As filed with the Securities and Exchange Commission on February 6, 1998
Registration No. 333-36787
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3
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>
Delaware 7372 86-0699474
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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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 Price (1) Fee
---------------------------- ---------- ------------------ ------------
<S> <C> <C> <C>
Series B Convertible Preferred Stock,
$.001 par value........................... 650,000 Shares $4,959,500 $1,844.37
Common Stock, $.001 par value (2) 650,000 Shares
</TABLE>
(1) Estimated in accordance with Rule 457(i) solely for the purpose of
calculating the registration fee.
(2) 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 FEBRUARY 6, 1998
650,000 Shares
[SANDBOX ENTERTAINMENT LOGO]
Series B Convertible Preferred Stock
(par value $.001 per share)
(subject to substantial restrictions on transfer)
All of the 650,000 shares of Series B Convertible Preferred Stock ("Series B
Preferred Stock") offered hereby are being sold by Sandbox Entertainment
Corporation ("Sandbox" or the "Company"). 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 the Series B Preferred Stock, for the
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 14.
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
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.
---------------
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 effective date 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 $400,000, 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 , 1998.
WIT CAPITAL CORPORATION BLUESTONE CAPITAL PARTNERS, L.P.
---------------
The date of this Prospectus is , 1998
<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. Pennsylvania investors will be required to meet standard
number (1).
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.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary..................................6 Business...........................................44
Recent Developments.................................9 Management.........................................60
The Offering.......................................10 Certain Transactions...............................65
Risk Factors.......................................14 Principal Stockholders.............................69
Venture Capital Investing..........................30 Description of Capital Stock.......................72
Use of Proceeds....................................32 Shares Eligible for Future Sale....................76
Dividend Policy....................................33 Underwriting.......................................77
Capitalization.....................................33 Legal Matters......................................80
Dilution...........................................35 Experts............................................80
Selected Financial Data............................36 Available Information..............................80
Management's Discussion and Analysis of Financial Index to Financial Statements.....................F-1
Condition and Results of Operations................37 Appendix A - Road Show Script.....................A-1
</TABLE>
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 in part 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 13 months. If proposed equipment lease
financing is not available on terms acceptable to the Company, the Company
believes such net proceeds will meet such anticipated cash needs for
approximately 10 months. The Company is currently negotiating the extension of
its $500,000 revolving bank line of credit due March 5, 1998 contingent on the
completion of this offering. If such extension is not available on terms
acceptable to the Company, the net proceeds from this offering together with
available funds will be sufficient to meet its anticipated cash needs for only
11 months if proposed lease financing is available, and 8 months if such lease
financing is unavailable.
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
February 1, 1998. 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
January 9, 1998, there were 21,412 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. As of the conclusion of the football season in January 1998, 108,727
teams had participated, 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 through 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 48,380 teams were participating
as of February 1, 1998, however, it has not yet produced any revenues. In
response to the popularity of Mid-Season Football, the Company launched
Second-Season Basketball on January 19, 1998, and 35,144 teams were
participating as of February 1, 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.
7
<PAGE>
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 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, the last full month
in which both football and basketball were running, 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 373,833 at February 1, 1998.
At February 1, 1998, Sandbox had 24 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, 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
December 31, 1997 the Company had total assets and stockholders' deficit on an
unaudited basis of approximately $2.1 million and $2.4 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.
8
<PAGE>
RECENT DEVELOPMENTS
$583,000 of written commitments from IBM, Saturn, Metropolitan Life
Insurance Company ("MetLife"), Quicken Financial Network and Sprint
Communication Company LP ("Sprint") 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, $539,000 (or average monthly
cash revenues of $77,000) relates to the period from October 1, 1997 through May
4, 1998, of which $479,000 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, an agreement with Quicken Financial Network providing for
$60,000 to sponsor a promotional contest in Final Bell and an agreement with
Sprint to sponsor the football playoffs in January 1998. 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 $50,000 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.
During the six-month period ending December 31, 1997, the Company invoiced
approximately $5,100, $35,850, $35,000, and $13,500 to Netscape, iVillage,
MetLife and American Express, respectively, for banner advertising.
All of these banner placements are subject to a revenue split with CNN.
The Company is currently negotiating a modification to the CNN/SI Agreement
to provide that (i) the Company will add an additional simulation for college
basketball, and, if a mutually agreeable advertising arrangement is in place,
additional simulations for golf and hockey and (ii) the Company may license
certain portions of the sports simulations to non-competitors of CNN/SI. 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
<TABLE>
<S> <C>
Issue.............................................. 650,000 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
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).
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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 annual gross 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. Pennsylvania investors will be
required to meet standard number (1).
Lock-In Agreements................................. Prior to the effective date of the registration
statement, Messrs. Little, Layne, Whittington and
Gomez will have entered into a four year lock-in
agreement, as required by certain state
securities laws, pursuant to which the
shareholders would be restricted from transfer or
sale of their shares, with certain limited
exceptions. The form of the state lock-in
agreement was filed as an exhibit to the
Registration Statement.
Capital Stock to be outstanding after the offering. 526,397 shares of Common Stock (1)
330,211 shares of Series A Preferred Stock (2)
650,000 shares of Series B Preferred Stock (3)
2,247,936 shares of Common Stock on a fully
diluted basis (4)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Use of Proceeds.................................... Purpose Amount(5) Percentage of Net
------- --------- -----------------
Proceeds
--------
<S> <C> <C> <C>
Staffing Costs $1,032,913 25%
Product and Services
Marketing and
Development 1,027,193(6) 25%
Reduction of Debt 1,571,117(7) 38%
Working Capital 531,517(6) 12%
------------------ -----------
$4,162,740 100%
See "Use of Proceeds".
</TABLE>
(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 112,504 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 52,000 shares issuable upon exercise of warrants granted
to the Underwriters effective upon the commencement of this offering at 110% of
the public offering price. See "Capitalization".
(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, $172,528, and $150,000
obtained in November and December 1997 and January 1998. See "Certain
Transactions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Liquidity and Capital Resources".
12
<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 $ 3,262,299
Working capital (deficit)................. (1,315,082) 2,829,497
Total assets.............................. 1,457,440 4,285,830
Notes payable............................. 500,000 --
Long term debt, including current portion. 2,077,131 1,373,126
Total stockholders' equity (deficit)...... (1,599,258) 2,563,482
(1) Non-Internet revenues were 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 650,000 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 thereof. See "Use of
Proceeds" and "Capitalization".
13
<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 address 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
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.
Net Capital Deficiency; Auditor's Doubt Regarding Continuation as a Going
Concern
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 13 months. The Company is
currently negotiating the extension of its $500,000 revolving bank line of
credit due March 5, 1998 contingent on the completion of this offering. If such
extension is not available on terms acceptable to the Company, the net proceeds
from this offering together with available funds will be sufficient to meet its
anticipated cash needs for only 11 months if proposed lease financing is
available, and 8 months if such lease financing is unavailable. 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
14
<PAGE>
Preferred Stock. There can be no assurance that 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. The Company is also in
arrears for past due payments and other charges under (i) an agreement with its
telecommunications service provider in the amount of $30,000, (ii) an agreement
with its Internet service provider in the amount of $15,000, (iii) its $500,000
revolving bank line of credit due March 5, 1998, (iv) its principal equipment
lease in the amount of $23,000, (v) various other equipment leases in the amount
of $15,000, and (vi) its building lease in the amount of $29,000. The Company
intends to use part of the net proceeds of this offering to pay such arrearages.
In addition, $109,058 in principal plus accrued interest under a promissory note
issued to an individual investor and $40,000 in pricipal plus accrued interest
under promissory notes issued to a group of investors is past due. The Company
intends to use part of the proceeds of this offering to pay off such notes. See
"Use of Proceeds."
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
15
<PAGE>
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.
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
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 CNNfn Final Bell in September 1997 and less than 300 copies
were sold through December 1997. The Company is not currently marketing the
CNNfn Final Bell CD-ROM. 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.
Potential Fluctuations in Quarterly Operating Results
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
16
<PAGE>
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. 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".
Seasonality
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.
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. 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".
17
<PAGE>
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
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
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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 were sold through
December 1997. The Company is not currently marketing the CNNfn Final Bell
CDROM. As of the conclusion of the football season in January 1998, 108,727
teams had participated in the fantasy football game in SportSim, and at January
9, 1998 there were 21,412 active portfolios in game number 7 of CNNfn Final
Bell. Fantasy Basketball, the second SportSim game, was launched on October 21,
1997, and 83,524 teams were participating as of February 1, 1998. 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".
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.
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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 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 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 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,
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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 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 intended 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
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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 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".
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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 57 full time employees: 23 in production, 18 in engineering; 13 in
sales and marketing and 3 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.
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 57 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
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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.
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 sites 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.
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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, 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.
25
<PAGE>
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 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".
26
<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".
Management's Discretion as to Use of Net Proceeds; Allocation of Proceeds to
Debt Reduction
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 $233,589 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 50% 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".
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 7,881,424
unissued and unreserved shares of Common Stock, 34,364 unissued and unreserved
shares of Series A Preferred Stock, 350,000 unissued and unreserved shares of
Series B Preferred Stock, and
27
<PAGE>
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. Any
such issuance of Preferred Stock will be approved by a majority of the
independent directors who do not have an interest in the transaction and who
have had access, at the Company's expense, to Company or independent legal
counsel. 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. Pursuant to
the terms of a Voting Agreement dated January 14, 1998, among the principal
stockholders of the Company, immediately and automatically upon the closing of
this offering (i) two of the management directors will resign and one individual
investor and one individual representing Wit Capital Corporation shall be
appointed to fill the vacancies and (ii) the Board of Directors will work
diligently and in good faith to replace the newly appointed directors with two
independent directors.
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".
Limited Experience of the Underwriters
To date, Wit Capital Corporation has been a syndicate member in four public
equity offerings. These offerings occurred from October 1997 through February
1998, and did not involve preferred stock. Wit Capital Corporation has
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<PAGE>
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. See "Underwriting".
Dilution
Investors participating in this offering will incur an immediate and
substantial dilution of $5.93 (78%) to 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".
29
<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. 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".
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<PAGE>
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 650,000 shares of
Series B Preferred Stock offered by the Company hereby are estimated to be
approximately $4,162,740, 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:
<TABLE>
<CAPTION>
Percentage of
Purpose Amount Net Proceeds
------- ------ ------------
<S> <C> <C>
Staffing Costs (1) $1,032,913 25%
Product and Services Marketing and Development (2)(4) 1,027,193 25%
Reduction of Debt (3) 1,571,117 38%
Working Capital(4) 531,517 12%
-------- ----
$4,162,740 100%
</TABLE>
(1) Through December 1998, the Company estimates it will hire 31 additional
employees, 12 in production, 11 in engineering, 6 in sales and marketing and 2
in general and administrative.
(2) Includes estimated allocation of $334,000 for prizes and $693,000 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 December 31, 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; (vii) $172,528 due to Andrew Todd
pursuant to a Subordinated Promissory Note issued December 12, 1997; and (viii)
$150,000 plus accrued interest due to various investors pursuant to bridge loans
payable within 15 days after demand after the closing date of this offering
bearing interest at 12% from January 14, 1998 to January 20, 1998, 18% from
January 20, 1998 to February 10, 1998, and 25% thereafter. This figure does not
include repayment of $540,000 aggregate principal amount of convertible one year
term promissory notes issued in May and July 1997, which are convertible, at the
option of the holder, into shares of Series A Preferred Stock at a conversion
price of $4.80 per share and bear interest at 10%. There are no assurances that
the convertible note holders will elect to convert such notes, in which case
such notes will need to be repaid when due in May and July 1998. $149,058 in
principal plus accrued interest is past due under the foregoing notes issued to
Glenn Gomez and Pickwick Group, LLP et al.
