement Agreement and the Promissory Note contain the entire
understanding and agreement of the Parties with respect to their subject matter
and supersede any and all prior negotiations and agreements as to the subject
matter. No change or modification to this Settlement
2
<PAGE>
Agreement or the Promissory Note will be effective unless contained in a writing
signed by the Party against whom enforcement of such change or modification is
sought.
7. Each Party represents and warrants that it has the full capacity and
authority to enter into, execute, deliver, and perform this Settlement Agreement
and that this Settlement Agreement constitutes an agreement binding upon, and
enforceable against, that Party.
8. By executing this Settlement Agreement, each Party acknowledges that
it has received the advice of legal counsel of its own selection concerning this
Settlement Agreement and that such Party executes this Settlement Agreement with
full knowledge and understanding of its terms and conditions after consultation
with such legal counsel.
9. This Settlement Agreement shall be governed by and construed in
accordance with the laws of the State of Arizona. The Parties agree that each
participated in the preparation of this Settlement Agreement and, in the event
of any claim arising from a breach of this Settlement Agreement, its language
shall not be construed against or in favor of any Party.
10. This Settlement Agreement shall inure to the benefit of and be
binding upon the Parties and their respective successors and assigns.
11. The Parties hereby agree to execute and deliver any further
documents and to perform any further acts that may be reasonably necessary to
carry out the purpose and intent of this Settlement Agreement.
12. This Settlement Agreement may be executed in counterparts, and the
Parties agree that each counterpart shall be deemed an original.
3
<PAGE>
KATHRYN W. KOLBE
Dated: 11/24/97 /s/ Kathryn W. Kolbe
--------------- -----------------------------
KOLBE CORP.
Dated: 11/24/97 By: /s/ Kathy Kolbe
--------------- --------------------------
Its CEO, Chairman
--------------------------
SANDBOX ENTERTAINMENT CORPORATION
Dated: 11/25/97 By: /s/ Mark Gorchoff
--------------- --------------------------
Its Chief Financial Officer
--------------------------
4
<PAGE>
EXHIBIT A
David C. Tierney (002385)
James W. Armstrong (009599)
SACKS TIERNEY PA
2929 North Central Avenue, 14th Floor
Phoenix, Arizona 85012-2742
Telephone: (602) 279-4900
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
DISTRICT OF ARIZONA
KATHRYN W. KOLBE, an Arizona ) No. CIV 95-1861 PHX RCB
resident; and KOLBE CORP., an )
Arizona corporation, ) FIRST AMENDED COMPLAINT
)
Plaintiffs, )
)
vs. )
)
JOHN T. FUREY; FUREY & COMPANY, )
LTD.; HUMANAGEMENT, INC.; and )
SANDBOX ENTERTAINMENT )
CORPORATION, )
)
Defendants. )
- -----------------------------------
For their First Amended Complaint against the Defendants in
this action, Plaintiffs Kathryn W. Kolbe and Kolbe Corp. hereby
allege the following:
JURISDICTION AND VENUE
----------------------
THE PARTIES
-----------
<PAGE>
9. Defendant Sandbox Entertainment Corporation is a Delaware
corporation with its principal place of business located in Maricopa County,
Arizona.
THE KOLBE ORIGINAL WORKS
------------------------
INVOLVEMENT OF DEFENDANTS FUREY AND FUREY & CO.
-----------------------------------------------
WITH KOLBE CORP.
----------------
INTELLECTUAL PROPERTY INFRINGEMENT
----------------------------------
MISREPRESENTATIONS IN DEFENDANTS' MATERIAL
------------------------------------------
LIABILITY OF SANDBOX ENTERTAINMENT CORPORATION
----------------------------------------------
71. Defendant Sandbox Entertainment Corporation ("Sandbox") is a
developer of computer software, and the successor in interest to an Arizona
corporation formerly known as Tracer Design, Inc. ("Tracer"). Tracer was merged
into Sandbox on or about April 18, 1996, and therefore no longer has a separate
corporate existence from Sandbox. Accordingly, Sandbox is liable for any acts
committed by Tracer which are the subject of this First Amended Complaint.
72. In 1995, Tracer agreed to place certain software that had been
developed for Furey and his company on certain computer servers owned and
operated by Tracer in Phoenix. This software, the content of which was known to
Tracer, included materials and
2
<PAGE>
test instruments which closely copy many of the aspects and expressions
contained in the original works of Ms. Kolbe, and was designed to create and
operate a World Wide Web site on the Internet for the purpose of promoting and
marketing Furey's ME2 system throughout the United States and all other places
from which the Internet may be accessed (the "ME2 Web Site").
73. Tracer further agreed to design, create and produce an interactive
informational advertisement for the ME2 system, and to place that advertisement
in a computer game which Tracer operated on the Internet known as "Cyberhunt."
74. In late l995 or early 1996, Furey's ME2 Web Site was placed on
Tracer' computer servers, a process which required Tracer to reprogram the
existing software for that Site in order for it to be operable on Tracer's
computer. In addition, Tracer made certain changes to the graphics on the ME2
Site, as well as its main page. Sandbox made later revisions to the ME2 Site
Software so that it would operate and function more effectively on the Internet,
most notably in June 1996 and February 1997.
75. After it was first placed on Tracer's computer server, the ME2 Web
Site was continuously maintained by Tracer and then Sandbox through and until
approximately June of 1997, resulting in the reproduction, display, distribution
and marketing of the information and materials contained in that Site throughout
the Internet. At all of these times, Tracer and then Sandbox retained
3
<PAGE>
the right and ability to control and supervise the transmission of the ME2 Web
Site over the Internet. In addition, Sandbox has placed advertisements for the
ME2 Web Site on Sandbox's World Wide Web sites, and has on occasion programmed
"hyperlinks" in those sites which permit persons using the Sandbox sites to
immediately transfer to the ME2 Web Site.
