<PAGE>
As filed with the Securities and Exchange Commission on February 8, 1999
Registration No. 333-68053
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
VERTICALNET, INC.
(Exact name of registrant as specified in its charter)
----------------
Pennsylvania 7319 23-2815834
(State or other (Primary Standard Industrial(I.R.S Employer
jurisdiction of Classification Code No.) Identification
incorporation or No.)
organization)
2 Walnut Grove Drive
Horsham, PA 19044
(215) 328-6100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MARK L. WALSH
President and Chief Executive Officer
2 Walnut Grove Drive
Horsham, PA 19044
(215) 328-6100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
JAMES W. McKENZIE, JR. BARBARA L. BECKER
Morgan, Lewis & Bockius LLP Chadbourne & Parke LLP
1701 Market Street 30 Rockefeller Plaza
Philadelphia, PA 19103-2921 New York, NY 10112
(215) 963-5000 (212) 408-5100
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Title of each class of Amount to be offering price maximum aggregate Amount of
securities to be registered registered(1) per share(2) offering price registration fee(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 4,025,000 shares $14.00 $56,350,000 $15,665.30
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 525,000 shares that the underwriters have the option to purchase
solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3) $11,189.50 of the registration fee was previously paid. An additional
registration fee of $4,475.80 has been paid with this filing.
----------------
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, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may change. We may not +
+sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 8, 1999
PROSPECTUS
3,500,000 Shares
[LOGO OF VERTICALNET APPEARS HERE]
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
3,500,000 shares.
No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"VERT."
Anticipated Price Range $12.00 to $14.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 7.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discount.......................................... $ $
Proceeds to VerticalNet........................................ $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 525,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
At our request, the underwriters have reserved up to 5% of the common stock
offered in this prospectus for sale at the initial public offering price to our
employees, officers, directors and their family members and to business
associates of VerticalNet. See "Underwriting."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about , 1999.
- --------------------------------------------------------------------------------
Lehman Brothers
Hambrecht & Quist
Volpe Brown Whelan & Company
Wit Capital Corporation
as e-ManagerTM
, 1999
<PAGE>
[IMAGE SHOWING LOGOS OF OUR VERTICAL TRADE COMMUNITIES WITH HEADING
"VISIT OUR PORTFOLIO OF BUSINESS-TO-BUSINESS COMMUNITIES OF COMMERCE"]
[INSIDE GATEFOLD: GRAPHIC SHOWING VERTICALNET'S WATER ONLINE HOME PAGE, AND
PAGES FOR A STOREFRONT, NEWS AND ANALYSIS, CAREER CENTER, AND PRODUCT SHOWCASE
ON WATER ONLINE WITH LINES FROM THE HEADING ON THE HOME PAGE TO EACH OTHER PAGE;
GRAPHIC LISTING 33 VERTICAL TRADE COMMUNITIES AND HEADING "OUR PORTFOLIO OF
BUSINESS-TO-BUSINESS COMMUNITIES OF COMMERCE" THE FOLLOWING TEXT ALSO APPEARS:
"STOREFRONT: COMPANY DESCRIPTION; PRODUCT PROMOTION; ASSOCIATED ARTICLES;
REQUEST INFORMATION FORMS; E-MAIL; LINKS TO COMPANY WEB SITE" AND "USERS CAN
ACCESS VARIOUS PAGES BY CLICKING ON THE HEADINGS ON OUR HOME PAGE"]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary............................................................................ 1
Risk Factors.................................................................................. 7
Forward-Looking Statements.................................................................... 17
Use of Proceeds............................................................................... 18
Dividend Policy............................................................................... 18
Capitalization................................................................................ 19
Dilution...................................................................................... 20
Selected Financial Data....................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations......... 23
Our Business.................................................................................. 32
Management.................................................................................... 49
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Transactions and Stock Issuances with Executive Officers,
Directors and Our Largest Shareholder.................................................... 60
Principal Shareholders........................................................................ 62
Description of Capital Stock.................................................................. 63
Shares Eligible for Future Sale............................................................... 68
Underwriting.................................................................................. 70
Experts....................................................................................... 73
Legal Matters................................................................................. 73
Additional Information........................................................................ 74
Reports to Security Holders................................................................... 74
Index to the Company's Financial Statements................................................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes our company as we
currently expect it to exist at the time of this offering.
Our subsidiaries include Boulder Interactive Technology Services Co., known
as RF Globalnet, and Informatrix Worldwide, Inc., both of which we acquired in
September 1998. The acquisition of RF Globalnet is reflected in the financial
information contained in this prospectus on a pro forma basis giving effect to
the acquisition as if it had occurred on January 1, 1997, and the acquisition
of Informatrix as if it had occurred on October 15, 1997 ("on a pro forma
basis").
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in the common
stock offered in this prospectus. All trademarks and trade names appearing in
this prospectus are the property of their respective holders.
Until , 1999, all dealers selling shares of the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This 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.
i
<PAGE>
PROSPECTUS SUMMARY
Our Company
VerticalNet owns and operates 33 industry-specific communities of commerce on
the Internet. These vertical trade communities are business-to-business Web
sites that act as comprehensive sources of information, interaction and
electronic commerce--the buying and selling of goods and services over the
Internet.