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<PAGE>
(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, 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". The Company is also in arrears for past due payments and other
charges under (i) an agreement with its telecommunications service provider in
the amount of $30,000, (ii) an agreement with its Internet service provider in
the amount of $15,000, (iii) its $500,000 revolving bank line of credit due
March 5, 1998, (iv) its principal equipment lease in the amount of $23,000, (v)
various other equipment leases in the amount of $15,000, and (vi) its building
lease in the amount of $29,000. The Company intends to use part of the net
proceeds of this offering to pay such arrearages. 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
and (b) on an as-adjusted basis to reflect the sale of the 650,000 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.
33
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------
Actual As Adjusted
-------- -------------
<S> <C> <C>
Notes payable:............................................. $ 500,000 $ -
========= =========
Long-Term Debt, including current portion:................. 2,077,131 1,373,126
Stockholders' Equity (Deficit):
Common Stock, 10,000,000 authorized, 526,397 issued and
outstanding actual and as adjusted (1) 526 526
Series A Preferred Stock, 600,000 authorized, 330,211
shares issued and outstanding actual and as adjusted (2)... 1,585,000 1,585,000
Series B Preferred Stock, 1,000,000 authorized, no shares
issued and outstanding actual, 650,000 shares issued and
outstanding as adjusted (3)................................ - 4,162,740
Paid-in capital.......................................... 381,108 381,108
Accumulated deficit...................................... (3,565,892) (3,565,892)
--------- ---------
Total stockholders' equity............................ (1,599,258) 2,563,482
--------- ---------
Total capitalization.................................. $ 477,873 $3,936,608
=============================
</TABLE>
(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 issuable
upon conversion of Series A Preferred Stock and Series B Preferred Stock.
(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 112,504 shares issuable upon conversion of certain promissory
notes.
(3) Based on no shares of Series B Preferred Stock outstanding prior to this
offering and excludes 52,000 shares issuable upon exercise of warrants granted
to the Underwriters effective upon commencement of this offering at 110% of the
public offering price.
34
<PAGE>
DILUTION
The 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 after giving effect to (i) the Reverse Stock Split, and
(ii) the conversion of each share of Series A Preferred Stock outstanding as of
September 30, 1997 into one share of Common Stock. The net tangible book value
(deficit) of the Company as of September 30, 1997, was approximately
$(1,599,258) or $(1.87) per share. 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 after giving effect to (i)
the sale of 650,000 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 650,000 shares of
Series B Preferred Stock into one share of Common Stock. On this basis, the
Company's net tangible book value as adjusted at September 30, 1997 would have
been $2,563,482 or $1.70 per share. This represents an immediate dilution of
$5.93 per share (78%) to new investors purchasing shares of Series B Preferred
Stock in this offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share ............................................ $7.63
Net tangible book value (deficit) per share at September 30, 1997....... $(1.87)
Increase per share attributable to new investors........................ 3.57
Net tangible book value per share as adjusted................................ 1.70
------
Net tangible book value dilution per share to new investors.................. $5.93
</TABLE>
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 650,000
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 (iv) the conversion of each of the 650,000 shares of Series B
Preferred Stock into one share of Common Stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
---------------------------------------------------------------- Price
Number Percent Amount Percent Per Share
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders...... 856,608 57% 1,891,278 28% $2.21
New Investors.............. 650,000 43% 4,959,500 72% 7.63
------- --- ---------- ----
100% $6,850,778 100%
==== ========== ====
</TABLE>
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 $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.
35
<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).
36
<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 through December 1997. The
Company is not currently marketing the CNNfn Final Bell CD-ROM. 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 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.
37
<PAGE>
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 revenues, 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".
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 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.
38
<PAGE>
$583,000 of written commitments from IBM, Saturn, MetLife, Quicken Financial
Network and Sprint 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, $535,000 (or average monthly cash revenues of
$77,000) relates to the period from October 1, 1997 through May 4, 1998, of
which $479,000 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, an agreement with Quicken Financial Network providing for
$60,000 to sponsor a promotional contest in Final Bell and an agreement with
Sprint to sponsor the football playoffs in January 1998. 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 $50,000 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.
During the six-month period ending December 31, 1997, the Company invoiced
approximately $5,100, $35,850, $35,000, and $13,500 to Netscape, 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
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 13 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".
39
<PAGE>
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 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 41
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".
40
<PAGE>
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
December 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 and additional operating expenses by the
first quarter of 1998. 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.
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 $1.6 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, $540,000 of which may be
converted 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. On January
14, 1998 the Company obtained a bridge loan from various investors payable
within 15 days after demand after the closing date of this offering bearing
interest at 12% from January 14, 1998 to January 20, 1998, 18% from January 20,
1998 to February 10, 1998, and 25% thereafter. 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
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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
$2,591,623 after commissions, expenses and debt repayment, together with
available funds, including the Company's revolving bank line of credit and
equipment 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 13 months. If proposed equipment lease financing is
not available on terms acceptable to the Company, the Company believes such net
proceeds will meet anticipated cash needs for approximately 10 months. The
Company is currently negotiating the extension of its $500,000 revolving bank
line of credit due March 5, 1998 contingent on the completion of this offering.
If such extension is not available on terms acceptable to the Company, the net
proceeds from this offering together with available funds will be sufficient to
meet its anticipated cash needs for only 11 months if proposed lease financing
is available, and 8 months if such lease financing is unavailable.
The Company is also in arrears for past due payments and other charges under
(i) an agreement with its telecommunications service provider in the amount of
$30,000, (ii) an agreement with its Internet service provider in the amount of
$15,000, (iii) its $500,000 revolving bank line of credit due March 5, 1998,
(iv) its principal equipment lease in the amount of $23,000, (v) various other
equipment leases in the amount of $15,000, and (vi) its building lease in the
amount of $29,000. The Company intends to use part of the net proceeds of this
offering to pay such arreareges. In addition, $109,058 in principal plus accrued
interest under a promissory note issued to an individual investor and $40,000 in
principal plus accrued interest under promissory notes issued to a group of
investors is past due. The Company intends to use part of the proceeds of this
offering to pay off such notes. See "Use of Proceeds."
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 - Net Capital Deficiency; Auditor's
Doubt Regarding Continuation as a 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
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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
February 1, 1998. 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.
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
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among the most active investment sites on the Web by Lycos, Inc., an Internet
navigation service that also furnishes Web site reviews, and at January 9, 1998,
there were 21,412 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
allow for more sophisticated gaming. Fantasy Football, the initial SportSim
game, which was sponsored by Saturn, was launched on July 15, 1997. As of the
conclusion of the football season in January 1998, 108,727 teams had
participated, 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 through 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 48,380 teams were participating
as of February 1, 1998, however, it has not yet produced cash revenues. In
response to the popularity of Mid-Season Football, the Company launched
Second-Season Basketball on January 19, 1998, and 35,144 teams were
participating as of February 1, 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.
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.
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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 as of the conclusion of the football season in
January 1998, 108,736 teams had participated. Fantasy Basketball, the second
SportSim game, was launched on October 21, 1997, and 83,524 teams were
participating as of February 1, 1998. 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).
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.
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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 includes 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 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.
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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 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 through December
1997. The Company is not currently marketing the CNNfn Final Bell CD-ROM and is
still evaluating the value of this product and may elect to market CD-ROM
products through third parties.
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 forecast 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
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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 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.
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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 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 million in November 1997, the last full month in
which
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both football and basketball were running. 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.
"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
- ---------
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
- --------
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
- ------
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 Investors Edge 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 sites, 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.
* The Company conducts informal surveys with potential and existing
advertisers and advertising agencies to identify targeted
audiences that these advertisers wish to reach.
* 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.
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* 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 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.
* 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.
* 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.
* 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.
$583,000 of written commitments from IBM, Saturn, MetLife, Quicken Financial
Network and Sprint 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, $539,000 (or average monthly cash revenues of
$77,000) relates to the period from October 1, 1997 through May 4, 1998, of
which $479,000 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, an agreement with Quicken Financial Network providing for
$60,000 to sponsor a
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promotional contest in Final Bell and an agreement with Sprint to sponsor the
football playoffs in January 1998. 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 $50,000 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.
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 six-month period
ending December 31, 1997, the Company invoiced $5,100, $35,850, $35,000 and
$13,500 for banner advertising to Netscape, 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 an advertising 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
advertising 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.
Sales
In addition to its Vice President of Sales, the Company employs a sales
representative in New York, and intends to hire 13 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
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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 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
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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 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.
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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.
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,
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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.
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 24 full time employees, 16
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,
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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 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 that 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.
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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 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 intended 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.
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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.
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
Pursuant to the terms of a Voting Agreement dated January 14, 1998 among the
principal stockholders of the Company, immediately and automatically upon the
closing of this offering (i) Messrs. Layne and Whittington will resign as
directors and one individual investor and one individual representing Wit
Capital Corporation shall be appointed to fill the vacancies and (ii) the Board
of Directors will work diligently and in good faith to replace the newly
appointed directors with two independent directors.
The Audit Committee of the 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 December 31, 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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- Awards(1)
------
Name and Principal Year Salary ($) Bonus ($) Securities All Other
Position (a) (b) (c) (d) Underlying Compensation ($)
Options/SARS (i)
(#)(2)
(g)
<S> <C> <C> <C> <C> <C>
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
1,250 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.
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.
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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 fail 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 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 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
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<PAGE>
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 into 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, the lenders 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 lenders 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.
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
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<PAGE>
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 seven 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. Leading up to the consummation of
the Stock Purchase Agreement, the Company paid Frank X. Helstab, as a
consultant, $21,000 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. Subsequent to this financing, the
Company engaged Newtek as a consultant pursuant to an agreement which granted
Newtek an option to purchase 21,923 shares of Common Stock at an exercise price
of $.60 per share, which to date has vested and been exercised with respect to
16,443 shares.
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 a 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 the lenders seven year warrants to
purchase the following numbers of shares of Series A Preferred Stock at an
exercise price of $4.80 per share, provided, however, that the exercise price is
$2.00 per share during the 30 day period beginning on the closing date of this
offering: Wasatch - 20,834 shares; Newtek - 10,417 shares; Sundance - 20,834
shares; and Sorensen - 4,167 shares. These warrants are exercisable at any time
during the term of the warrants. There are no assurances that the convertible
note holders will elect to convert such notes, in which case such notes will
need to be repaid when due in May 1998.
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 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 the lenders seven year warrants to
purchase the following numbers of shares of Series A Preferred Stock at an
exercise price of $4.80 per share, provided, however, that the exercise price is
$2.00 per share during the 30 day period beginning on the closing date of this
offering: 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. There are no assurances that the convertible
note holders will elect to convert such notes, in which case such notes will
need to be repaid when due in July 1998.
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
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<PAGE>
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 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, as of December 15, 1997,
$178,434 and $207,662 in equipment lease financing has been personally
guaranteed by Messrs. Whittington and Layne and Mr. Little, respectively.
On January 14, 1998, the following holders of Series A Preferred Stock
loaned the Company an aggregate of $150,000 in the following amounts: Wasatch -
$57,692; Newtek - $34,616; and Sundance - $57,692. Such loans were made pursuant
to subordinated promissory notes bearing interest at 12% through January 20,
1998, 18% from January 20, 1998 to February 10, 1998, and 25% thereafter,
payable 15 days after demand, provided that no such demand can be made prior to
the closing of this offering. In connection with these loans, the Company also
issued to the lenders seven year warrants to purchase that number of shares of
Common Stock determined by dividing the amount loaned by 85% of the price per
share of the Series B Preferred Stock in this offering at an exercise price of
$2.45 per share.