76. As consideration for their services, Tracer and Sandbox have
received payments of money and a computer from Furey. As further consideration,
Sandbox was also promised a percentage of any software products sold from the
ME2 Web Site.
FIRST CAUSE OF ACTION
---------------------
(Copyright Infringement)
SECOND CAUSE OF ACTION
----------------------
(Copyright Infringement by Sandbox)
92. The above allegations are incorporated by this reference.
93. Prior to modifying and placing the ME2 Web Site software on its
computer servers, Tracer had knowledge that Ms. Kolbe had commenced the instant
lawsuit against Furey, and that this lawsuit involved claims of copyright
infringement relating to the ME2 software. Tracer also knew that Furey had
worked for Ms. Kolbe, and that her business involved furnishing conflict
resolution, team
4
<PAGE>
building and other services to companies which would assist their employees in
operating better.
94. Furey notified Sandbox that a preliminary injunction had been
issued against him in this action, shortly after that injunction was entered by
the Court on June 7, 1996. Furey also notified Sandbox that the injunction
required that the ME2 Web Site be modified so that further purchases of products
and services from that Site would be temporarily suspended. Upon Furey's
request, Sandbox made those modifications, but did not delete, remove, redact or
disable various portions of the ME2 Web Site which included testing instruments
and other materials found by the Court to be infringing of Plaintiffs'
copyrights, nor did Sandbox delete, remove, redact or disable any of those
portions of the ME2 Web Site until after Sandbox was notified that contempt
proceedings had been filed against Furey due to his alleged violations of the
preliminary injunction.
95. As a result of its and Tracer's actions, Sandbox has substantially
contributed to the other Defendants' infringement of Plaintiffs' copyrighted
materials, and/or has directly or vicariously infringed those materials by
duplicating, displaying, distributing and marketing them over the Internet.
96. Plaintiffs have been financially harmed and otherwise damaged by
Sandbox's acts of direct, contributory and/or vicarious copyright infringement.
5
<PAGE>
97. Accordingly, Sandbox is liable for all applicable damages and other
relief permitted by law or equity.
DATED this day of , 1997.
--------- ------------
SACKS TIERNEY P.A.
By:
------------------------------
David C. Tierney
James W. Armstrong
Attorneys for Plaintiffs
COPY OF THE FOREGOING
MAILED this day
---------
of , 1997, to:
---------------
Timothy H. Barnes, Esq.
Roger W. Riviere, Esq.
RIDENOUR, SWENSON, CLEERE & EVANS
40 North Central Avenue, Suite 1400
Phoenix, Arizona 85004
Attorneys for Defendants John T. Furey
and Humanagement, Inc.
Brett L. Dunkelman, Esq.
OSBORN MALEDON, P.A.
2929 North Central Avenue, Suite 2100
Phoenix, Arizona 85012
Attorneys for Defendant Furey & Company, Ltd.
- ---------------------------------------------
6
<PAGE>
EXHIBIT B
PROMISSORY NOTE
---------------
$30,000 November___, 1997
Phoenix, Arizona
FOR VALUE RECEIVED, the undersigned, Sandbox Entertainment Corporation,
a Delaware corporation with its principal place of business at 2231 E. Camelback
Road, Suite 324, Phoenix, Arizona 85016 (hereinafter "Maker"), promises to pay
to the order of Kathryn W. Kolbe and Kolbe Corp., an Arizona corporation, or
assigns (collectively "Holder"), at Phoenix, Arizona, or at such other place as
Holder of this Promissory Note shall designate in writing, the principal sum of
Thirty Thousand Dollars ($30,000), without interest. The entire amount of
indebtedness under this Note shall be due and payable on February __, 1998.
Maker shall have the right at any time or from time to time to prepay
all or a portion of this Note without premium or penalty. Any such prepayment
shall not affect the total amount due under this Note or its due date.
If there should be a default in the payment of any amount which is not
paid when due, such amount shall bear interest from the date when due until paid
in full at the rate of eighteen percent (18%) per annum. In the event of default
in the payment of any amount under this Note, Maker promises to pay all
reasonable attorneys' fees and costs incurred by Holder in connection therewith.
This Promissory Note shall be governed by and construed in accordance with the
laws of the State of Arizona.
Failure of Holder to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or in the event of continuance of any existing default after demand for
strict performance hereof.
Maker waives demand, diligence, presentment for payment, protest and
notice of demand, protest, nonpayment and exercise of any option hereunder.
Maker further agrees that the granting without notice of any extension or
extensions of time for payment of any sum or sums due hereunder, or for the
performance of any covenant, condition or agreement hereof, shall in no way
release or discharge the liability of Maker.
Time is of the essence in this Note and each and every term and
provision hereof.
SANDBOX ENTERTAINMENT CORPORATION
By:
Name:
-------------------------
Its:
-------------------------
EXHIBIT 10(oo)
PROMISSORY NOTE
---------------
$30,000 November 25, 1997
Phoenix, Arizona
FOR VALUE RECEIVED, the undersigned, Sandbox Entertainment Corporation,
a Delaware corporation with its principal place of business at 2231 E. Camelback
Road, Suite 324, Phoenix, Arizona 85016 (hereinafter "Maker"), promises to pay
to the order of Kathryn W. Kolbe and Kolbe Corp., an Arizona corporation, or
assigns (collectively "Holder"), at Phoenix, Arizona, or at such other place as
Holder of this Promissory Note shall designate in writing, the principal sum of
Thirty Thousand Dollars ($30,000), without interest. The entire amount of
indebtedness under this Note shall be due and payable on February 23, 1998.