Each of our communities is individually branded, focuses on one business
sector and caters to individuals with similar professional interests. We design
each of our vertical trade communities to attract professionals responsible for
selecting and purchasing highly specialized industry related products and
services.
For example, our vertical trade community for the chemical industry, chemical
online (www.chemicalonline.com), serves the needs of buyers and suppliers
involved in the manufacturing and processing of chemicals.
Our communities combine:
. product information
. requests for proposals
. discussion forums
. electronic commerce opportunities
. industry news
. directories
. classifieds
. job listings
. online professional education courses
We satisfy a developing market not currently being adequately served through
traditional channels, such as trade publishers, trade shows and trade
associations. We also believe that this market is not currently being served by
Internet companies, which tend to focus on the consumer and not on the
business-to-business market.
Our vertical trade communities exploit the interactive features and global
reach of the Internet, allowing buyers to research, source, contact and
purchase from suppliers.
----------------
Our 33 Vertical Trade Communities
Process Group Environmental Group
chemical online pollution online (pollutiononline.com)
(chemicalonline.com) public works online (publicworks.com)
semiconductor online water online (wateronline.com)
(semiconductoronline.com) power online (poweronline.com)
hydrocarbon online solid waste online (solidwaste.com)
(hydrocarbononline.com) pulp and paper online
pharmaceutical online (pulpandpaperonline.com)
(pharmaceuticalonline.com)
adhesives and sealants online
(adhesivesandsealants.com) Food & Packaging Group
food online (foodonline.com) bakery online (bakeryonline.com)
oil and gas online beverage online (beverageonline.com)
(oilandgasonline.com) dairy network.com (dairynetwork.com)
paint and coatings online food ingredients online
(paintandcoatings.com) (foodingredientsonline.com)
Communications Group meat and poultry online
fiber optics online (meatandpoultryonline.com)
(fiberopticsonline.com) packaging network.com
photonics online (packagingnetwork.com)
(photonicsonline.com)
RF Globalnet (rfglobalnet.com) Sciences Group
premises networks.com bioresearch online
(premisesnetworks.com) (bioresearchonline.com)
wireless design online laboratory network.com
(wirelessdesignonline.com) (laboratorynetwork.com)
Services Group
Electronics Group property and casualty.com
computerOEM online (propertyandcasualty.com)
(computeroemonline.com) safety online (safetyonline.com)
medical design online
(medicaldesignonline.com)
plant automation.com
(plantautomation.com)
test and measurement
(testandmeasurement.com)
1
Prospectus Summary
<PAGE>
Although other companies offer business-to-business services on the Internet,
we believe we are currently the only company operating a portfolio of
specialized business-to-business communities. A portfolio strategy permits us
to:
. offer consistent content and services in our current vertical trade
communities, and replicate these offerings as we launch new communities;
. realize cost savings and operating efficiencies in our technology, marketing,
infrastructure and management resources; and
. increase our overall audience, making our individual sites more appealing to
a broad array of advertisers and suppliers who sell their goods and services
over the Internet.
Our objective is to continue to be a leading owner and operator of industry
specific vertical trade communities on the Internet. Our strategy includes:
. expanding our user base;
. enhancing the user's experience with new content, features and services;
. establishing and expanding multiple revenue streams;
. continuing to rapidly develop new vertical trade communities;
. forming alliances to enhance our distribution, marketing and technology;
. pursuing strategic acquisitions; and
. expanding internationally.
We currently generate the majority of our revenues from Internet advertising,
including the development of "storefronts." A storefront is a Web page posted
on one of our vertical trade communities that provides information on an
advertiser's products, links a visitor to the advertiser's Web site and
generates sales inquiries from interested visitors.
For the nine months ended September 30, 1998, we generated more than 98% of
our revenues from the sale of Internet advertising.
We believe that industry professionals using our vertical trade communities
possess the demographic characteristics that are attractive to our advertisers.
As of December 31, 1998, we had more than 700 advertisers including, Asea Brown
Boveri, FMC Corporation, Hewlett-Packard, Koch Industries, Motorola,
Schlumberger and U.S. Filter.
Marketing and Distribution Alliances
As part of our strategy to increase the number of users that visit our
vertical trade communities and to develop electronic commerce activities, we
actively pursue marketing and distribution alliances. To date, we have entered
into several marketing and distribution alliances including content
distribution alliances with Excite, Inc. and AltaVista and an
electronic commerce alliance with Junglee Corp.
Acquisitions
On September 1, 1998, we acquired RF Globalnet which operates
rfglobalnet.com, a vertical trade community focused on professionals in the
radio frequency and wireless communications industry. We also acquired
Informatrix on September 30, 1998. Informatrix operates
propertyandcasualty.com, a vertical trade community that caters to risk
managers, agents, brokers and other professionals in the insurance industry.
On January 13, 1999, we purchased the online business, operated as safety
online, from Coastal Video Communication Corp. for $260,000 in cash and a
$50,000 note which is
2
Prospectus Summary
<PAGE>
payable without interest no earlier than 90 days from such date. We also
provided Coastal with an advertising commitment on our Web site, which will be
subsequently valued. This Web site is used by professionals in the safety
industry.