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.
Pursuant to the terms of a Voting Agreement dated January 14, 1998 among the
principal stockholders of the Company, immediately and automatically upon the
closing of this offering (i) Messrs. Layne and Whittington will resign as
directors and one individual investor and one individual representing Wit
Capital Corporation shall be appointed to fill the vacancies and (ii) the Board
of Directors will work diligently and in good faith to replace the newly
appointed directors with two independent directors.
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. Any issuance of authorized but unissued Preferred Stock without
stockholder approval will be approved by a majority of the independent directors
who do not have an interest in the transaction and who have had access, at the
Company's expense, to Company 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
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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 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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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)
---------------------- ----------------------
Before the After the Before the After the
---------- --------- ---------- ---------
Title of Class Name and Address of Beneficial Owner Offering Offering Offering Offering
- -------------- ------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Series A Wasatch Venture Corporation (2)
Preferred One South Main, Suite 1340
Stock Salt Lake City, UT 84111 229,170 229,170 55.4% 55.4%
Newtek Ventures II, L.P. (3)
500 Washington Street,
Suite 720
San Francisco, CA 94111 118,751 118,751 31.6% 31.6%
Sundance Venture Partners, L.P.(4)
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004 177,086 177,086 42.8% 42.8%
Wayne Sorensen (5)
1925 E. Michigan Avenue
Salt Lake City, UT 85108 22,919 22,919 6.7% 6.7%
All executive officers and
directors as a group(6) 525,007 525,007 96.7% 96.7%
</TABLE>
<TABLE>
<CAPTION>
Number of Shares Percentage of Class
---------------- -------------------
Beneficially Owned (1) Beneficially Owned (1) Fully Diluted
---------------------- ---------------------- -------------
Common Stock
------------
Before After the Before the After the Ownership After
------ --------- ---------- --------- ---------------
Title of Class Name and Address of Beneficial Owner Offering Offering Offering Offering the Offering (7)
- -------------- ------------------------------------ -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Common Stock Chad M. Little (8)
2231 E. Camelback, Suite 324
Phoenix, AZ 85016 264,585 264,585 42.7% 20.8% 8.4%
James A Layne (9)
2231 E. Camelback, Suite 324
Phoenix, AZ 85016 122,917 122,917 23.4% 10.4% 6.0%
Lonnie A. Whittington (10)
2231 E. Camelback, Suite 324
Phoenix, AZ 85016 122,917 122,917 23.4% 10.4% 6.0%
Wasatch Venture Corporation (11)
One South Main, Suite 1340
Salt Lake City, UT 84111 238,072 238,072 31.1% 17.3% 10.4%
Newtek Ventures II, L.P. (12)
500 Washington Street, Suite 720
San Francisco, CA 94111 146,016 146,016 22.3% 11.4% 6.5%
Sundance Venture Partners, L.P.(13)
c/o Anderson & Wells
400 East Van Buren, Suite 750
Phoenix, AZ 85004 185,988 185,988 26.1% 14.1% 7.8%
Pickwick Group LLC (14)
172 Dan's Highway
New Canaan, Conn. 06840 58,003 58,003 9.9% 4.7% 2.8%
Glenn Gomez (15)
1950 Stemmons Freeway, Suite 3054
Dallas, TX 75207 46,599 46,599 8.7% 3.9% 2.3%
All executive officers and directors
as a group (16) 1,037,492 1,037,492 74.3% 50.7% 50.4%
</TABLE>
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<PAGE>
(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 41,668 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 22,917 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.
(4) Includes 41,668 shares of Series A Preferred Stock issuable upon conversion
of warrants and 41,668 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 6,251 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) 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 and (ii) shares of
Series B Preferred Stock issued in the offering. The Commission's beneficial
ownership rules were not considered in calculating fully diluted percentages.
(8) 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).
(9) 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
8.
(10) 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
8.
(11) Includes 229,170 shares of Series A 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 Footnote 2.
(12) Includes 146,016 shares of Common Stock and Series A 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
Footnote 3.
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(13) Includes 177,086 shares of Series A 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 Footnote 4.
(14) 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.
(15) 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.
(16) Includes the shares described above in Footnote 8 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 9 for Mr.
Layne; the shares described above in Footnote 10 for Mr. Whittington; the shares
described above in Footnote 11 for Wasatch Venture Corporation for which Todd
Stevens, a director, is an affiliate; the shares described above in Footnote 12
for Newtek Ventures II, L.P. for which John Hall, a director, is an affiliate;
the shares described above in Footnote 13 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 currently has 565,636 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
112,504 shares of Series A Preferred Stock reserved for issuance upon conversion
at the option of the holder of certain promissory notes.
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.
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
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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 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.
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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 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
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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 B 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.
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, 23,146
shares of Common Stock will be issuable upon exercise of outstanding warrants at
an exercise price of $2.45 per share, 112,504 shares of Series A Preferred Stock
will be issuable upon exercise of outstanding warrants at an exercise price of
$4.80 per share; provided, however, that the exercise price shall be $2.00 per
share during the 30 day period beginning on the closing date of this offering,
112,504 shares of Series A Preferred Stock will be issuable upon conversion of
certain convertible promissory notes, and 52,000 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
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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, except as permitted
by State Securities administrators and the Underwriters, the Company will not
grant options and warrants to purchase shares of Common Stock during the one
year period following the effective date 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 7,881,424
unissued and unreserved shares of Common Stock, 34,364 unissued and unreserved
shares of Series A Preferred Stock, 350,000 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 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. Any
such issuance of Preferred Stock will be approved by a majority of the
independent directors who do not have an interest in the transaction and who
have had access, at the Company's expense, to Company or independent legal
counsel.
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
650,000 shares of Series B Preferred Stock that are convertible into Common
Stock. 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, lock-in agreements, or contractual restrictions
on transfer as described below. The remaining
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Restricted Securities, and the Restricted Securities subject to lock-up
agreements, lock-in 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"), the lock-in agreement described below
required by certain state securities laws in connection with this offering (the
"Lock-In 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, Lock-In 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 Lock-In
Agreements or 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".
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 89,483 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 the Lock-Up Period. In
addition, prior to the effective date of the registration statement, Messrs.
Little, Layne, Whittington and Gomez will have entered into a four year lock-in
agreement, as required by certain state securities laws, pursuant to which the
shareholders would be restricted from transfer or sale of their shares, with
certain limited exceptions. The form of the state lock-in agreement was filed as
an exhibit to the Registration Statement. Certain stockholders are also 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.
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.
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Number of
Underwriters Shares
------------ -------------
Wit Capital Corporation
BlueStone Capital Partners, L.P.
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. After
completion of the initial offering, the offering price may be reduced by the
Underwriters. 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. Pennsylvania investors will be required to
meet standard number (1).
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 81,149 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
78
<PAGE>
distributed to the public in this offering. 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 or on a cashless basis. 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. See "Risk Factors -- Limited Experience
of the Underwriters".
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 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
79
<PAGE>
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 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.
80
<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
February __, 1998 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
February 5, 1998 /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 Flow
<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 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.
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.)
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 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).
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.)
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; provided, however, that the exercise price shall be
$2.00 per share during the 30 day period beginning on the closing date of the
offering described in Note 13. 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 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; provided, however, that
the exercise price shall be $2.00 per share during the 30 day period beginning
on the closing date of the offering described in Note 13. 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 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.
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.)
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.
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.
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.)
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
---------- ----------------
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
Preferred Stock (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.
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.)
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.
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 intended 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
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.)
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 __________ __, 1998. 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 , 1998 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.
On December 31, 1997, the Company obtained a short term loan in the amount of
$40,000 from a relative of one of the principal shareholders. Such loan was
repaid by the Company without interest on January 7, 1998.
On January 14, 1998, the Company obtained a bridge loan of $150,000 from its
venture capital investors. The notes are payable within 15 days after demand,
provided that no such demand shall be made until after the closing date of the
offering described in this Note, and bears interest at the rate of 12% from
January 14, 1998 to January 20, 1998, 18% from January 20, 1998 to February 10,
1998, and 25% thereafter. In connection with this bridge loan, the Company also
issued to the lenders seven year warrants to purchase that number of shares of
the Company's Common Stock determined by dividing the amount loaned by 85% of
the purchase price per share of the Series B Preferred Stock in the offering
described in this Note.
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 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.
A-1
<PAGE>
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.
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
A-2
<PAGE>
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.
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
A-3
<PAGE>
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
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.
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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 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.
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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 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:
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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 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.
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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. 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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<PAGE>
================================================================================
650,000 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 BlueStone Capital Partners, L.P.
================================================================================
<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......... 85,000
Legal Fees and Expenses.............. 200,000
Printing Expenses.................... 40,000
Blue Sky Fees and Expenses........... 70,000
Miscellaneous........................ 3,156
--------
Total........................... $400,000
========
- ------------------
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.
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.
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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 the
lenders 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.
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 the lenders 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
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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
the lenders to purchase an aggregate of 56,252 shares of Series A Preferred
Stock at an exercise price of $4.80 per share; provided, however, that the
exercise price shall be $2.00 per share during the 30 day period beginning on
the closing date of this offering. 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
the lenders to purchase an aggregate of 56,252 shares of Series A Preferred
Stock at an exercise price of $4.80 per share; provided, however, that the
exercise price shall be $2.00 per share during the 30 day period beginning on
the closing date of this offering. 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.
17. In January 1998, in connection with demand notes evidencing loans to the
Company in an aggregate amount of $150,000, the Company issued warrants to the
lenders to purchase an aggregate of 23,128 shares of Common Stock at an exercise
price of $2.45 per share. The lenders were Wasatch Venture Corporation, Newtek
Ventures II, L.P. and Sundance Venture Partners, L.P., three prior venture
capital investors in the Company, each of which has a representative on the
Company's Board of Directors. 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 access
to information the Company.
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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.
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.
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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 the Underwriter and
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.
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 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.
II-5
<PAGE>
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.
4(cc)* Form of Lock-In Agreement required by state securities
laws executed by each of the persons listed on Schedule
4(cc) attached thereto on the dates set forth
4(cc)* thereon.
4(dd)* Form of Note and Warrant Purchase Agreement dated January
14, 1998 between the Company and the investors listed on
Schedule 4(dd) attached thereto.
4(ee)* Form of Subordinated Promissory Note dated January 14,
1998 with Company as Maker. A list of Holders is attached
thereto as Schedule 4(ee).
4(ff)* Form of Stock Subscription Warrant dated January 14, 1998
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(ff) attached thereto.
4(gg)* Form of Second Amendment to Note and Warrant Purchase
Agreement dated May 9, 1997 executed by the Company and
each of Wasatch Venture Corporation, Newtek Ventures II,
L.P., Sundance Venture Partners II, L.P. and Wayne
Sorensen.
4(hh)* Form of Amendment to Note and Warrant Purchase Agreement
dated July 25, 1997 executed by the Company and each of
Wasatch Venture Corporation, Newtek Ventures II, L.P.,
Sundance Venture Partners II, L.P. and Wayne Sorensen.
4(ii)* Voting Agreement dated January 14, 1998 between the
Company and the signators thereto.
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.
II-6
<PAGE>
10(h) Form of Stock Subscription Warrant dated February 13, 1996
to purchase shares of Series A Preferred Stock of Tracer
held by the 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.