Maker shall have the right at any time or from time to time to prepay
all or a portion of this Note without premium or penalty. Any such prepayment
shall not affect the total amount due under this Note or its due date.
If there should be a default in the payment of any amount which is not
paid when due, such amount shall bear interest from the date when due until paid
in full at the rate of eighteen percent (18%) per annum. In the event of default
in the payment of any amount under this Note, Maker promises to pay all
reasonable attorneys' fees and costs incurred by Holder in connection therewith.
This Promissory Note shall be governed by and construed in accordance with the
laws of the State of Arizona.
Failure of Holder to exercise any option hereunder shall not constitute
a waiver of the right to exercise the same in the event of any subsequent
default or in the event of continuance of any existing default after demand for
strict performance hereof.
Maker waives demand, diligence, presentment for payment, protest and
notice of demand, protest, nonpayment and exercise of any option hereunder.
Maker further agrees that the granting without notice of any extension or
extensions of time for payment of any sum or sums due hereunder, or for the
performance of any covenant, condition or agreement hereof, shall in no way
release or discharge the liability of Maker.
Time is of the essence in this Note and each and every term and
provision hereof.
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Mark Gorchoff
----------------------------------
Name: /s/ Mark Gorchoff
--------------------------------
Its: Chief Financial Officer
---------------------------------
Exhibit 10(pp)
SANDBOX ENTERTAINMENT CORPORATION
SUBORDINATED PROMISSORY NOTE
----------------------------
November 26, 1997 $36,166.16
For value received, subject to the terms and conditions of this Subordinated
Promissory Note (the "Note"), Sandbox Entertainment Corporation, a Delaware
corporation (the "Company"), hereby promises to pay to the order of Lonnie
Whittington, or his/her/its permitted assigns (the "Holder") the principal sum
of Thirty-Six Thousand One Hundred Sixty-Six and 16/100 dollars ($36,166.16)
plus simple interest accrued on unpaid principal from the date hereof until
paid, at the interest rates set forth hereafter: Twelve percent (12%) per annum
for the period from the date hereof through December 10, 1997; eighteen percent
(18%) per annum for the period after December 10, 1997, through January 1, 1998;
and twenty-five percent (25%) for the period after January 1, 1998. Subject to
the terms and conditions of this Note, the unpaid principal amount of this Note
and the unpaid interest accrued thereon shall be payable in full at the
principal office of the Company within thirty (30) days after written demand
from Holder for payment thereof, provided that no such demand shall be made
until the Registration Statement of the Company on Form SB-2 initially filed
with the Securities and Exchange Commission on September 30, 1997, File No.
333-36787 has been declared effective under the Securities Act of 1933, as
amended.
The following is a statement of the rights of the holder of this Note
and the terms and conditions to which this Note is subject, and to which the
holder hereof, by the acceptance of this Note, agrees:
1. Definitions. Unless the context otherwise requires, as used in this
Note, the following terms shall have the following meanings:
1.1 "Company" includes any corporation or other entity that
shall succeed to or assume the obligations of the Company under this Note.
1.2 "Noteholder," "Holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
1.3 "Senior Indebtedness" shall mean the principal of and
unpaid accrued interest on: (i) all indebtedness of the Company to commercial
banks or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company now or hereafter
(whether or not secured), (ii) all indebtedness and obligations of the Company
that are secured by any portion of the assets of the Company, and (iii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for
1
<PAGE>
such Senior Indebtedness, or any indebtedness arising from the satisfaction of
such Senior Indebtedness by a guarantor.
2. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth
herein, in right of payment to the prior payment in full of all the Company's
Senior Indebtedness.
2.1 Default on Senior Indebtedness. Upon any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), dissolution, liquidation or other marshaling of the assets and
liabilities of the Company (i) no amount shall be paid by the Company in respect
of the principal of or interest on this Note at the time outstanding, unless and
until any defaults on the Senior Indebtedness have been cured or waived or shall
have ceased to exist and principal and interest on such obligations has been
paid current, and (ii) no claim or proof of claim shall be filed with the
Company by or on behalf of the Holder which shall assert any right to receive
any payments in respect of principal or interest on this Note except in the
event that any defaults on the Senior Indebtedness have been cured or waived or
shall have ceased to exist. If there occurs an event of default that has been
declared in writing with respect to any Senior Indebtedness, or in the
instrument under which it is outstanding, permitting the holder of such Senior
Indebtedness to accelerate the maturity thereof, then, unless and until such
event of default shall have been cured or waived or shall have ceased to exist,
or all Senior Indebtedness shall have been paid in full, no payment shall be
made in respect of the principal of or interest on this Note without the
approval of the holders of the Senior Indebtedness.
2.2 Undertaking. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 5.
3. No Impairment. The Company will not willfully avoid or seek to avoid
the observance or performance of any of the terms of this Note, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Noteholder against impairment.
4. Prepayment. The Company may at any time, without penalty, prepay in
whole or in part the principal amount, and/or any accrued interest outstanding
under this Note. Any prepaying shall be applied first to unpaid accrued interest
until all such interest has been paid, and then to unpaid principal.
5. Event of Default. The principal amount due hereunder together with
all accrued interest to date will accelerate and become due if an Event of
Default (as hereinafter defined) occurs. An "Event of Default" shall exist under
this Note if the Company: (i) petitions or applies to any tribunal for or
consents to the appointment of a receiver, (ii) admits in writing its inability
to pay its debts as they mature, (iii) makes a general assignment for the
benefit of its creditors,
2
<PAGE>
(iv) is adjudicated bankrupt or insolvent, or (v) files voluntarily or has filed
against it a petition in bankruptcy or a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy, reorganization, insolvency, readjustment of debts, dissolution or
liquidation law or statute.
6. Amendment; Waiver. Any term of this Note may be amended, and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of the Company and Noteholder.
7. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, and only if the assignee of this Note
acknowledges in writing to the Company that it is bound by all the terms and
conditions of this Note. Any attempted assignment in violation of this Section
shall be void.
8. Headings; References. The headings in this Note are for purposes of
convenience of reference only, and shall not be deemed to constitute a part of
this Note. Unless otherwise expressly noted, all references to Sections in this
Note refer to Sections of this Note.
9. Notices. Any notice or other document required or permitted to be
given or delivered to Noteholder shall be delivered at, or sent by certified or
registered mail to, Noteholder at the address on file with the Company, or to
such other address as shall have been furnished to Company in writing by
Noteholder. Any notice or other document required or permitted to be given or
delivered to Company shall be delivered at or sent by registered or certified
mail to, Company at 2231 East Camelback Road, Suite 324, Phoenix, AZ 85016, or
to such other address as shall have been furnished in writing to Noteholder by
Company. Any notice so addressed and mailed by registered or certified mail
shall be deemed to be given when so mailed. Any notice so addressed and
otherwise delivered shall be deemed to be given when actually received by the
addressee.
10. Law Governing. This Note shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of Arizona,
excluding the body of law applicable to conflicts of law.
11. Attorneys' Fees; Waiver of Presentment. The Company promises to pay
the holder hereof, without demand, all reasonable attorneys fees, costs and
other expenses incurred by such holder in enforcing any provision of this Note
and hereby waives presentment, notice of nonpayment, notice of dishonor,
protest, demand and diligence.
3
<PAGE>
12. Terms Binding. By acceptance of this Note, the holder of this Note
(and each subsequent holder of this Note) accepts and agrees to be bound by all
the terms and conditions of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name the date first written above.
SANDBOX ENTERTAINMENT CORPORATION
By: /s/ Mark Gorchoff
---------------------------
Name: Mark Gorchoff
---------------------------
Title: Chief Financial Officer
-------------------------
Exhibit 10(qq)
SANDBOX ENTERTAINMENT CORPORATION
SUBORDINATED PROMISSORY NOTE
----------------------------
December 12, 1997 $172,528.00
In consideration of Andrew Todd lending to Sandbox Entertainment Corporation, a
Delaware corporation (the "Company"), the sum of One Hundred Fifty Thousand
Dollars ($150,000.00), the Company hereby promises, on the terms and conditions
of this Subordinated Promissory Note (the "Note"), to pay to the order of Andrew
Todd, or his/her/its permitted assigns (the "Holder") the principal sum of One
Hundred Seventy Two Thousand Five Hundred Twenty Eight Dollars ($172,528.00),
without interest, on or before the ninetieth (90th) day from the date hereof.
The following is a statement of the rights of the holder of this Note
and the terms and conditions to which this Note is subject, and to which the
holder hereof, by the acceptance of this Note, agrees:
1. Definitions. Unless the context otherwise requires, as used in this
Note, the following terms shall have the following meanings:
1.1 "Company" includes any corporation or other entity that
shall succeed to or assume the obligations of the Company under this Note.
1.2 "Noteholder," "Holder," or similar terms, when the context
refers to a holder of this Note, shall mean any person who shall at the time be
the registered holder of this Note.
1.3 "Senior Indebtedness" shall mean the principal of and
unpaid accrued interest on: (i) all indebtedness of the Company to commercial
banks or other financial institutions regularly engaged in the business of
lending money, which is for money borrowed by the Company now or hereafter
(whether or not secured), (ii) all indebtedness and obligations of the Company
that are secured by any portion of the assets of the Company, and (iii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor.
2. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth
herein, in right of payment to the prior payment in full of all the Company's
Senior Indebtedness.
2.1 Default on Senior Indebtedness. Upon any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), dissolution, liquidation or other
1
<PAGE>
marshaling of the assets and liabilities of the Company (i) no amount shall be
paid by the Company in respect of the principal of or interest on this Note at
the time outstanding, unless and until any defaults on the Senior Indebtedness
have been cured or waived or shall have ceased to exist and principal and
interest on such obligations has been paid current, and (ii) no claim or proof
of claim shall be filed with the Company by or on behalf of the Holder which
shall assert any right to receive any payments in respect of principal or
interest on this Note except in the event that any defaults on the Senior
Indebtedness have been cured or waived or shall have ceased to exist. If there
occurs an event of default that has been declared in writing with respect to any
Senior Indebtedness, or in the instrument under which it is outstanding,
permitting the holder of such Senior Indebtedness to accelerate the maturity
thereof, then, unless and until such event of default shall have been cured or
waived or shall have ceased to exist, or all Senior Indebtedness shall have been
paid in full, no payment shall be made in respect of the principal of or
interest on this Note without the approval of the holders of the Senior
Indebtedness.
2.2 Undertaking. By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested from
time to time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 5.
3. No Impairment. The Company will not willfully avoid or seek to avoid
the observance or performance of any of the terms of this Note, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the Noteholder against impairment.
4. Prepayment. The Company may at any time, without penalty, prepay in
whole or in part this Note.
5. Event of Default. The principal amount due hereunder together with
all accrued interest to date will accelerate and become due if an Event of
Default (as hereinafter defined) occurs. An "Event of Default" shall exist under
this Note if the Company: (i) petitions or applies to any tribunal for or
consents to the appointment of a receiver, (ii) admits in writing its inability
to pay its debts as they mature, (iii) makes a general assignment for the
benefit of its creditors, (iv) is adjudicated bankrupt or insolvent, or (v)
files voluntarily or has filed against it a petition in bankruptcy or a petition
or an answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy, reorganization, insolvency, readjustment of debts,
dissolution or liquidation law or statute.
6. Amendment; Waiver. Any term of this Note may be amended, and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of the Company and Noteholder.
7. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, and only if the assignee of this Note
acknowledges in writing to the Company that it is bound by all the terms and
conditions of this Note. Any attempted assignment in violation of this Section
shall be void.
2
<PAGE>
8. Headings; References. The headings in this Note are for purposes of
convenience of reference only, and shall not be deemed to constitute a part of
this Note. Unless otherwise expressly noted, all references to Sections in this
Note refer to Sections of this Note.
9. Notices. Any notice or other document required or permitted to be
given or delivered to Noteholder shall be delivered at, or sent by certified or
registered mail to, Noteholder at the address on file with the Company, or to
such other address as shall have been furnished to Company in writing by
Noteholder. Any notice or other document required or permitted to be given or
delivered to Company shall be delivered at or sent by registered or certified
mail to, Company at 2231 East Camelback Road, Suite 324, Phoenix, AZ 85016, or
to such other address as shall have been furnished in writing to Noteholder by
Company. Any notice so addressed and mailed by registered or certified mail
shall be deemed to be given when so mailed. Any notice so addressed and
otherwise delivered shall be deemed to be given when actually received by the
addressee.
10. Law Governing. This Note shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of Arizona,
excluding the body of law applicable to conflicts of law.
11. Attorneys' Fees; Waiver of Presentment. The Company promises to pay
the holder hereof, without demand, all reasonable attorneys fees, costs and
other expenses incurred by such holder in enforcing any provision of this Note
and hereby waives presentment, notice of nonpayment, notice of dishonor,
protest, demand and diligence.
12. Terms Binding. By acceptance of this Note, the holder of this Note
(and each subsequent holder of this Note) accepts and agrees to be bound by all
the terms and conditions of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be signed in
its name the date first written above.
SANDBOX ENTERTAINMENT CORPORATION
By: \s\ Mark Gorchoff
------------------------------------
Name: Mark Gorchoff
Title: Chief Financial Officer
3
EXHIBIT 10(rr)
Ogilvy & Mather
Worldwide Plaza
309 West 49th Street * New York, New York * 10019-7399
Telephone: (212) 237-4000 * Telex 12279 * Facsimile: (212) 237-5123
September 12, 1997
Mr. Robert Connery
Sandbox Entertainment
420 Fifth Avenue
New York, NY 10018
Dear Robert:
This serves as a binding agreement between Ogilvy & Mather, as agent of IBM, and
Sandbox Entertainment for the sponsorship of the Trade Center, MBA Challenge and
Blue Chip Challenge on Final Bell (www.finalbell.com) on behalf of IBM, its
wholly-owned subsidiaries, and its business partners for IBM.
Flight: September 15, 1997 - March 14, 1998
Net Cost: $180,000
Impression Guarantee: 1,000,000
Sponsorship Details: Based on Sandbox Proposal dated August 20, 1997
Placement Restrictions: IBM banners/logos are not to appear in conjunction with
any chat room without express written permission from IBM.
Bannerviews are defined as the number of times that IBM's ad banner has been
fully downloaded. In reporting and for guarantee purposes please remove all
impressions from ogilvy.com.
Makegoods: Should vendor fail to reach the guaranteed number of bannerviews/mo,
Client will receive a credit in the amount prorated of missed impressions or the
completion of missed banners and 10% penalty for all banners missed above and
beyond the guarantee.
Bonus: Client will not be charged for any amount of Bannerviews over guaranteed
amount.
Media: Contact Andy Hueser for any media questions at 212-237-6696.
Traffic: Contact Navarre Joseph for any questions on traffic instructions at:
212-237-6429
Billing: To insure that you get paid properly and in a timely fashion, all
invoices must include the name of this campaign on the billing. We cannot assure
timely payment of invoices that do not include the campaign name.
This campaign is: "IBM Brand e-Business".
Reports: Reports, which include Bannerview and Catches to the IBM Banner, will
be generated on a weekly basis and sent to Jason Miller via Email:
<PAGE>
jason.miller @ ogilvy.com. Please email online reporting instructions to them as
well. A 3rd-Party Audited Statement specifically detailing the number of
BannerViews should be both Emailed or Faxed and mailed to: Jeff Minsky, Ogilvy &
Mather, 309 West 49th St., 6th Floor, New York, NY 10019. As these reports
provide the basis for fulfillment of our agreement, please provide them on a
timely basis.
Technology Requirements
- -----------------------
By signing this contract you agree to the following technology requirements.
Failure to accept the below technology on your site after signing this contract
will result in Ogilvy & IBM ceasing all IBM activity on your site.
The technology requirements you agree to:
o Site must have capability to post an HTML based/enhanced banner composed of
multiple graphics as well as a CGI based form pull down menu all contained
within HTML table coding.
o Site must have ability to host the CGI script necessary to execute the pull
down menu requests.
o Site must have ability to run javascript banners and embedded coding
associated with these banners.
o Site must confirm that their ability to post these banners will have no
effect upon tracking data made available to Ogilvy & IBM.
Cancellation:
Should vendor fail to deliver any of the agreed upon advertising media or
reports, client reserves cancellation privileges without penalty.
Should IBM's logo or advertising banner appear in conjunction with any
inappropriate material, such as nudity, foul language, hatred sites, anarchy
sites (ie., how to make a bomb), this contract is null and void and the site,
IBM, agrees to indemnify IBM from any legal action that may ensure.
All information in this agreement and attached IBM guidelines are confidential
and proprietary. Any breach in confidentiality will serve to nullify this
agreement.
By posting advertising, you acknowledge receipt of and agree to comply with
Ogilvy & Mather's on-line advertising guidelines, effective June 1, 1997
attached hereto. Failure to comply with this agreement without prior Ogilvy &
Mather approval, may result in the nullification of the agreement. Payment may
be withheld for all activity, and you will further be held responsible for any
and all damages associated with non-compliance.