About VerticalNet
Principal Executive Offices:
VerticalNet, Inc.
2 Walnut Grove Drive
Horsham, Pennsylvania 19044
Phone: (215) 328-6100
Incorporation: 1995 in Pennsylvania.
Our Controlling Shareholders
ICG Capital Group, Inc., which does business as Internet Captial Group,
currently controls VerticalNet and has two representatives on our board of
directors. Koch Ventures, Inc. is also a significant shareholder of VerticalNet
and has one representative on our board. After the offering, Internet Capital
Group, will beneficially own 6,177,552 shares of common stock and warrants to
purchase 119,656 shares of common stock, which represent approximately 38.4% of
the outstanding shares, at an assumed initial public offering price of $13.00
per share. After the offering, Koch Ventures will beneficially own 854,701
shares, or 5.3% of the outstanding shares. After we complete the offering, the
three representatives of Internet Capital Group and Koch Ventures will remain
on our board, although we will no longer have an obligation to nominate them as
directors. See "Certain Transactions and Stock Issuances with Executive
Officers, Directors and Our Largest Shareholders." Through their stock
ownership and board representation these shareholders will be in a position to
significantly affect our corporate actions. See "Risk Factors--The interests of
our controlling shareholders may conflict with our interest and the interests
of our other shareholders."
Recent Developments
Revenues (unaudited)
We generated revenues of $1.27 million for the three months ended December
31, 1998, giving us revenues of $3.13 million for the year ended December 31,
1998. For the three months ended December 31, 1998, we generated 95% of our
revenues from the sale of Internet advertising and 5% of our revenues from
electronic commerce. At December 31, 1998, we had deferred revenues of $2.10
million.
The revenue growth from $897,000 for the three months ended September 30,
1998 to $1.27 million for the three months ended December 31, 1998 is
attributable to the expansion of our sales and sales support personnel, the
acquisition of Informatrix and a full quarter of revenues for the acquisition
of RF Globalnet, and the addition of new revenue streams. We believe that the
higher revenue levels for the three months ended December 31, 1998 will not
translate into correspondingly lower net losses for that period. In
management's opinion, we have recorded all adjustments necessary to present
fairly the revenues for the three months ended December 31, 1998.
This summary highlights some information from this prospectus and may not
contain all the information that is important to you.
3 Prospectus Summary
<PAGE>
The Offering
<TABLE>
<C> <S>
Common Stock offered by VerticalNet .. 3,500,000 shares
Common Stock outstanding after the
offering ............................ 16,260,252 shares. This number
includes shares resulting from $5.0
million in convertible notes that will
convert into common stock at the
initial public offering price per
share. Assuming a $13.00 initial
public offering price, the
$5.0 million in convertible notes will
convert into 384,615 shares.
Use of proceeds....................... We estimate that we will receive net
proceeds from this offering of
approximately $41.0 million or
$47.4 million if the underwriters
exercise their over-allotment option
in full. We will use approximately
$2.0 million of the net proceeds to
repay the note issued to Progress
Bank. We expect to use the remaining
proceeds for investments in existing
and future vertical trade communities,
general corporate purposes and
potential strategic acquisitions. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol............................... "VERT"
</TABLE>
Shares that May Be Issued After the Offering Upon the Exercise of Options and
Warrants
In addition to the shares of common stock to be outstanding after the
offering, we will issue shares of common stock to current warrant holders and
option holders upon the exercise of their warrants and options. Our board of
directors and shareholders have also approved plans that will permit us to
issue additional shares of common stock. The additional shares of common stock
that we have currently approved for issuance after the offering are as follows:
. 3,591,411 shares issuable upon the exercise of grants under the 1996
Equity Compensation Plan consisting of:
. 2,242,612 options outstanding at a weighted average exercise price
of $2.84 per share of which 419,070 were exercisable;
. 102,564 options authorized to be issued before the offering at an
exercise price equal to the initial public offering price; and
.1,246,235 options available for future awards after the offering;
.300,000 shares available for issuance to our employees that elect to buy
stock in the future under our Employee Stock Purchase Plan, and
. 235,871 shares issuable upon the exercise of warrants outstanding at a
weighted average exercise price of $5.37 per share.
4
Prospectus Summary
<PAGE>
Summary Financial Data
The following table summarizes the financial data for our business. The pro
forma statement of operations data gives effect to our acquisition of RF
Globalnet as if it had occurred on January 1, 1997 and our acquisition of
Informatrix as if it had occurred on October 15, 1997, the inception of
Informatrix.