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-7
<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.
10(vv) Barter Agreement dated November 24, 1997 between the
Company and Kodak.
10(ww)* Form of Warrant issued to the Underwriters.
II-8
<PAGE>
10(xx)* Addendum No. 3 to Master Lease Agreement dated as of March
31, 1997 between the Company and Third Coast Venture Lease
Partners I, L.P.
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 6th day of February, 1998.
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 February 6, 1998.
Signature Title
--------- -----
/s/ CHAD M. LITTLE Chief Executive Officer;
------------------------------ Director
Chad M. Little
/s/ MARK GORCHOFF Chief Financial Officer;
------------------------------ Chief Accounting Occicer
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 )
As attorney-in-fact for the above
By: /s/ CHAD M. LITTLE directors marked by an asterisk
-------------------------- pursuant to powers of attorney duly
(Chad M. Little executed by such persons.
Attorney-in-Fact)
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.
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.
II-12
<PAGE>
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 the Underwriter and
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.
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 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.
II-13
<PAGE>
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.
4(cc)* Form of Lock-In Agreement required by state securities
laws executed by each of the persons listed on Schedule
4(cc) attached thereto on the dates set forth
4(cc)* thereon.
4(dd)* Form of Note and Warrant Purchase Agreement dated January
14, 1998 between the Company and the investors listed on
Schedule 4(dd) attached thereto.
4(ee)* Form of Subordinated Promissory Note dated January 14,
1998 with Company as Maker. A list of Holders is attached
thereto as Schedule 4(ee).
4(ff)* Form of Stock Subscription Warrant dated January 14, 1998
to purchase shares of Common Stock of the Company held by
the investors listed on Schedule 4(ff) attached thereto.
4(gg)* Form of Second Amendment to Note and Warrant Purchase
Agreement dated May 9, 1997 executed by the Company and
each of Wasatch Venture Corporation, Newtek Ventures II,
L.P., Sundance Venture Partners II, L.P. and Wayne
Sorensen.
4(hh)* Form of Amendment to Note and Warrant Purchase Agreement
dated July 25, 1997 executed by the Company and each of
Wasatch Venture Corporation, Newtek Ventures II, L.P.,
Sundance Venture Partners II, L.P. and Wayne Sorensen.
4(ii)* Voting Agreement dated January 14, 1998 between the
Company and the signators thereto.
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.
II-14
<PAGE>
10(h) Form of Stock Subscription Warrant dated February 13, 1996
to purchase shares of Series A Preferred Stock of Tracer
held by the 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.
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.
10(vv) Barter Agreement dated November 24, 1997 between the
Company and Kodak.
10(ww)* Form of Warrant issued to the Underwriters.
II-16
<PAGE>
10(xx)* Addendum No. 3 to Master Lease Agreement dated as of March
31, 1997 between the Company and Third Coast Venture Lease
Partners I, L.P.
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-17
EXHIBIT 4(CC)
PROMOTIONAL SHARES LOCK-IN AGREEMENT
I. This Promotional Shares Lock-In Agreement ("Agreement"), which was
entered into the 6th day of February, 1998, by and between Sandbox
Entertainment Corporation ("Issuer"), whose principal place of business
is located at 2231 E. Camelback, Suite 324, Phoenix, AZ 85016, and
_________, ("Security Holder") witnesses that:
A. The Issuer has filed an application with the Securities
Administrators of those States participating in the
Coordinated Equity Review Program adopted by the North
American Securities Administrators Association, Inc.,
("Administrators") to register certain of its Equity
Securities for sale to public investors who are residents of
those states ("Registration");
B. The Security Holder is the owner of the shares of common stock
or similar securities and/or possesses convertible securities,
warrants, options or rights which may be converted into, or
exercised to purchase shares of common stock or similar
securities of Issuer.
C. As a condition to Registration, the Issuer and Security Holder
("Signatories") agree to be bound by the terms of this
Agreement.
II. THEREFORE, the Security Holder agrees not to sell, pledge, hypothecate,
assign, grant any option for the sale of, or otherwise transfer or
dispose of, whether or not for consideration, directly or indirectly,
except in compliance with this Agreement, ____ PROMOTIONAL SHARES as
defined in the North American Securities Administrators Association
("NASAA") Statement of Policy on Promotional Shares and all
certificates representing stock dividends, stock splits,
recapitalizations, and the like, that are granted to, or received by,
the Security Holder while the PROMOTIONAL SHARES are subject to this
Agreement ("Restricted Securities"):
The Agreement shall be a Class B Agreement as defined in NASAA
Statement of Policy Regarding Promotional Shares, as amended April 27, 1997 and
shall provide that
(i) beginning two years following completion of the offering,
2 1/2% of Promotional Shares may be released from the Agreement each quarter;
and
(ii) on the fourth anniversary of the offering, all remaining
Promotional Shares shall be released from the Agreement.
1
<PAGE>
III. THEREFORE, the Signatories agree and will cause the following:
A. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the
Issuer's assets or securities (including by way of tender
offer), or any other transaction or proceeding with a person
who is not a Promoter, which results in the distribution of
the Issuer's assets or securities ("Distribution"), while this
Agreement remains in effect that the Restricted Securities may
be transferred in connection with such transaction, provided
that the following shall apply:
1. All holders of the Issuer's Series A Preferred Stock
and Series B Preferred Stock (the "Preferred Stock")
will initially share on a pro rata, per share basis
in the Distribution, in proportion to the amount of
cash or other consideration that they paid per share
for their Preferred Stock (provided that the
Administrator has accepted the value of the other
consideration), until the shareholders who purchased
the Issuer's EQUITY SECURITIES pursuant to the public
offering ("Public Shareholders") have received, or
have had irrevocably set aside for them, an amount
that is equal to one hundred percent (100%) of the
public offering's price per share times the number of
shares of EQUITY SECURITIES THAT THEY PURCHASED
PURSUANT TO THE PUBLIC OFFERING AND WHICH THEY STILL
HOLD AT THE TIME OF THE Distribution, adjusted for
stock splits, stock dividends recapitalizations and
the like; and
2. All holders of the Issuer's EQUITY SECURITIES shall
thereafter participate on an equal, per share basis
times the number of shares of EQUITY SECURITIES they
hold at the time of the Distribution, adjusted for
stock splits, stock dividends, recapitalizations and
the like.
3. The Distribution may proceed on lesser or different
terms and conditions than the terms and conditions
stated in paragraphs 1 and 2 above if a majority of
the Preferred Stock that are not held by Security
Holders or their affiliates, vote, or consent by
consent procedure, to approve the lesser terms and
conditions.
B. In the event of a dissolution, liquidation, merger,
consolidation, reorganization, sale or exchange of the
Issuer's assets or securities (including by way of tender
offer), or any other transaction or proceeding with a person
who is a Promoter, which results in a Distribution while this
Agreement remains in effect, the Restricted Securities shall
remain subject to the terms of this Agreement.
2
<PAGE>
C. Restricted Securities may be transferred by will, the laws of
descent and distribution, the operation of law, or by order of
any court of competent jurisdiction and proper venue.
D. Restricted Securities of a deceased Security Holder may be
hypothecated to pay the expenses of the deceased Security
Holder's estate. The hypothecated Restricted Securities shall
remain subject to the terms of this Agreement. Restricted
Securities may not be pledged to secure any other debt.
E. Restricted Securities may be transferred by gift to the
Security Holder's family members, provided that the Restricted
Securities shall remain subject to the terms of this
Agreement.
F. With the exception of paragraph A.3 above, the Restricted
Securities shall have the same voting rights as similar EQUITY
SECURITIES not subject to the Agreement.
G. A notice shall be placed on the face of each stock certificate
of the Restricted Securities covered by the terms of the
Agreement stating that the transfer of the stock evidenced by
the certificate is restricted in accordance with the
conditions set forth on the reverse side of the certificate;
and
H. A typed legend shall be placed on the reverse side of each
stock certificate of the Restricted Securities representing
stock covered by the Agreement which states that the sale or
transfer of the shares evidenced by the certificate is subject
to certain restrictions until January , 2002 pursuant to an
agreement between the Security Holder (whether beneficial or
of record) and the Issuer, which agreement is on file with the
Issuer and the stock transfer agent from which a copy is
available upon request and without charge.
I. The term of this Agreement shall begin on the date that the
Registration is declared effective by the Administrators
("Effective Date") and shall terminate:
1. January , 2002; or
2. On the date the Registration has been terminated if
no securities were sold pursuant thereto; or
3. If the Registration has been terminated, the date
that checks representing all of the gross proceeds
that were derived therefrom and addressed to the
public investors have been placed in the U.S.
3
<PAGE>
Postal Service with first class postage affixed; or
4. On the date the securities subject to this Agreement
become "Covered Securities," as defined under the
National Securities Markets Improvement Act of 1996.
J. This Agreement to be modified only with the written approval
of the Administrator.
IV. THEREFORE, the Issuer will cause the following:
A. A manually signed copy of the Agreement signed by the
Signatories to be filed with the Administrators prior to the
Effective Date;
B. Copies of the Agreement and a statement of the per share
initial public offering price to be provided to the Issuer's
stock transfer agent;
C. Appropriate stock transfer orders to be placed with the
Issuer's stock transfer agent against the sale or transfer of
the shares covered by the Agreement prior to its expiration,
except as may otherwise be provided in this Agreement;
D. The above stock restriction legends to be placed on the
periodic statement sent to the registered owner if the
securities subject to this Agreement are uncertificated
securities.
Pursuant to the requirements of this Agreement, the Signatories have entered
into this Agreement, which may be written in multiple counterparts and each of
which shall be considered an original. The Signatories have signed the Agreement
in the capacities, and on the dates, indicated.
IN WITNESS WHEREOF, the Signatories have executed this Agreement.
SANDBOX ENTERTAINMENT CORPORATION
By
------------------------------- ---------------------------------
Signature of Shareholder
Name
-----------------------------
Title
---------------------------- ---------------------------------
Printed Name of Shareholder
4
<PAGE>
Schedule 4(cc) to the Form of Lock-In Agreement -
List of Security Holders and Dates of Agreements
Security Holder - Shares
- --------------- ------
Chad Little - 170,834
James Layne - 122,917
Lonnie Whittington - 122,917
Glenn Gomez - 8,423
5
Exhibit 4(dd)
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT (this "Agreement") is made
effective as of January 14, 1998 by and between Sandbox Entertainment
Corporation, a Delaware corporation ("Sandbox"), and____________________________
("Purchaser"), whose address is__________________________________________
PREMISES: Sandbox desires to borrow $_____________ (the "Loan") from
Purchaser, and Purchaser is willing to make such Loan to Sandbox in
consideration of Sandbox issuing to Purchaser a Subordinated Promissory Note
evidencing the Loan in the form attached hereto as Exhibit I (the "Note") and a
warrant (the "Warrant"), a form of which is attached to this Agreement as
Exhibit II , to purchase the number of shares of the Common Stock, $.001 par
value, of Sandbox determined pursuant to this Agreement (the "Warrant Shares"),
on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, Sandbox and Purchaser agree as follows:
1. Issuance, Sale and Delivery of the Note and the Warrant. At the
Closing (defined in Section 2) Sandbox agrees to issue and deliver to Purchaser
and Purchaser agrees to receive from Sandbox the Note in consideration of
Purchaser making the Loan to Sandbox. Also in consideration of the Loan, Sandbox
will deliver to the Purchaser the Warrant, registered in the name of Purchaser,
within five (5) days after the effective date of 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 (the "IPO"). The number of
Warrant Shares (as defined in the Warrant) shall be the number of shares of
Common Stock determined, after any stock split or reclassification effectuated
in connection with the IPO, by dividing the amount of the Loan set forth above
by eighty-five percent (85%) of the price per share at which Sandbox issues
shares of Series B Preferred Stock in the IPO. Prior to delivery of the Warrant
to Purchaser, Sandbox shall insert the number of Warrant Shares determined
pursuant to the preceding sentence.