Should you have any questions, please call.
Sincerely,
Andrew Hueser
Interactive Media Planner
cc: S. Schiekofer (O&M)
J. Minsky
Please sign and return to indicate acceptance of this agreement.
Fax to: (212) 237-6072.
Name: /s/ James A. Layne Date: September 15, 1997
-------------------------------------- ---------------------
Name: Date:
-------------------------------------- ---------------------
2
<PAGE>
Sandbox.net
-----------
www.sandbox.net [email protected] 602.468.6400 2231 East Camelback
602.468.6401 FAX Suite 324
Phoenix, AZ 85016
Sandbox Entertainment
Corporation
September 23, 1997
Andy Hueser
Interactive Media planner
Ogilvy & Mather
309 West 49th Street
New York, NY 10019-7399
Dear Andy:
Attached you will find the signed copy of the contract. Per our conversation in
the September 16 meeting, this letter will confirm your agreement to the
following changes to the contract between Ogilvy & Mather, as agent of IBM, and
Sandbox Entertainment for the sponsorship of the Trade Center in Final Bell.
o Under "Bannerviews are defined as the number of times that IBM's ad banner
has been fully downloaded", Sandbox does not count fully downloaded banner
impressions.
o Under "In reporting and for guarantee purposes please remove all
impressions from ogilvy.com." Sandbox will adjust total impressions
downward by 1/10th of 1% to cover this request.
o Counting for impression Guarantee: per your email, this is clarification of
impression counting. "Regarding the impressions, the header can count
towards the guaranteed impressions as long as there is nothing else fixed
on the page (banner) that is counting towards guaranteed impressions. In
other words if a user is on the page with the header and a banner, this
should not be considered 2 impressions it should only be 1 impression."
o Technology Requirements: Sandbox will display the various types of ad
technologies outlined in the agreement, however it will have an effect on
the tracking data made available to Ogilvy and IBM. Sandbox is currently
upgrading its ad delivery software to accommodate the various ad
technologies and reporting criteria. This software should be available in
the fourth quarter on 1997.
o Finally, Sandbox is contracting with ABVS, the auditing service, to
generated reports on overall web site information, and not individual ad
campaigns. A fourth quarter start date for the audit process is scheduled.
Reporting impressions and clicks by creative is handled internally by Sandbox.
Sincerely,
James A. Layne
Vice President Marketing
JL/bb
enclosures
3
Exhibit 10(ss)
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Turner INTERACTIVE ORDER FORM
CNNfn____
CNNSI____ Section Buy:____________
CNN/Time All Pol OR
WCW____ Rotation Buy:___________
Cartoon Network (AOL)____
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
SALESPERSON INFORMATION: TIMS SALESREP:____________
Salesperson/Team N. Johnson/S. Bender/S. Pollack Salesperson Number/Team Number____________
C. Curry/M. Stanton
Split Partner/Team__________________________ Split Person Number/Team Number____________
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
AGENCY/ORDER INFORMATION:
Advertiser: Saturn Agency/Adv. Making Purchase: Hal Riney + Partners
Inc.
Product/Campaign: Saturn Category: Full Contact Sponsor - Fantasy Football
Buying Contact: Angelique Vega Phone: (415) 955-8837
--------------------------------- --------------
Creative Contact: Hank Gastineau Phone: (415) 981-0950
------------------------------- --------------
Billing Contact: Angelique Vega Phone: (415) 955-8837
-------------------------------- --------------
Billing Address: 735 Battery Street, San Francisco, California 94111
Reports Sent To: Angelique Vega Email: vega-angelique @ hrp.com
Report Contacts Fax: (415) 955-8896 Phone: (415) 955-8837
---------------------------- --------------
Credit Approved Agency? Yes___No___ If Not, has paperwork been submitted? Yes___No___ If Yes, MSA
Agency No.__
*If it is not a credit approved billing address please send order information,
credit application and MSA# request to Credit in Atlanta.
Invoice: Gross ________ Net ________ Invoice: Agency________ or Advertiser Direct________
Invoiced By: Interactive _____ or Part of Broadcast Deal _____
- ------------------------------------------------------------------------------------------------------------
All Rotation orders must be pre-approved by TIMS Manager (signature) ________ CPM:_____
- ------------------------------------------------------------------------------------------------------------
Sections No. of Months Start Date End Date Total Dollars p/Mo. Total Guar. Guarantee/Mo.
Dollars
- ---------- --------------- ----------- ----------- ------------- -------------- ------------ ---------------
Fantasy 4 1/2 9/15 1/31 $180,000 $40,000 -- --
Football
- ---------- --------------- ----------- ----------- ------------- -------------- ------------ ---------------
- ---------- --------------- ----------- ----------- ------------- -------------- ------------ ---------------
- ---------- --------------- ----------- ----------- ------------- -------------- ------------ ---------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 10(tt)
<TABLE>
<CAPTION>
INSERTION ORDER s a n d b o x . n e t
--------------------------------------------------------------------------------
www.sandbox net info@sandbox net 602.468.6400 2231 East Camelback
602.468.6401 FAX Suite 324
Phoenix, AZ 85016
TRACER Design, Inc.
<S> <C>
Advertiser MetLife Today's date 9/29/1997
--------------------------------------------------- -------------
Billing address One Madison Avenue Booked by Connery
---------------------------------------------- ----------------
City/State/Zip New York, NY 10010-3690 Booking method
----------------------------------------------- ------------
Telephone 212.578.0265 Payment method
---------------------------------------------------- ------------
Fax 212.683.6570 Payment method
---------------------------------------------------------- ------------
Contact's e-mail address [email protected] P.O. #
------------------------------------- ------------
Contact name Doron Storfer
---------------------------
</TABLE>
For questions regarding advertising files, Sandbox should contact:
Name Doron Storfer
---------------------------------------------
Telephone 212.578.0265
-----------------------------------------
Agency in-house
--------------------------------------------
Agency contact
------------------------------------
- --------------------------------------------------------------------------------
Billing Information
- --------------------------------------------------------------------------------
Page Views Gross Rate Gross Agency Miscellaneous Net Due
per View Discount Discounts
500,000 $23,000 PER
MO.