<TABLE>
<CAPTION>
July 28, 1995
(Inception) Year Ended December 31, Nine Months Ended September 30,
to ---------------------------------- ----------------------------------
December 31, 1997 1998
1995 1996 1997 Pro Forma 1997 1998 Pro Forma
------------- ---------- ---------- ---------- ---------- ---------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 16 $ 285 $ 792 $ 1,118 $ 551 $ 1,862 $ 2,332
Operating loss.......... (210) (703) (4,664) (5,674) (2,813) (8,349) (9,813)
Net loss................ (211) (709) (4,779) (5,789) (2,842) (8,334) (9,801)
Basic and diluted net
loss per share......... $ (0.19) $ (0.27) $ (1.89) $ (2.28) $ (1.12) $ (3.27) $ (3.77)
Shares used in basic and
diluted net loss per
share
calculation............ 1,096,679 2,583,648 2,526,865 2,536,480 2,526,865 2,550,619 2,596,604
Pro forma basic and
diluted net loss
per share ............. $ (0.19) $ (0.21) $ (0.77) $ (0.93) $ (0.50) $ (0.83) $ (0.97)
Shares used in pro forma
basic and diluted net
loss per common share
calculation ........... 1,096,679 3,326,284 6,184,326 6,193,941 5,677,540 10,052,180 10,098,165
</TABLE>
The following table indicates a summary of our balance sheet as of September
30, 1998. The Pro Forma column reflects the issuance and conversion of $5.0
million of convertible notes into common stock at the consummation of the
offering, the issuance of the $2.0 million note to Progress Bank and the
issuance of warrants, valued at $200,000. The Pro Forma As Adjusted column
reflects the repayment of the $2.0 million note to Progress Bank and the sale
of 3,500,000 shares of common stock in the offering at an assumed initial
public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses. See "Use of
Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
As of September 30, 1998
--------------------------
Pro Pro Forma
Actual Forma As Adjusted
------ ------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $3,794 $10,794 $49,809
Working capital...................................... 1,122 6,122 47,137
Total assets......................................... 9,158 16,158 55,173
Long-term debt, less current portion................. 374 374 374
Total shareholders' equity........................... 4,709 9,709 50,724
</TABLE>
5
Prospectus Summary
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the shares of our common stock.
We have limited operating history upon which you may evaluate us
We launched our first vertical trade community in October 1995. Accordingly,
we have a limited operating history upon which you may evaluate us. In
addition, our revenue model is evolving. Currently, our revenues are primarily
generated from the sale of advertising on our vertical trade communities. In
the future, we expect to generate revenue from multiple sources, including
electronic commerce and business services. We may not be able to sustain our
current revenues or successfully generate electronic commerce or business
services revenue. If we do not generate such revenue, our business, financial
condition and operating results will be materially adversely affected.
We anticipate we will incur continued losses for the forseeable future
To date, we have not been profitable. We may never be profitable or, if we
become profitable, we may be unable to sustain profitability. We have incurred
significant losses since inception. We reported a net loss of $8.3 million for
the nine months ended September 30, 1998. We expect to continue to incur
significant losses for the foreseeable future. As of September 30, 1998, our
accumulated deficit was $14.0 million. Our limited operating history makes
predicting our future operating results, including operating expenses,
difficult. Although our revenues have grown in recent periods, they may not
continue to grow or even continue at their current level.
Some of our expenses are fixed, including non-cancellable agreements,
equipment leases and real estate leases. If our revenues do not increase, we
may not be able to compensate by reducing expenses in a timely manner. In
addition, we plan to significantly increase our operating expenses to:
. launch additional vertical trade communities;
. increase our sales and marketing operations;
. enter into additional sponsorship agreements;
. broaden our customer support capabilities; and
. pursue marketing and distribution alliances.
Expenses may also increase due to the potential impact of goodwill and other
charges resulting from completed and future acquisitions.
Additionally, leading Web sites, browser providers and other Internet
distribution channels may begin to charge us to provide access to our products
and services. If any of these expenses are not accompanied by increased
revenues, our business, financial condition and operating results would be
materially adversely affected.
Fluctuations in our quarterly results may adversely affect our stock price
We expect that our quarterly operating results will fluctuate significantly
due to many factors, including:
. the seasonality of our revenues;
. the uncertain adoption of the Internet as an advertising medium;
. potential dependence on development of the electronic commerce market;
6
Risk Factors
<PAGE>
. intense competition;
. our dependence on content providers;
. license fees payable to content providers;
. uncertain acceptance of our Internet content;
. management of our growth; and
. risks associated with potential acquisitions.
All of these factors are described in more detail in the "Risk Factors"
below. Many of these factors are beyond our control.
Due to the limited history of businesses relying on the Internet as a
commercial medium, we believe that period-to-period comparisons of our
operating results are not meaningful. Additionally, if our operating results
in one or more quarters do not meet the securities analysts' or your
expectations, the price of our common stock could be materially adversely
affected.
The seasonality of our advertising revenues and usage causes our overall
revenues to be seasonal
Some of our revenue is seasonal which causes our revenues to be lower in the
second and third quarters of each calendar year. As a result, after the
announcement of our results for the second and third quarters or each calendar
year, our stock price may be lower than at other times of the year. We
experience seasonality in our advertising revenue because advertising and
media buying tends to be highest in the first and fourth quarters of each
calender year. We also experience seasonality in our traffic. User traffic on
our vertical trade communities and the Web sites of our partners is lower
during the summer and year-end vacation and holiday periods, when business
usage of the Web and our services typically declines.