2. Closing. The issuance and delivery of the Note to be delivered later
shall take place at the offices of Sandbox on January 14, 1998 at 10 a.m. local
time, or at such other location, date and time as may be agreed upon between
Purchaser and Sandbox (such transaction being the "Closing" and such date and
time being the "Closing Date"). At the Closing Sandbox shall issue and deliver
to Purchaser the Note. In exchange for such delivery, Purchaser shall deliver
its check payable to the order of "Sandbox Entertainment Corporation" in the
amount of the Loan, or a wire transfer of such amount, as agreed by the parties.
3. Representations and Warranties of Sandbox . Sandbox represents and
warrants to Purchaser as follows:
<PAGE>
(a) Organization and Standing; Charter and Bylaws. Sandbox has
requisite corporate power and authority to own its property and to carry on its
business as presently conducted or as proposed to be conducted. Sandbox has all
requisite legal and corporate power to sell and issue the Note, Warrant and the
Warrant Shares to Purchaser and in all other respects to carry out and perform
its obligations under this Agreement.
(b) Authorization. All corporate action on the part of Sandbox
necessary for the authorization, execution, and delivery of this Agreement, and
performance of all of Sandbox's obligations hereunder, including issuance and
delivery of the Note, the Warrant and the Warrant Shares, shall have been taken
prior to the Closing.
(c) Corporate Law Status. When the Note, Warrant, and the
Warrant Shares have been issued, delivered and paid for in accordance with this
Agreement, the Note, and the Warrant, they will be validly issued, fully paid
and non-assessable and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through any act or omission
on the part of Sandbox. With the exception of the rights of first offer held by
the holders of the Series A Preferred Stock of Sandbox pursuant to Section 2.1
of that certain Investor Rights Agreement (the "Investor Rights Agreement")
dated as of February 13, 1996 among Sandbox and certain Investors (as defined
therein), for which the Company is seeking appropriate consents and waivers, the
issuance, sale or delivery of the Note, the Warrant and the Warrant Shares are
not subject to any preemptive right of stockholders of Sandbox or to any right
of first refusal or other right in favor of any person that has not been waived
in writing.
(d) Validity. This Agreement has been duly executed and
delivered by Sandbox and constitutes the legal, valid and binding obligation of
Sandbox, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditor's rights generally, and
except as enforceability may be subject to general principles of equity, whether
applied in a court of equity or at law or by an arbitration panel.
4. Representations and Warranties of Purchaser. Purchaser represents
and warrants to Sandbox, and where so stated, promises as follows:
(a) Unregistered Securities. Purchaser understands that the
Note, the Warrant and the Warrant Shares (the "Securities") have not been
registered under the Securities Act of 1933 (the "Securities Act") or any state
securities laws (collectively, "Securities Laws") in reliance upon an exemption
from registration accorded for nonpublic offerings. Purchaser further recognizes
that the Securities may not be sold unless they and the transaction in which
they are to be sold has been registered under the Securities Laws or an
exemption from registration is available for such sale. Purchaser accepts that
the Securities will each bear a legend to that effect. Further, Purchaser
recognizes that Sandbox has made no representations as to registration of the
Securities under the Securities Laws.
2
<PAGE>
(b) Investment Intent. Purchaser is acquiring the Securities
for its own account for investment and not with a view to resale or
distribution. The Purchaser promises that it will not sell, hypothecate,
transfer or otherwise dispose of the Securities, or attempt so to do, unless
they have been registered, to the extent applicable, under the Securities Laws
or, in the opinion of counsel reasonably acceptable to Sandbox and its counsel,
an exemption from registration is available.
(c) Negotiation; Access to Information. The terms of
Purchaser's purchase of the Securities were established by negotiations between
Purchaser and Sandbox 's representative, and in connection therewith, Purchaser
was given access to the relevant information it requested concerning Sandbox 's
condition and operations, and the opportunity to ask questions of and receive
answers from Sandbox 's representatives. Purchaser is knowledgeable and
experienced in financial and business matters and, on the basis of the
information it received concerning Sandbox 's condition and operations,
Purchaser is in a position to make an informed investment decision concerning
its investment in the Securities and the risks attending such investment.
Further, in light of its financial position, Purchaser is able to bear the
economic risks of investment in the Securities.
(d) Accredited Investor. Purchaser acknowledges that he/she/it
is an "accredited investor" as defined in Rule 501 of Regulation D as
promulgated by the Securities and Exchange Commission under the Securities Act,
and shall submit to Sandbox such further assurances of such status as may be
reasonably requested by Sandbox.
(e) Legends; Stop Transfer Orders. Purchaser hereby consents
and agrees that Sandbox may imprint on any certificate evidencing the Securities
an appropriate legend or notification to the effect that such shares are not
freely transferable and may be transferred only in compliance with applicable
securities laws. Purchaser further consents and agrees that Sandbox may give
appropriate "stop order" instructions in this regard to any transfer agent for
the Securities.
(f) Compliance; Indemnity. Purchaser hereby expressly promises
not to offer for sale or sell any of the Securities, or any interest therein,
except in compliance with the Securities Act and other applicable securities
laws and regulations, including those of the State of Arizona. Purchaser hereby
promises to indemnify Sandbox , together with its officers and directors,
against any and all liabilities, losses, damages and expenses (including
reasonable attorney fees) arising (directly or indirectly) from or in connection
with Purchaser's disposition of any of the Securities, or any interest therein,
in violation of (or allegedly in violation of) applicable securities laws or
regulations, including all such expenses incurred in connection with the defense
against any such claim.
(g) Delivery of Investment Letter upon Exercise of Warrant. At
the request of Sandbox, Purchaser shall deliver upon exercise of the Warrant an
investment letter in form and substance substantially to the effect of Sections
4(a)-(f) above.
3
<PAGE>
5. Conditions to the Obligations of Purchaser. The obligation of
Purchaser to make the Loan and receive the Note and the Warrant on the Closing
Date is, at Purchaser's sole option, subject to satisfaction on or before the
Closing Date of the following conditions:
(a) Representations and Warranties to Be True. The
representations and warranties contained in Section 3 shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date.
(b) Performance. Sandbox shall have performed and complied
with all agreements contained herein and required to be performed or complied
with by it prior to or at the Closing Date.
(c) Proceedings. All corporate and other proceedings to be
taken by Sandbox in connection with the transactions contemplated hereby and all
documents incident thereto shall be satisfactory in form and substance to
Purchaser and its counsel.
6. Conditions to the Obligations of Sandbox. The obligation of Sandbox
to issue the Note and the Warrant on the Closing Date is subject to satisfaction
on or before the Closing Date of the following condition:
(a) Consents and Waivers Received. Sandbox shall have obtained
all necessary consents and waivers from the Investors (as that term is defined
in the Investor Rights Agreement) pursuant to Section 2.1 of the Investor Rights
Agreement in connection with the issuance of the Note and the Warrant, including
but not limited to a consent to the treatment of the Warrant Shares as "Shares"
under the Investor Rights Agreement and a waiver of the rights of first offer
under the Investor Rights Agreement by the Investors in connection with the
issuance of the Note and Warrant.
7. Miscellaneous.
(a) Survival. All covenants, representations and warranties
made herein shall survive the Closing.
(b) Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
(c) Notices. Any notice or other document required or
permitted to be given or delivered to Purchaser shall be delivered at, or sent
by certified or registered mail to, Purchaser at the address written on the
first page of this Agreement, or to such other address as shall have been
furnished to Sandbox in writing by Purchaser. Any notice or other document
required or permitted to be given or delivered to Sandbox shall be delivered at
or sent by registered or
4
<PAGE>
certified mail to, Sandbox at 2231 East Camelback Road, Suite 324, Phoenix, AZ
85016, or to such other address as shall have been furnished in writing to
Purchaser by Sandbox. 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.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
(e) Entire Agreement; Amendment. This Agreement constitutes
the sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
(f) Investor Legal Fees. Sandbox agrees to pay the reasonable
legal fees of Purchaser in connection with this Agreement in an aggregate amount
not to exceed $1,000 for all Purchasers entering into Note and Warrant Purchase
Agreements in substantially the same form as this Agreement.
IN WITNESS WHEREOF, Sandbox and the Purchaser have executed this
Agreement as of the day and year first above written.
SANDBOX:
SANDBOX ENTERTAINMENT CORPORATION
By: _______________________________
Title: _______________________________
PURCHASER:
______________________________________
By: __________________________________
By:_______________________________
5
<PAGE>
EXHIBIT I
SUBORDINATED PROMISSORY NOTE
<PAGE>
EXHIBIT II
WARRANT
<PAGE>
Schedule 4(dd) to the Form of Note and Warrant Purchase Agreement dated January
14, 1998 -
List of Purchasers and Amounts of Loans.
Purchaser and Address Amount of Loan
Sundance Venture Partners, L.P. $57,692.30
400 East Van Buren Street
Suite 750
Phoenix, Arizona 85004
Newtek Ventures II, L.P. $34,615.40
500 Washington Street
Suite 720
San Francisco, California 94111
Wasatch Venture Corporation $57,692.30
c/o Zions First National Bank
Investment Division, Venture Capital Dept.
1 South Main Street, Suite 1000
Salt Lake City, Utah 84133
Exhibit 4(ee)
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNTIL REGISTERED UNDER THE ACT OR, IN THE
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
SANDBOX ENTERTAINMENT CORPORATION
SUBORDINATED PROMISSORY NOTE
----------------------------
January 14, 1998 $_________
For value received, subject to the terms and conditions of this
Subordinated Promissory Note (the "Note"), Sandbox Entertainment Corporation, a
Delaware corporation (the "Company"), hereby promises to pay to the order of
__________________________________, or its permitted assigns (the "Holder") the
principal sum of _____________________________ ($_____________) 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 through January 20, 1998; eighteen percent (18%) per annum for the period
after January 20, 1998, through February 10, 1998; and twenty-five percent (25%)
for the period after February 10, 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 fifteen (15) 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, and been closed.
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.
<PAGE>
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 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
2
<PAGE>
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, (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. Any Event of Default shall also be an
Event of Default under both that certain Convertible Subordinated Promissory
Note dated May 9, 1997 issued by the Company that is payable to the Holder and
that certain Convertible Subordinated Promissory Note dated July 25, 1997 issued
by the Company that is payable to Holder.
6. Restrictions on Transfer. Noteholder acknowledges that this Note has
not been registered or qualified under federal or state securities laws.
Accordingly, the representations and warranties to be made by Noteholder in the
Note and Warrant Purchase Agreement, or similar agreement, to which the Company
and the original Noteholder are parties (the "Purchase Agreement") shall be
deemed included herein and shall pertain to this Note as though fully set forth
herein. By acceptance of this Note, the registered holder represents that the
registered holder is purchasing this Note for its own account and not with a
view to, or for sale in connection with, any distribution of this Note or any
interest herein.
7. 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.
8. Assignment. This Note may be assigned by the holder only with the
Company's prior written consent, only in compliance with the provisions of the
Purchase Agreement, 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.
9. 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.
10. 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 set forth on the first page to
that certain Note and Warrant Purchase
3
<PAGE>
Agreement, 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.