- --------------------------------------------------------------------------------
Advertising start date 11/10/97 End date 5/4/98
---------------------- ----------------------
Ad to appear in: [ ] Run of Sandbox Site
[ ] Special pages (Please List) MetLife Mutual Fund Center
Is this ad a pick-up? [ ] No [ ] Yes, which ad?
---------------------------
Special Instructions:
Integrated sponsorship opportunity whose technological elements will be created
- --------------------------------------------------------------------------------
by Sandbox and be subject to MetLife approval. Raw content and links to be
- --------------------------------------------------------------------------------
supplied by MetLife.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Material due date to Sandbox (images due one week prior to insertion)
- -------------------------------------
Please forward all advertising materials to: Dolores White, Sandbox
Entertainment Corporation, 2231 East Camelback Road, Suite 324, Phoenix, AZ
85016 or e-mail to: [email protected]
<PAGE>
Sandbox
Insertion Order
Page 2
<TABLE>
<CAPTION>
Value Pack (Please check appropriate boxes and fill in required information).....................................................
<S> <C>
[X] Product Integration [ ] Interactive Ad (up to three pages)
[ ] Prize Integration (Explain in Special Instructions) [ ] Supplied by advertiser
[X] Home Page Integration to link to: [ ] Sandbox to develop
URL MetLife.com
-------------------------------------------- [ ] CyberCoupons
Please attach information needed on the Coupon
[X] Banners (.gif 468 by 60 Pixels, 72 dpi, size greater than 10Kb)
[ ] Single [ ] Reader Response Card (from interactive Ad)
[X] Multiple Please attach questions that are needed on the
[ ] Banner provided in .gif format Response Card.
[ ] Sandbox to develop (advertiser to provide raw Send replies to:
materials and information) [ ] e-mail
----------------------------------------
[ ] Buttons (.gif 55 by 55 Pixels, 72 dpi, size greater than 10Kb) [ ] fax
[ ] Single -------------------------------------------
[ ] Multiple [ ] mail
[ ] Button provided in .gif format ------------------------------------------
[ ] Sandbox to develop (advertiser to provide raw
materials and information) Are there any incentives for filling out the form.
[ ] No
[ ] Banner Alt Text [ ] Yes (What is it?)
----------------------------------- -----------------------------
- ------------------------------------------------------
[ ] Usage Reports Required
[ ] Button Alt Text [ ] Number of requests per specific page/ad
----------------------------------- [ ] Number of ad banner views
- ------------------------------------------------------ [ ] Number of connections to advertiser's
home page
[ ] Banner Connection
[ ] Go to interactive ad then home page [ ] Forums
[ ] Go to home page directly Provide information on what type of forum.
[ ] Go to URL
------------------------------------- --------------------------------------------------
--------------------------------------------------
[ ] Button Connection
[ ] Go to interactive ad then home page
[ ] Go to home page directly
[ ] Go to URL
-------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
This insertion order is hereby agreed to by the advertiser. Signature indicates
advertiser has read and understands the conditions and requirements on the
current rate card. No rate protection implied.
Approved By: /s/ Doron Storfer (Print Name): Doron Storfer Date: 9/29/97
----------------------- ----------------- ----------
Sandbox Confirmation:
-----------------------------------------------------------
- --------------------------------------------------------------------------------
Terms of payment - Net 10 days upon receipt of signed insertion order. Purchase
orders must accompany the insertion order. Reservations will not be held without
a signed insertion order. Sandbox shall have the right to hold the advertiser
and/or its agent jointly and severely liable for such monies Sandbox is due.
Make checks payable to TRACER:
Sandbox reserves the right to refuse any advertiser request, or to cancel
advertisers that do not fulfill advertising terms and conditions set forth in
the Sandbox media kit. Sandbox does not accept advertising from organizations
selling products or services related to tobacco, firearms or pornography.
Sandbox makes no guarantee that statistics will be equal to any published
numbers at any given time. Sandbox shall not be held liable for any claims as
they relate to said usage statistics. Sandbox provides advertiser with usage
statistics only as a courtesy to the sponsor.
EXHIBIT 10(uu)
November 6, 1997
Christy Bulkeley
Product Manager
Quicken Financial Network
2535 Garcia Avenue
Mountain View, CA 94043
Dear Christy,
Per our oral agreement, this letter serves as the contract between Sandbox
Entertainment and Quicken.com and Excite for the building of a promotional
contest on the Sandbox Entertainment Network designed to promote the Business
and Investing channel.
1. Sandbox will create two customized, twenty-eight day contests designed to
drive users from the contest residing on the Sandbox Entertainment Network
to both Quicken.com and Quicken.Excite.com to retrieve contest answers
found within the joint site; Excite/Quicken Business and Investing Channel
and the Quicken.com site.
2. Sandbox will develop content based on marketing direction from Quicken.com
and Excite. The focus of this contest is based on integrating the most
relevant Excite/Quicken Business and Investing Channel content. Final
content will be subject to Quicken.com and Excite approval.
3. Sandbox is responsible for the development of all creative for the game
pages. All creative is subject to Quicken.com and Excite approval.
4. Users originating from the Quicken.com and Excite sites will be forwarded
back to the respective sites they came from to search for contest answers
in order to maintain Excite and Quicken.com brand consistency.