We currently rely heavily on advertising revenues and if these revenues
decline our business would be adversely affected
We currently rely on revenues generated from the sale of advertising on our
vertical trade communities for substantially all of our revenues. To be
successful, we must continue to develop advertising and other sources of
revenues. Our ability to increase our advertising revenues may depend, among
other things, on many factors, including:
. advertisers' acceptance of the Internet as a legitimate advertising medium;
. the development of a large base of users on our vertical trade communities
who possess demographic characteristics attractive to advertisers; and
. the expansion of our sales force.
It is difficult to predict advertising revenues because a wide range of
rates are quoted and a variety of pricing models are offered by different
vendors for a variety of advertising services. For example, we currently base
our storefront advertising rates on a variety of factors including the
maturity of the particular vertical trade community, the number of storefronts
and amount of other advertising purchased and the length of the advertising
contract. In the future, advertising rates may be based on different
parameters such as the number of sales inquiries generated or visitors sent
from our vertical trade communities to advertisers' Web sites. Changes in
industry pricing practices could materially adversely affect our revenues in
the future. Other factors could also affect our revenues. For example,
widespread use of "filter" software programs that limit access to storefront
advertising from the Internet user's browser could reduce advertising on the
Internet, which would materially adversely affect our business, financial
condition and operating results.
Adoption of the Internet as an advertising medium is uncertain
The growth of Internet advertising requires validation of the Internet as an
effective advertising medium. This validation has yet to
7
Risk Factors
<PAGE>
fully occur. Acceptance of the Internet among advertisers will also depend on
growth in the commercial use of the Internet. If widespread commercial use of
the Internet does not develop, or if the Internet does not develop as an
effective and measurable medium for advertising, our business, financial
condition and operating results could be materially adversely affected.
No standards have been widely accepted to measure the effectiveness of
Internet advertising. If such standards do not develop, existing advertisers
may not continue their current levels of Internet advertising and advertisers
who are not currently advertising on the Internet may be reluctant to do so.
Our business, financial condition and operating results would be adversely
affected if the market for Internet advertising fails to develop or develops
slower than expected.
We may not develop additional revenue sources
For the nine months ended September 30, 1998, approximately 2% of our
revenues were generated from electronic commerce. If we do not generate
increased revenue from electronic commerce, our business, financial condition
and operating results could be materially adversely affected. We plan to
generate revenues through revenue-sharing relationships with electronic
commerce partners in addition to selling advertising. To generate significant
electronic commerce revenues, we will have to continue to build or license an
electronic commerce platform in addition to our Junglee relationship.
Our long-term success depends on the development of the electronic commerce
market which is uncertain
If electronic commerce does not grow or grows slower than expected, our
business will suffer. Our long-term success depends on widespread market-
acceptance of electronic commerce.
A number of factors could prevent such acceptance, including the following:
. electronic commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
. the necessary network infrastructure for substantial growth in usage of the
Internet may not be adequately developed;
. increased government regulation or taxation may adversely affect the
viability of electronic commerce;
. insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
. adverse publicity and consumer concern about the security of electronic
commerce transactions could discourage its acceptance and growth.
There is intense competition for Internet products and services, advertising
and sales of goods and services
Competition for Internet products and services, advertising and electronic
commerce is intense. We expect that competition will continue to intensify.
Barriers to entry are minimal, and competitors can launch new Web sites at a
relatively low cost. We compete for a share of a customer's advertising budget
with online services and traditional off-line media, such as print and trade
associations. Although to date we believe there are no companies with a larger
portfolio of vertical trade communities than ours, several companies offer
competitive vertical trade communities. We expect that additional companies
will offer competing vertical trade communities on a standalone or portfolio
basis.
8
Risk Factors
<PAGE>
Our competitors may develop Internet products or services that are superior
to, or have greater market acceptance than, our solutions. If we are unable to
compete successfully against our competitors, our business, financial
condition and operating results will be adversely affected.
Many of our competitors have greater brand recognition and greater
financial, marketing and other resources than ours. This may place us at a
disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and
other initiatives.
Concerns regarding security of transactions and transmitting confidential
information over the Internet may negatively impact our electronic commerce
business
We believe that concern regarding the security of confidential information
transmitted over the Internet, such as credit card numbers, prevents many
potential customers from engaging in online transactions. If we do not add
sufficient security features to future product releases, our products may not
gain market acceptance or there may be additional legal exposure to us. We
have included basic security features in some of our products to protect the
privacy and integrity of customer data, such as password requirements for
access to portions of our vertical trade communities. We do not currently use
authentication technology, which requires passwords and other information to
prevent unauthorized persons from accessing a customer's information, or
encryption, which transforms information into a "code" designed to be
unreadable by third parties, to protect confidential information such as
credit card numbers. However, we intend to license encryption technology to
protect confidential transaction data.
Despite the measures we have taken, our infrastructure is potentially
vulnerable to physical or electronic break-ins, viruses or similar problems.