11. 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.
12. 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.
13. 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:____________________________
Name:__________________________
Title:_________________________
4
<PAGE>
Schedule 4(ee) of the Form of Subordinated Promissory Note dated January 14,
1998 -
List of Holders and Amounts of Loans
Holder and Address Amount of Loan
Sundance Venture Partners, L.P. $57,692.30
400 East Van Buren Street
Suite 750
Phoenix, Arizona 85004
Newtek Ventures II, L.P. $34,615.40
500 Washington Street
Suite 720
San Francisco, California 94111
Wasatch Venture Corporation $57,692.30
c/o Zions First National Bank
Investment Division, Venture Capital Dept.
1 South Main Street, Suite 1000
Salt Lake City, Utah 84133
5
Exhibit 4(ff)
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
STOCK SUBSCRIPTION WARRANT
to Purchase ______ Shares of the
Common Stock, $.001 Par Value, of
SANDBOX ENTERTAINMENT CORPORATION,
a Delaware corporation (the "Company")
DATE OF INITIAL ISSUANCE: As of January 14, 1998
THIS CERTIFIES THAT for value received, _________________________, or
its registered assigns (hereinafter called the "Holder"), is entitled to
purchase from the Company, during the Term of this Warrant, _____________
(________) shares of common stock, $.001 par value, of the Company (the "Common
Stock"), at the Warrant Price, payable in lawful money of the United States of
America, to be paid upon the exercise of this Warrant, provided that
notwithstanding any other provision hereof, this Warrant may not be exercised
prior to the first anniversary of the Date of Initial Issuance of this Warrant.
The exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained and may be exercised in whole or in part.
1. Definitions. For all purposes of this Warrant, the following terms
shall have the meanings indicated:
Common Stock shall mean and include the Company's authorized Common Stock, $.001
par value as constituted at the date of this Warrant, and shall also include any
capital stock of any class or series of the Company now or hereafter authorized
that is not limited to a fixed sum or percentage of par value or of the purchase
price of such stock in respect of the rights of the holders thereof to
participate in dividends and/or in the distribution of assets upon the voluntary
or involuntary liquidation, dissolution or winding up of the Company.
IPO shall mean the offering by the Company of Series B Preferred Stock pursuant
to 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.
IPO Price shall mean the price per share at which the Company issues shares of
Series B Preferred Stock in the IPO.
<PAGE>
Term of this Warrant shall mean the period beginning on the date of initial
issuance hereof and ending on the seventh (7th) anniversary of the Date of
Initial Issuance of this Warrant set forth above.
Warrant Price shall mean $2.45.
Warrant Shares shall mean the shares of Common Stock purchased or purchasable by
the Holder of this Warrant upon exercise hereof.
2. Exercise of Warrant. The Warrant shall be exercised, if at all, only
as follows:
(a) To exercise this Warrant in whole or in part, the Holder
shall deliver to the Company at its principal office, at any time and from time
to time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, (ii) cash, certified or official bank check
payable to the order of the Company, wire transfer of funds to the Company's
account, or the surrender of evidence of any indebtedness of the Company to the
Holder (or any combination of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant.
(b) Notwithstanding any contrary provisions in this Warrant,
if the Current Market Price (as defined in Section 2(c) below) exceeds the
Warrant Price at the date of calculation, instead of exercising this Warrant as
described in Section 2(a) above, the Holder may elect to receive Warrant Shares
equal to the value of this Warrant (or the portion thereof being exercised), by
delivering to the Company at its principal office, at any time and from time to
time during the Term of this Warrant: (i) the notice of exercise in the form
attached hereto as Exhibit A, and (ii) this Warrant, in which event the Company
shall issue to the Holder a number of Warrant Shares calculated using the
following formula:
CS = WCS x (CMP-WP)
-------------------
CMP,
where CS = the number of Warrant Shares to be issued to the
Holder,
WCS = the number of Warrant Shares purchasable under
the Warrant, or if only a portion of the Warrant
is being exercised, the portion of the Warrant
being exercised at the date of such calculation,
CMP = the Current Market Price (as defined in Section
2(c) below) at the date of such calculation, and
WP = the Warrant Price, as adjusted to the date of
such calculation.
2
<PAGE>
(c) For the purpose of any calculation made pursuant to this
Section 2, the "Current Market Price" at any date of one share of Common Stock
shall be deemed to be the average of the daily closing bid and asked prices for
the Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on the
NASDAQ National Market System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in the appropriate edition of the
Wall Street Journal for the five (5) trading days immediately prior to the date
of exercise of this Warrant; provided, however, that (i) if the Common Stock is
not traded in such manner that the quotations referred to in this Section 2(c)
are available for the period required hereunder, the Current Market Price shall
be the fair market value of the Common Stock as determined by the Board of
Directors of the Company, acting in good faith.
(d) Each certificate for Warrant Shares shall bear the
following legend (and any additional legend required by (i) any applicable state
securities laws, and (ii) any securities exchange upon which such Warrant Shares
may, at the time of such exercise be listed) on the face thereof, unless at the
time of exercise, such Warrant Shares shall be registered under the Securities
Act of 1933, as amended (the "Securities Act");
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR ANY EXEMPTION THEREFROM UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS."
3. Covenants As to Common Stock. The Company covenants and agrees that:
(i) all shares of Common Stock that may be issued upon the exercise of this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof;
(ii) it will pay when due and payable any and all federal and state taxes (other
than federal or state income taxes, if any, which shall remain Holder's
responsibility) that may be payable in respect of the issue of this Warrant or
any Common Stock or the Warrant Shares; (iii) it will at all times have
authorized and reserved, free from preemptive rights, a sufficient number shares
of Common Stock to provide for the exercise of the rights represented by this
Warrant; (iv) if any shares of capital stock to be reserved for the purpose of
the issuance of shares upon the exercise of this Warrant require registration
with or approval of any governmental authority under any federal or state law
before such shares may be validly issued or delivered upon exercise, then the
Company shall in good faith and as expeditiously as possible endeavor to secure
such registration or approval, as the case may be; and (v) if and so long as the
Common Stock issuable upon the exercise of this Warrant is listed on any
national securities exchange, the Company, will, if permitted by the rules of
such exchange, list and keep listed on such exchange, upon official notice of
issuance, all shares of such Common Stock issuable upon exercise of this
Warrant.
3
<PAGE>
4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5 below, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest 1/10th of a share) obtained by multiplying the
Warrant Price in effect immediately before such adjustment by the number of
shares purchasable pursuant hereto immediately before such adjustment, and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(a) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, following the record date fixed for the determination of
Holders of Common Stock entitled to receive such stock dividend, subdivision or
split-up, the Warrant Price shall be appropriately decreased so that the number
of shares of Common Stock issuable upon the exercise of this Warrant shall be
increased in proportion to such increase in outstanding shares.
(b) If, at any time during the term of this Warrant, the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(c) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest 1/10th of a share, as the case may be.
(d) If the Company proposes to take any action of the types
described in Section 5(a) or (b), the Company shall forward at the same time and
in the same manner, to the Holder of this Warrant, such notice, if any, that the
Company shall give to the Holders of capital stock of the Company.
6. Transfers. The Company may deem and treat the person in whose name
this Warrant is registered as the Holder and owner hereof. Notwithstanding the
foregoing, the Warrant and all rights hereunder are not transferable in whole or
in part without the prior written consent of the Company and compliance with
that certain Note and Warrant Purchase Agreement of even date herewith between
the Company and Holder, and any attempted transfer without such consent and such
compliance shall be void. Transferability of the Warrant Shares is limited as
set forth in this Warrant.
7. Mergers, Consolidations, Sales. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of any such consolidation, merger, sale,
4
<PAGE>
reorganization or reclassification, lawful and adequate provision shall be made
pursuant to which the Holder of this Warrant shall thereafter have the right to
receive upon the basis and upon the terms and conditions specified herein, in
lieu of the shares of Common Stock of the Company immediately purchasable
hereunder, such shares of stock, securities or assets as may, by virtue of such
consolidation, merger, sale, reorganization or reclassification, be issued or
payable with respect to or in exchange for the number of shares of such Common
Stock purchasable hereunder immediately before such consolidation, merger, sale
reorganization or reclassification. The Company shall forward at the same time
and in the same manner, to the Holder of this Warrant, such notice, if any, that
the Company shall give to the Holders of capital stock of the Company with
respect to any proposed transaction described above or any distribution of
assets of the Company in dissolution or liquidation, or any extraordinary
dividend or other distribution on its Common Stock except out of earned surplus
or by way of a stock dividend payable in shares of its Common Stock. This
Warrant shall be binding upon any corporation or other person or entity
succeeding to the Company by merger, consolidation or acquisition of all or
substantially all of the Company's assets.
8. Investor Rights Agreement. The Company and Holder agree that the
Warrant Shares issuable pursuant this Warrant shall be deemed to be "Shares"
under that certain Investor Rights Agreement dated as of February 13, 1996 (the
"Investor Rights Agreement") among the Company and certain Investors (as defined
therein) and that the Warrant Shares shall be entitled to all the rights and
subject to all of the restrictions as Shares under the Investor Rights
Agreement. Pursuant to a Consent and Waiver, the Investors shall have agreed
prior to the execution of this Warrant to the inclusion of the Warrant Shares as
"Shares" under the Investor Rights Agreement.
9. Miscellaneous.
(a) Notices. Any notice or other document required or
permitted to be given or delivered to the Holder shall be delivered at, or sent
by certified or registered mail to, the Holder at the address set forth on the
first page of that certain Note and Warrant Purchase Agreement between the
Holder and Company of even date herewith, or to such other address as shall have
been furnished to the Company in writing by the Holder. Any notice or other
document required or permitted to be given or delivered to the Company shall be
delivered at or sent by registered or certified mail to, the Company at 2231
East Camelback Road, Suite 324, Phoenix, AZ 85016, or to such other address as
shall have been furnished in writing to the Holder by the 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.
(b) Governing Law. This Warrant shall be governed in all
respects by the laws of the State of Arizona as applied to agreements entered
into and performed entirely in the State of Arizona by residents thereof.
5
<PAGE>
(c) Entire Agreement; Amendment. This Warrant constitutes the
sole and entire agreement of the parties with respect to the subject matter
hereof. Neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
(d) Counterparts. This Agreement may be executed in
counterparts, each of which shall be enforceable against the party actually
executing the counterpart, and both of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly and authorized officer as of the date first written above.
THE COMPANY:
ATTEST: SANDBOX ENTERTAINMENT CORPORATION
By:________________________ By:______________________________
Its Secretary Its President
ACCEPTED:
HOLDER:
_________________________________________________
By: ___________________________________________
By:_______________________________
_______________________________
6
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
1. The undersigned hereby exercises the right to purchase ________
shares of Common Stock that the undersigned is entitled to purchase by the terms
of the within Warrant according to the conditions thereof, and herewith makes
payment of the Warrant Price of such shares in full. All shares to be issued
pursuant hereto shall be issued in the name of and the initial address of such
person to be entered on the books of the Company shall be:
- -------------------------------------------------------------------------------.
The shares are to be issued in certificates of the following denominations:
- -------------------------------------------------------------------------------.
2. The undersigned hereby represents that the shares of the Company's
Common Stock to be delivered to it pursuant to the above-mentioned exercise of
the Warrant are being acquired by the undersigned as an investment and not with
a view to, or for sale in connection with, the distribution of any such shares.