5. Sandbox Entertainment will promote the event from a permanent graphic ad,
which will reside on the home pages of the Sandbox Entertainment Network.
Users originating from the Sandbox site will be forwarded to the
Quicken.com and Excite versions of the game on a rotating basis. Sandbox
will send an e-mail promoting the contest to their respected registered
base.
6. The contest environment will be branded with the appropriate marks of
Excite and Quicken.com approved by both parties.
7. All pages content, look and feel will be subject to the approval of
Quicken.com and Excite.
8. All Prizes will be provided by Quicken.com/Excite. This responsibility also
includes fulfillment and execution.
9. Users will be required to register in order to play. The data base and
registration process will utilize Sandbox's existing infrastructure. They
will be given the option to receive notices of future Quicken.com/Excite
games and activities. The complete registration data for these users will
be compiled to report form and provided to Quicken.com and Excite.
<PAGE>
10. While the contest is designed to drive traffic throughout the Quicken.com
and Excite sites, user activity within the contest on the sandbox site will
be reported to Quicken.com and Excite. This includes all page
views/impressions and click through data.
11. Users must adhere to rules that will be subject to the approval of Excite
and Quicken.com.
12. In accordance with Quicken.com and Excite's request to run the contest as a
sweepstakes and acceptance of the necessary experience to do so,
Quicken.com and Excite acknowledge and agree that Quicken.com and Excite
will be responsible for verifying that the "Fiscal Fitness Challenge"
complies with all applicable federal, state and local lottery, sweepstakes
and related laws and that Quicken.com and Excite agree to indemnify and
hold harmless Sandbox Entertainment Corporation, its predecessors,
successors and assigns and each past or present subsidiary, officer,
director, employee or agent (each an "Indemnified Party"), from and against
any and all claims, demands, liabilities, penalties, interest, charges,
losses, and costs (including, without limitation, reasonable attorneys'
fees) that an Indemnified Party incurs arising from or related to the ___
compliance with such laws.
13. The cost for the development, maintenance and execution of the two
customized twenty-eight day contests is $60,000. The contest will be paid
in equal amounts of $30,000 by Excite and Quicken.com. Sandbox will bill
each entity accordingly.
Christy Bulkeley Matt Stanton
/s/ Christy Bulkeley /s/ Matt Stanton
- --------------------------------- -----------------------------------
Date 11/12/97 Date 11/14/97
----------------------------- -------------------------------
2
Ehibit 10(vv)
Strategic Interactive Group
A Bronner Slosberg Humphrey Company
- --------------------------------------------------------------------------------
INSERTION ORDER AUTHORIZATION
-----------------------------
Client: Kodak Sales: Robert Connery
----------------------------- ----------------------
Program: Wave 2-DC210 Digital Camera Phone: 212-398-4440
----------------------------- ----------------------
Size: Final Bell and SportSim Fax: 212-398-4441
----------------------------- ----------------------
Tech E-mail: [email protected]
----------------------
Guaranteed
----------
Site Impressions Cost (Barter)
---- ----------- -------------
Final Bell 2,250,000 $ 75,200
SportSim 750,000 $ 18,800
Sharks Sponsorship TBD $ 56,000
------------------------------------------------
TOTAL COST: $ 150,000
------------------------------------------------
- --------------------------------------------------------------------------------
This sponsorship will be paid solely through barter
credits earned by Kodak through GMR. Please contact
Bill Bender or Sharon Elbas at GMR at 212-297-9600 to negotiate barter
agreement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
November 26 - January 26
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Reports should be received each week and should
include total impressions and click throughs for
each banner posted on your sites. Please send all
reporting data to: susan.develin@[illegible].com
(cc: [illegible]@sig.[illegible].com)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Sandbox has agreed to closely monitor this campaign to ensure a click rate
between 1-2%. Sandbox will bonus impressions to Kodak if click rate drops below
1%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please call [illegible] at 614-867-1549 (technical) or Sue Develin at
617-867-1985 with questions regarding this order.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Authorized Site Signature/Date Authorized SIG Signature/Date
- ------------------------------ -----------------------------
Susan Develin 11/24/97
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Exhibit 11
SANDBOX ENTERTAINMENT CORPORATION
STATEMENT OF COMPUTATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31 September 30
-------------------------- --------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net loss ........................................ ($ 507,090) ($1,477,059) ($1,143,254) ($1,621,365)
=========== =========== =========== ===========
Weighted average common shares outstanding: ..... 425,170 487,511 480,058 520,746
Common stock equivalents pursuant to SAB 83;
Stock, options, warrants, and other
potentially dilutive instruments issued within
one year of initial filing ................... 307,059 307,059 307,059 307,059
Less: SAB 83 common stock equivalents included in
weighted average shares outstanding -- -- -- (427)
----------- ----------- ----------- -----------
Weighted average common shares outstanding during
the period ................................... 732,229 794,570 787,117 827,378
=========== =========== =========== ===========
Net loss per share .............................. ($ 0.69) ($ 1.86) ($ 1.45) ($ 1.96)
=========== =========== =========== ===========
</TABLE>
Page 1
Exhibit 23(a)
Consent of Independent Auditors
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm in "Selected Financial Data"
and "Experts" and to the use of our report dated March 14, 1997, except for
Notes 11 and 13 as to which the date is December __, 1997, in Amendment No. 2 to
the Registration Statement (Form SB-2 No. 333-69787) and related Prospectus of
Sandbox Entertainment Corporation for the registration of 690,000 shares of its
Series B Convertible Preferred Stock.
Ernst & Young LLP
Phoenix, Arizona
December __, 1997
- --------------------------------------------------------------------------------
The foregoing Consent is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 13 to the Financial
Statements.
/s/ Ernst & Young LLP
Phoenix, Arizona
December 12, 1997