If a person circumvents our security measures, he or she could misappropriate
proprietary information or cause interruptions in our operations. Security
breaches that result in access to confidential information could damage our
reputation and expose us to a risk of loss or liability. We may be required to
make significant investments and efforts to protect against or remedy security
breaches. Additionally, as electronic commerce becomes more prevalent (and
consequently becomes the focus of our development of direct marketing
products), our customers will become more concerned about security. If we do
not adequately address these concerns, this could materially adversely affect
our business, financial condition and operating results.
Marketing and distribution alliances may not generate the expected number of
new customers or may be terminated
We use marketing and distribution alliances with other Internet companies to
create traffic on our vertical trade communities and consequently, to generate
revenues. These marketing and distribution alliances allow us to link our
vertical trade communities to search engines such as those offered by Excite,
and on other Web sites such as AltaVista. The success of these relationships
depends on the amount of increased traffic we receive from the alliance
partners' Web sites. These arrangements may not generate the expected number
of new customers. We also cannot assure you that we will be able to renew
these marketing and distribution alliance agreements. If any of these
agreements are terminated, the traffic on our verticle trade communities could
decrease or our advertising revenues derived from the sales of advertising on
co-branded pages could decrease.
9
Risk Factors
<PAGE>
We may not have opportunities to enter into new partnerships or marketing and
distribution alliances
We are interested in entering into additional partnerships with search engine
providers to increase traffic to our verical trade communities, but we cannot
assure you that we will be able to enter into any new partnerships. If we are
unable to enter into new arrangements the traffic on our verticle trade
communities may not increase.
Our business depends on the growth of the Internet, which is uncertain
Our market is new and rapidly evolving. Our business would be adversely
affected if Internet usage does not continue to grow. Internet usage may be
inhibited by a number of reasons, such as:
. infrastructure;
. security concerns;
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline. In addition, Web sites may from time to time
experience interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, Internet usage, as well as
usage of our vertical trade communities, could be adversely affected.
Our Internet content may not attract users with demographic characteristics
valuable to our advertisers
Our future success depends upon our ability to deliver compelling Internet
content about various industries that will attract users with demographic
characteristics valuable to our advertising customers. If we are unable to
develop Internet content that attracts a loyal user base possessing demographic
characteristics attractive to advertisers, it could have a material adverse
effect on our business, financial condition and operating results. In addition,
we may be unable to anticipate or respond to rapidly changing buyer preferences
to attract enough users to our vertical trade communities. Internet users can
freely navigate and instantly switch among a large number of Web sites. Many of
these Internet sites offer original content. Thus, it is difficult for us to
distinguish our content and attract users.
We depend on third parties to provide the content for our vertical trade
communities
We rely on third parties, such as trade publications and news wires, to
provide the content for our vertical trade communities. It is critical to our
business that we maintain and build our existing relationships with content
providers. Many of our agreements with content providers are for initial terms
of one to two years. The content providers may choose not to renew the
agreements or may terminate the agreements early if we do not fulfill our
contractual obligations, including our payment obligations. If a significant
number of content providers terminate our agreements with them, it could result
in decreased traffic on our vertical trade communities and decreased
advertising revenue. Because our agreements with certain of our content
providers are nonexclusive, a competitor could offer content similar to or the
same as ours.
The licensee fees we pay to content providers may increase
If licensing fees increase, it could materially adversely affect our
business, financial condition and operating results.
10
Risk Factors
<PAGE>
License fees to content providers may increase as competition for such content
increases. Our content providers may not enter into new agreements with us on
similar terms as our current agreements.
The development of the "VerticalNet" brand and our vertical trade community
brands is important to our success
To be successful, we must establish and strengthen the brand awareness of
the "VerticalNet" brand as well as the brands associated with each individual
vertical trade community (e.g. wateronline.com). If our brand awareness is
weakened, it could decrease the attractiveness of our audiences to
advertisers, which could result in decreasing advertising revenues. We believe
that brand recognition will become more important in the future with the
growing number of Internet sites. Our brand awareness could be diluted, which
could adversely affect our business, finanical condition and operating results
if users do not perceive our products and services to be of high quality.
Effectively managing our growth may be difficult
We have grown and expect to continue to grow rapidly both by adding new
products and hiring new employees. This growth is likely to place a
significant strain on our resources and systems. To manage our growth, we must
implement systems and train and manage our employees.
Many of our senior management have only recently joined us. Of the eleven
employees listed in the management section of this prospectus, six have worked
for us less than one year. We cannot assure you that our management will be
able to effectively or successfully manage our growth.
We may not be able to protect our proprietary rights and we may infringe the
proprietary rights of others
Proprietary rights are important to our success and our competitive
position. We have applied for several trademarks, none of which has been
issued to date. Although we seek to protect our proprietary rights, our
actions may be inadequate to protect any trademarks and other proprietary
rights or to prevent others from claiming violations of their trademarks and
other proprietary rights. We currently have two pending trademark
applications. Generally, our domain names for our vertical trade communities
are not protectible as trademarks because they are too generic. In addition,
effective copyright and trademark protection may be unenforceable or limited
in certain countries, and the global nature of the Internet makes it
impossible to control the ultimate destination of our work. We also license
content from third parties and it is possible that we could become subject to
infringement actions based upon the content licensed from those third parties.