The undersigned agrees to indemnify the Company and its subsidiaries, together
with their officers and directors, for any liabilities, losses, damages and
expenses (including reasonable attorney fees) arising from or in connection with
any disposition of the shares hereby being acquired, or any interest therein, in
violation of applicable securities laws or regulations. The undersigned further
represents that the undersigned has been given access to all information
requested by the undersigned to allow the undersigned to make a decision as to
the advisability of an investment in the Company's stock and the value of such
stock, and that undersigned has the skill and experience necessary to make such
decision.
______________________________________
[Type Name of Holder]
By: _______________________________
Title: _______________________________
Date: _______________________________
7
<PAGE>
Schedule 4(ff) to Form of Stock Subscription Warrant dated January 14, 1998 -
List of Warrant Holders, Amounts of Loans and Number of Share Under Warrant
Holder and Address Amount of Loan Number of Shares
- ------------------ -------------- ----------------
Under the Warrant
-----------------
Sundance Venture Partners, L.P. $57,692.30
400 East Van Buren Street
Suite 750
Phoenix, Arizona 85004
Newtek Ventures II, L.P. $34,615.40
500 Washington Street
Suite 720
San Francisco, California 94111
Wasatch Venture Corporation $57,692.30
c/o Zions First National Bank
Investment Division, Venture Capital Dept.
1 South Main Street, Suite 1000
Salt Lake City, Utah 84133
8
Exhibit 4(gg)
SECOND AMENDMENT TO MAY 9, 1997 STOCK SUBSCRIPTION WARRANT
THIS AMENDMENT TO STOCK SUBSCRIPTION WARRANT (this "Amendment") is made
effective as of January 14, 1998 by and between Sandbox Entertainment
Corporation, a Delaware corporation (the "Company"), and
__________________________ ("Holder"), which are parties to that certain Stock
Subscription Warrant with an initial issue date of May 9, 1997 (the "May
Warrant"); IT IS AGREED:
1. That the definition of "Warrant Price" on page 2 of the May Warrant
shall be deleted in its entirety and replaced with the following:
"Warrant Price shall mean Eighty Cents ($.80) per share,
subject to adjustment in accordance with Section 5; provided, however,
that the Warrant Price shall be $2.00 per share (which price shall not
be subject to adjustment) during the 30 day period beginning on the
date that the IPO closes."
2. Counterparts. This Amendment may be executed in counterparts, each
of which shall be enforceable against the party actually executing the
counterpart, and both of which together shall constitute one instrument.
IN WITNESS WHEREOF, the Company and Holder have caused this Amendment
to be signed by its duly and authorized officer as of the date first written
above.
THE COMPANY:
SANDBOX ENTERTAINMENT CORPORATION
By: _____________________________
Its _____________________________
ACCEPTED BY HOLDER:
Holder:
By: ________________________
By:_________________________________
1
<PAGE>
Schedule 4(gg) to the Second Amendment to the Note and Warrant Purchase
Agreement dated May 9, 1997 -
List of Holders:
Holder and Address
- ------------------
Sundance Venture Partners, L.P.
400 East Van Buren Street
Suite 750
Phoenix, Arizona 85004
Newtek Ventures II, L.P.
500 Washington Street
Suite 720
San Francisco, California 94111
Wasatch Venture Corporation
c/o Zions First National Bank
Investment Division, Venture Capital Dept.
1 South Main Street, Suite 1000
Salt Lake City, Utah 84133
2
Exhibit 4(hh)
AMENDMENT TO JULY 25, 1997 STOCK SUBSCRIPTION WARRANT
THIS AMENDMENT TO STOCK SUBSCRIPTION WARRANT (this "Amendment") is made
effective as of January 14, 1998 by and between Sandbox Entertainment
Corporation, a Delaware corporation (the "Company"), and
________________________ ("Holder"), which are parties to that certain Stock
Subscription Warrant with an initial issue date of July 25, 1997 (the "July
Warrant"); IT IS AGREED:
1. That the definition of "Warrant Price" on page 2 of the July Warrant
shall be deleted in its entirety and replaced with the following:
"Warrant Price shall mean Eighty Cents ($.80) per share,
subject to adjustment in accordance with Section 5; provided, however,
that the Warrant Price shall be $2.00 per share (which price shall not
be subject to adjustment) during the 30 day period beginning on the
date that the IPO closes."
2. Counterparts. This Amendment may be executed in counterparts, each
of which shall be enforceable against the party actually executing the
counterpart, and both of which together shall constitute one instrument.
IN WITNESS WHEREOF, the Company and Holder have caused this Amendment
to be signed by its duly and authorized officer as of the date first written
above.
THE COMPANY:
SANDBOX ENTERTAINMENT CORPORATION
By: _____________________________
Its _____________________________
ACCEPTED BY HOLDER:
_______________________________________
By: ___________________________________
By: _______________________________
1
<PAGE>
Schedule 4(hh) to the Amendment to the Note and Warrant Purchase Agreement dated
July 25, 1997 -
List of Holders:
Holder and Address
- ------------------
Sundance Venture Partners, L.P.
400 East Van Buren Street
Suite 750
Phoenix, Arizona 85004
Newtek Ventures II, L.P.
500 Washington Street
Suite 720
San Francisco, California 94111
Wasatch Venture Corporation
c/o Zions First National Bank
Investment Division, Venture Capital Dept.
1 South Main Street, Suite 1000
Salt Lake City, Utah 84133
2
Exhibit 4(ii)
VOTING AGREEMENT
THIS VOTING AGREEMENT is made as of the 14th day of January, 1998, by
and among Sandbox Entertainment Corporation, a Delaware corporation (the
"Company"), and the holders of shares of the Company's Series A Preferred Stock
(the "Investors") whose signatures appear on this Agreement or any counterpart
hereof, and whose names are listed on Schedule A attached hereto, as such
schedule may be amended from time to time, and the holders of shares of the
Company's Common Stock ("Management") whose signatures appear on this Agreement
or any counterpart hereof, and whose names are listed on Schedule B attached
hereto, as such schedule may be amended from time to time. All references in
this Voting Agreement to numbers of shares of capital stock of the Company
assume the occurrence of the one-for-six reverse stock split described in and
contemplated by Amendment Number 2 to the Registration Statement of the Company
filed with the Securities & Exchange Commission, Reg. No. 333- 36787 (the
"Registration Statement", which term will also include any subsequent amendments
thereto) in connection with the public offering (the "Offering") by the Company
of Series B Preferred Stock.
WHEREAS, the Investors are the beneficial owners of an aggregate of
328,944 shares of the Company's Series A Preferred Stock (the "Series A
Preferred Stock," which shall also include the Common Stock of the Company
issuable upon conversion thereof plus any additional shares of capital stock of
the Company now owned or hereafter acquired by any Investor) and Management are
the beneficial owners of an aggregate of 419,567 shares of the Company's Common
Stock (the "Common Stock");
WHEREAS, simultaneously with its approval of this Voting Agreement, the
Board of Directors of the Company (the "Board") has adopted the amendments (the
"Bylaw Amendments") to the Company's Bylaws set forth in Exhibit 1 attached
hereto, which become effective only upon abandonment of the Offering by the
Company; and
WHEREAS, in order to induce the Company and certain Investors to enter
into and perform that certain NOTE AND WARRANT PURCHASE AGREEMENT of even date
herewith, the parties hereto have indicated their willingness to enter into this
Agreement upon the terms and conditions set forth below;
IT IS HEREBY AGREED AS FOLLOWS:
1. Board Composition and Certain Actions. Management and a
representative of each of the Investors presently fill all seven (7) authorized
seats of the Board. In connection with the Offering, Management and the
Investors desire and agree that two independent members of the Board should be
appointed as soon as is practicable after the closing of the Offering (the
"Closing") or the abandonment of the Offering. In order to accomplish the
foregoing, the parties agree as follows.
<PAGE>
a. The following shall occur immediately and automatically upon
completion of the Closing and continue during the term of this
Agreement:
i. James Layne and Lonnie Whittington shall resign from
the Board of Directors and John M. Holliman, III and
Andrew Klein shall be appointed as directors of the
Company to fill these vacancies on an interim basis;
and
ii. The Board shall work diligently and in good faith to
appoint "independent directors" to replace Mr.
Holliman and Mr. Klein as soon as is practicable.
Such replacement directors shall be "independent
directors" as contemplated by the Registration
Statement, and shall not be affiliated in any way
with any of the Investors or Management, or any
person or entity affiliated with any of the Investors
or Management.
b. The following shall occur immediately and automatically upon
the abandonment of the Offering and shall continue during the
term of this Agreement:
i. James Layne and Lonnie Whittington shall resign from
the Board of Directors, which shall then consist of
two members of Management, three representatives of
the Investors, and two vacancies; and
ii. The remaining members of the Board shall work
diligently and in good faith to appoint a sixth and
seventh director (the "Sixth Director" and the
"Seventh Director", respectively) as soon as is
practicable. The Sixth Director and Seventh Director
shall be "independent directors" and shall not be
affiliated in any way with any of the Investors or
Management, or any person or entity affiliated with
any of the Investors or Management; and
iii. To the extent they are entitled under the Company's
certificate of incorporation or applicable law, the
Investors and Management agree to vote (whether in
his or its capacity as a stockholder, director,
voting trustee, member of a Board committee or
officer of the Company or otherwise, and including
attendance at meetings in person or by proxy for
purposes of obtaining a quorum and execution of
written consents in person or by proxy for purposes
of obtaining a quorum and execution of written
consents in lieu of meetings) all of the shares of
the Company's voting securities now or hereafter
owned or controlled by them, whether beneficially or
otherwise, so that:
(1) the authorized number of directors
comprising the Board will be established at
seven directors;
(2) the following persons shall be elected to
the Board:
2
<PAGE>
(a) two nominees of Management,
(b) three nominees of the Investor
group, and
(c) the Sixth Director and the Seventh
Director;
(3) the Bylaw Amendments shall continue in full
force and effect in accordance with their
terms;
(4) the removal from the Board (with or without
cause) of any representative designated
pursuant to Sections 1(b)(iii)(2)(a), (b),
or (c) will be at the written request of the
party(ies) entitled to designate directors
under each such respective provision, but
only upon such written request and under no
other circumstances and under no other
circumstances; and
(5) in the event that any representative
designated pursuant to Sections
1(b)(iii)(2)(a), (b), or (c) for any reason
ceases to serve as a member of the Board
during his or her term of office, the
resulting vacancy on the Board will be
filled by a representative designated by the
party(ies) and in the manner described in
such respective Section.
2. Successors in Interest of the Investors and Management.
a. The provisions of this Agreement shall be binding upon the
successors in interest of the Investors to any of the Series A
Preferred Stock and of Management. The Company shall not
permit the transfer of any Investor's or Management's shares
on its books or issue a new certificate representing any
Series A Preferred Stock or any Common Stock being transferred
by any Investor or Management unless and until the person to
whom such security is to be transferred shall have executed a
counterpart of this Agreement, pursuant to which such person
becomes a party to this Agreement and agrees to be bound by
all the provisions hereof as if such person was an party
hereunder.
b. Each certificate representing any Investor's or Management's
shares shall be endorsed by the Company with a legend
substantially in the following form:
THE SHARES EVIDENCED HEREBY ARE
SUBJECT TO CERTAIN RESTRICTIONS AND
AGREEMENTS AMONG THE REGISTERED
OWNER OF THIS CERTIFICATE, THE
COMPANY AND CERTAIN OTHER
STOCKHOLDERS OF THE COMPANY,
3
<PAGE>
COPIES OF WHICH ARE AVAILABLE FOR
INSPECTION AT THE OFFICES OF THE
SECRETARY OF THE COMPANY.