We generally obtain representations as to the origin and ownership of such
licensed content; however, this may not adequately protect us. Any of these
claims, with or without merit, could subject us to costly litigation and the
diversion of our technical and management personnel.
We may not be able to acquire or maintain effective Web addresses
We currently hold various Internet Web addresses relating to our brand.
These Web addresses include wateronline.com, wirelessdesignonline.com,
pollutiononline.com and other Web addresses. We may not be able to prevent
third parties from acquiring Web addresses that are similar to our addresses,
which could materially adversely affect our business, financial condition and
operating results. The acquisition and maintenance of
11
Risk Factors
<PAGE>
Web addresses generally is regulated by governmental agencies and their
designees. For example, in the United States, the National Science Foundation
has appointed Network Solutions, Inc. as the exclusive registrar for the
".com," ".net" and ".org" generic top-level addresses. The regulation of Web
addresses in the United States and in foreign countries is subject to change.
As a result, we may not be able to acquire or maintain relevant Web addresses
in all countries where we conduct business. Furthermore, the relationship
between regulations governing such addresses and laws protecting trademarks is
unclear.
Acquisitions may disrupt or otherwise have a negative impact on our business
We have made, and plan to continue to make, investments in complementary
companies, technologies and assets. Future acquisitions are subject to the
following risks:
. acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures;
. we may acquire companies in markets in which we have little experience;
. we may not be able to successfully integrate the services, products and
personnel of any acquisition into our operations;
. we may be required to incur debt or issue equity securities, which may be
dilutive to existing shareholders, to pay for acquisitions; and
. our acquisitions may not result in any return on our investment and we may
lose our entire investment.
We may not be able to consummate future acquisitions
Our acquisition strategy is subject to the risk of not being able to identify
additional suitable acquisition candidates available for sale at reasonable
prices or on reasonable terms. Additionally, regardless of whether suitable
candidates are available, we may not be able to consummate future acquisitions
for other reasons such as the availability of capital. If we are unable to
consummate future acquisitions, our business, financial condition and operating
results could be adversely affected.
We may be subject to legal liability for publishing or distributing content
over the Internet
We may be subject to legal claims relating to the content in our vertical
trade communities, or the downloading and distribution of such content. For
example, persons may bring claims against us if material that is inappropriate
for viewing by young children can be accessed from our vertical trade
communities. Claims could also involve matters such as defamation, invasion of
privacy, and copyright infringement. Providers of Internet products and
services have been sued in the past, sometimes successfully, based on the
content of material. In addition, some of the content provided on our vertical
trade communities is drawn from data compiled by other parties, including
governmental and commercial sources, and we re-key the data. This data may have
errors. If our content is improperly used or if we supply incorrect
information, it could result in unexpected liability. Our insurance may not
cover claims of this type, or may not provide sufficient coverage. Our
business, financial condition and operating results could suffer a material
adverse effect if costs resulting from these claims are not covered by our
insurance or exceed our coverage.
12
Risk Factors
<PAGE>
Risk of failure of our computer and communications hardware systems increases
without redundant facilities
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems. Any system interruptions that
cause our vertical trade communities to be unavailable to Web browsers may
reduce the attractiveness of our vertical trade communities to advertisers and
could materially adversely affect our business, financial condition and
operating results. We maintain most of our computer systems in two Web-hosting
facilities in New Jersey. However, we do not have back-up or redundant
facilities for our computer systems. Interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar
events.
Capacity constraints on our technology, transaction processing system and
network hardware and software may be difficult to project
As traffic in our vertical trade communities continues to increase, we must
expand and upgrade our technology, transaction processing systems and network
hardware and software. We may not be able to accurately project the rate of
increase in our vertical trade communities. In addition, we may not be able to
expand and upgrade our systems and network hardware and software capabilities
to accommodate increased use of our vertical trade communities. If we do not
appropriately upgrade our systems and network hardware and software, our
business, financial condition and operating results will be materially
adversely affected.
Our market is characterized by rapid technological change
Our market is characterized by rapid technological change and frequent new
product announcements. Significant technological changes could render our
existing vertical trade community technology obsolete. If we are unable to
successfully respond to these developments or do not respond in a cost-
effective way, our business, financial condition and operating results will be
materially adversely affected. To be successful, we must adapt to our rapidly
changing market by continually improving the responsiveness, services and
features of our vertical trade communities and by developing new features to
meet customer needs. Our success will depend, in part, on our ability to
license leading technologies useful in our business, enhance our existing
services and develop new services and technology that address the needs of our
customers. We will also need to respond to technological advances and emerging
industry standards in a cost-effective and timely basis.
Our success is dependent on our key personnel
We believe that our success will depend on continued employment of our
senior management team and key technical personnel. If one or more members of
our senior management team were unable or unwilling to continue in their
present positions, our business, financial condition and operating results
could be materially adversely affected. Most of our senior management do not
have employment agreements. We carry key person life insurance on certain, but
not on all, of our senior management personnel.
Our success also depends on having a highly trained sales force and
telesales group. Our telesales group was formed recently. We will need to
continue to hire additional personnel as our business grows. A shortage in the
number of trained salespeople could limit our ability to increase sales in our
existing vertical trade communities and to sell as we launch new vertical
trade communities.