3. Covenants of the Company. The Company agrees to take all actions
required to ensure that the rights given to the Investors and Management
hereunder are effective and that the Investors and Management enjoy the benefits
thereof. The Company will not, by any voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be performed hereunder by
the Company, but will at all times in good faith assist in the carrying out of
all of the provisions of this Agreement and in the taking of all such actions as
may be necessary or appropriate in order to protect the rights of the parties
hereunder against impairment, including without limitation calling special
meetings of the Board or the stockholders. The Company further agrees to use its
best efforts to obtain Director and Officer liability insurance for the Company
as soon as reasonably practical. The Company agrees that prior to the Closing or
an abandonment of the Offering by the Company, it will not borrow money or issue
any stock (other than as contemplated in the Offering or disclosed in the
Registration Statement) without approval of a majority in interest of the
holders of Series A Preferred Stock.
4. Termination. This Agreement shall terminate upon the earlier of (i)
appointment of the successor directors to Mr. Holliman and Mr. Klein, or (ii)
appointment of the Seventh Director, or (iii) that date when all outstanding
shares of Series A Preferred Stock have been converted to Common Stock of the
Company, or (iv) the written consent of each of the Company, the holders of a
majority of the Series A Preferred Stock voting together as a single class on an
as-converted basis, and the holders of a majority of the shares of Common Stock
held by Management voting together as a single class.
5. Amendments and Waivers. Any term hereof may be amended and the
observance of any term hereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of each of the Company, the holders of a majority of the Series A
Preferred Stock voting together as a single class on an as-converted basis, and
the holders of a majority of the shares of Common Stock held by Management
voting together as a single class. Any amendment or waiver so effected shall be
binding upon the Company, the Investors, Management, and any of their assigns.
6. Stock Splits, Stock Dividends, etc. In the event of any stock split,
stock dividend, recapitalization, reorganization, or the like, any securities
issued with respect to the Series A Preferred Stock of the Common Stock, shall
become, respectively, Series A Preferred Stock of Common Stock for purposes of
this Agreement.
7. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such
4
<PAGE>
provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
8. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware, without regard to the conflict of laws
provisions thereof.
9. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10. Successors and Assigns. Except as otherwise expressly provided in
this Agreement, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
5
<PAGE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
THE COMPANY:
------------
SANDBOX ENTERTAINMENT
CORPORATION, a Delaware corporation
By: /s/ Chad M. Little
-------------------------------------
Chad M. Little, President
Address: 2231 East Camelback Road, Suite 324
Phoenix, AZ 85016
INVESTORS:
----------
WASATCH VENTURE CORPORATION
By: /s/ Todd J. Stevens
-----------------------------------------
Title: Secretary and Treasurer
--------------------------------------
NEWTEK VENTURES II, L.P.
By: /s/ John Hall
-----------------------------------------
Title: General Partner
--------------------------------------
SUNDANCE VENTURE PARTNERS, L.P., a
Delaware limited partnership
By: Anderson & Wells Company, a Delaware
corporation
By: /s/ Brian N. Burns
------------------------------------
Brian N. Burns, Vice-President
6
<PAGE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
MANAGEMENT:
----------
/s/ Chad M. Little
----------------------------------------
Chad M. Little
/s/ Lonnie A. Whittington
----------------------------------------
Lonnie A. Whittington
/s/ James A. Layne
----------------------------------------
James A. Layne
/s/ Michael S. Turico
----------------------------------------
Michael S. Turico
7
<PAGE>
SCHEDULE A
Schedule of Holders of Series A Preferred Stock
----------------------------------------------------------------------
Name of Stockholder Number of Shares of
Series A*
----------------------------------------------------------------------
Newtek Ventures II, L.P.* 89,360
----------------------------------------------------------------------
Sundance Venture Partners, L.P. 93,750
----------------------------------------------------------------------
Wasatch Venture Corporation 145,834
----------------------------------------------------------------------
TOTAL 328,944
----------------------------------------------------------------------
*Number includes 16,443 shares of Common Stock of the Company owned by Newtek
Ventures II, L.P.
<PAGE>
SCHEDULE B
Schedule of Management Holders of Common Stock
----------------------------------------------------------------------
Name of Stockholder Number of Shares of
Common Stock*
----------------------------------------------------------------------
Chad M. Little 170,834
----------------------------------------------------------------------
Lonnie A. Whittington 122,917
----------------------------------------------------------------------
James A. Layne 122,917
----------------------------------------------------------------------
Michael S. Turico 2,899
----------------------------------------------------------------------
TOTAL 419,567
----------------------------------------------------------------------
*Little has the right to vote 41,667 shares held by Layne and 41,667 shares held
by Whittington.
<PAGE>
EXHIBIT 1
Amendment to Bylaws
Of
Sandbox Entertainment Corporation
1. Article VIII of the Bylaws (the "Bylaws") of Sandbox Entertainment
Corporation (the "Corporation") is hereby amended by inserting the phrase "or in
Article IX of these Bylaws" after the phrase "Except as otherwise provided in
the Certificate of Incorporation" at the beginning of Article VIII. Accordingly,
Article VIII, as amended, shall read in its entirety as follows:
Except as otherwise provided in the Certificate of Incorporation or in Article
IX of these Bylaws, the Bylaws of the Corporation shall be subject to
alteration, amendment, or repeal, and new Bylaws not inconsistent with any
provision of the Certificate of Incorporation or statute, may be made, either by
the affirmative vote of the stockholders entitled to cast a majority of the
number of votes present and entitled to be cast at any annual or special meeting
of the stockholders, a quorum being present, or by the affirmative vote of a
majority of the whole Board, given at any regular or special meeting of the
Board, provided that notice of the proposal so to make, alter, amend, or repeal
such Bylaws be included in the notice of such meeting of the Board or the
stockholders, as the case may be. Bylaws made, altered, or amended by the Board
may be altered, amended or repealed by the affirmative vote of stockholders
entitled to cast a majority of the number of votes present and entitled to be
cast at any annual or special meeting thereof.
2. New Article IX is hereby adopted and shall read in its entirety as follows:
Notwithstanding any other provision of the Bylaws, until appointment of
the Seventh Director (as hereinafter defined), any act, including without
limitation any amendment of this Article IX, which shall receive the affirmative
votes of less than eighty percent (80%) of the whole Board shall not be
authorized or effective. Upon appointment of the Seventh Director, this Article
IX and the amendment to Article VIII adopted simultaneously herewith shall
expire and be of no further force or effect whatsoever. For purposes of this
Article IX, the term "Seventh Director" shall have the same meaning as set forth
in that certain Voting Agreement dated ________, 1998, among the Corporation,
the "Investors" and "Management", as defined therein, a copy of which is
attached hereto as Exhibit A.
<PAGE>
Exhibit A to Bylaws Amendment
[attach Voting Agreement]
Exhibit 10(ww)
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES
ISSUABLE UPON EXERCISE 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 SUCH 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 FOR THE COMPANY, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO
HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _________, 200_
No. W- ___________Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ___________________________ or
registered assigns, is the registered holder of ___________ Warrants to
purchase, at any time from ________, 1997 until 5:00 P.M. New York City time on
__________, 200_ ("Expiration Date"), up to ________________ fully-paid and
non-assessable share(s) of Series B Convertible Preferred Stock, par value
$0.001 per share (the "Shares"), of Sandbox Entertainment Corporation, a
Delaware corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $_____ per Share, upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the warrant agreement dated as of _______, 1997 between the Company and
Wit Capital Corporation (the "Underwriter") (the "Warrant Agreement"). Payment
of the Exercise Price may be made in cash, or by certified or official bank
check in New York Clearing House funds payable to the order of the Company, or
any combination of cash or check.
No Warrant may be exercised after 5:00 P.M., New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated: ____________, 1997 SANDBOX ENTERTAINMENT CORPORATION
[Seal] By:_______________________________________
Name: Chad M. Little
Title: President and Chief Executive
Officer
Attest:
_______________________
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____________ Shares of
Series B Convertible Preferred Stock and herewith tenders in payment for such
securities, cash or a certified or official bank check payable in New York
Clearing House Funds to the order of ___________ in the amount of $____________,
all in accordance with the terms hereof. The undersigned requests that a
certificate for such securities be registered in the name of ______________,
whose address is _________________, and that such Certificate be delivered to
___________________, whose address is ________________________.
Dated: Signature:_________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificate.)
FOR VALUE RECEIVED ______________________________ hereby sells, assigns
and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ____________________,
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: Signature:_________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
________________________________
________________________________
(Insert Social Security or Other
Identifying Number of Holder)
EXHIBIT 10(xx)
ADDENDUM NO. 3 TO
MASTER LEASE AGREEMENT NO. 101-19001-001
DATED AS OF MARCH 31, 1997
BETWEEN
THIRD COAST VENTURE LEASE PARTNERS I, L.P., AS LESSOR
AND
SANDBOX ENTERTAINMENT CORPORATION, AS LESSEE
This Addendum is attached to and forms part of that certain Master Lease
Agreement no. 101-19001-001 dated as of March 31, 1997, between THIRD COAST
VENTURE LEASE PARTNERS I, L.P. ("Lessor") and SANDBOX ENTERTAINMENT CORPORATION
("Lessee"), ("Lease") agreeing as follows:
WHEREAS, Lessee has experienced difficulties in meeting its financial
commitment to Lessor under the Lease and has requested certain concessions and
accommodations from Lessor.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises contained herein, Lessor and Lessee agree as follows:
1. Terms defined in the Lease shall have the same meanings herein
unless otherwise expressly set forth herein or otherwise required by context
hereof.
2. To the extent any terms or conditions in this Addendum No. 3 may be
inconsistent or conflict with any terms or conditions contained in the Lease,
the terms and conditions contained herein shall govern and control.
3. Schedule 01, 02 and 03 to the Lease shall be amended as follows:
A. No payment shall be due January 1, 1998.
B. The Initial Lease Term for each of Schedules 01, 02 and 03
shall be extended three (3) months upon the same terms and conditions
and at the same base monthly rental payment as set forth in each such
Schedule, as follows:
Amended Initial Lease Base Monthly
--------------------- ------------
Schedule No. Term Expiration Date Rental Payment
------------ -------------------- --------------
01 September 30, 2000 $3,670.93
02 December 31, 2000 $12,529.97
03 December 31, 2000 $5,301.67
<PAGE>
4. Lessor and Lessee hereby restate all other terms and conditions
contained in the Lease which shall continue in full force and effect.
IN WITNESS WHEREOF, this Addendum No. 3 has been executed by a duly authorized
officer of Lessee as of the 20th day of January, 1998.
SANDBOX ENTERTAINMENT CORPORATION, Lessee
2231 East Camelback Road
Suite 324
Phoenix, AZ 85016
By: /s/ Mark Gorchoff
-----------------
Name: Mark Gorchoff
Title: CFO
THIRD COAST VENTURE LEASE PARTNERS I, L.P.
900 North Franklin Street
Suite 700
Chicago, IL 60610
By: Its General Partner, Third Coast GP-I, L.L.C.
By: /s/ Miroslav Avic
-----------------
Name: Miroslav Avic
Title: Manager
2
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 February __, 1998, in Amendment No. 3 to
the Registration Statement (Form SB-2 No. 333-69787) and related Prospectus of
Sandbox Entertainment Corporation for the registration of 650,000 shares of its
Series B Convertible Preferred Stock.
Ernst & Young LLP
Phoenix, Arizona
February __, 1998
- --------------------------------------------------------------------------------
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
February 5, 1998