We plan to expand our employee base to manage our anticipated growth.
Competition for personnel, particularly for employees with technical
expertise, is intense. Our business,
13
Risk Factors
<PAGE>
financial condition and operating results will be materially adversely affected
if we cannot hire and retain suitable personnel.
Our systems may not be Year 2000 compliant
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. If our present efforts
to address the Year 2000 compliance issues are not successful, or if
distributors, suppliers and other third parties with which we conduct business
do not successfully address such issues, our business, operating results and
financial position could be materially and adversely affected.
In the event that our Web-hosting facilities are not Year 2000 compliant,
our production Web sites would be unavailable and we would not be able to
deliver services to our users. In the event that our production and operational
facilities that support our Web sites are not Year 2000 compliant, small
portions of our Web sites may become unavailable.
The interests of our controlling shareholders may conflict with our interests
and the interests of our other shareholders
As a result of its stock ownership and board representation, Internet Capital
Group will be in a position to affect significantly our corporate actions such
as mergers or takeover attempts in a manner that could conflict with the
interests of our public shareholders. Internet Capital Group will own 6,177,552
shares of common stock after the conversion of their preferred stock and
convertible notes in the offering at an assumed initial public offering price
of $13.00 per share. Internet Capital Group also owns warrants to purchase
119,656 shares of common stock. Based on its ownership of common stock and
warrants after the offering, Internet Capital Group will beneficially own 38.4%
of the common stock and two representatives of Internet Capital Group will
remain on our board of directors after the offering.
Shares eligible for future sale by our current shareholders may adversely
affect our stock price
If our shareholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and warrants, in the
public market following the offering, then the market price of our common stock
could fall. Restrictions under the securities laws and certain lock-up
agreements limit the number of shares of common stock available for sale in the
public market. The holders of 1,305,468 shares of common stock, 7,805,667
shares of convertible preferred stock that will automatically convert to
9,307,495 shares of common stock before the offering and warrants and options
exercisable into an aggregate of 462,074 shares of common stock have agreed not
to sell any such securities for 180 days after the offering without the prior
written consent of Lehman Brothers. In addition, the holders of the convertible
notes that will automatically convert into 384,615 shares of common stock,
assuming an initial public offering price of $13.00, have also agreed to such
restrictions. However, Lehman Brothers may, in its sole discretion, release all
or any portion of the securities subject to such lock-up agreements.
The holders of 7,805,667 shares of preferred stock that will automatically
convert to 9,734,846 shares of common stock prior to the offering and warrants
to purchase 235,871 shares of common stock have demand and piggy-back
registration rights. In addition, the holders of the convertible notes that
will automatically convert into 384,615 shares of common stock, assuming an
initial public
14
Risk Factors
<PAGE>
offering price of $13.00 per share, have similar registration rights. The
exercise of such rights could adversely affect the market price of our common
stock. We also may shortly file a registration statement to register all
shares of common stock under our stock option plans. After such registration
statement is effective, shares issued upon exercise of stock options will be
eligible for resale in the public market without restriction.
Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult
VerticalNet is a Pennsylvania corporation. Anti-takeover provisions of
Pennsylvania law could make it more difficult for a third party to acquire
control of us, even if such change in control would be beneficial to
shareholders. Our articles of incorporation provide that our board of
directors may issue preferred stock without shareholder approval. In addition,
our bylaws provide for a classified board, with each board member serving a
staggered three year term. The issuance of preferred stock and the existence
of a classified board could make it more difficult for a third-party to
acquire us.
Our common stock has never been publicly traded
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiations between representatives of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
Our common stock price is likely to be highly volatile
The market price of our common stock is likely to be highly volatile as the
stock market in general, and the market for Internet-related and technology
companies in particular, has been highly volatile. Investors may not be able
to resell their shares of our common stock following periods of volatility
because of the market's adverse reaction to such volatility. The trading
prices of many technology and Internet-related companies' stocks have reached
historical highs within the last 52 weeks and have reflected relative
valuations substantially above historical levels. During the same period, such
companies' stocks have also been highly volatile and have recorded lows well
below such historical highs. We cannot assure you that our stock will trade at
the same levels of other Internet stocks or that Internet stocks in general
will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
. actual or anticipated variations in quarterly operating results;
. announcements of technological innovations;
. new sales formats or new products or services;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet industry;
. changes in the market valuations of other Internet companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships or joint ventures;
. capital commitments;
. additions or departures of key personnel; and
. sales of common stock.
Many of these factors are beyond our control. These factors may materially
adversely affect the market price of our common stock, regardless of our
operating performance.
15
Risk Factors
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among other
things, electronic commerce strategy, acquisition and expansion strategy,
development of services, use of proceeds, projected capital expenditures,
liquidity, development of additional revenue sources, development and
maintenance of profitable marketing and distribution alliances, market
acceptance of the Internet, acquisition and/or development of profitable new
vertical trade communities, technological advancement, ability to develop
"brand" identification, and global expansion. These statements may be found in
the sections of this prospectus entitled "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Our Business" and in this prospectus generally.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including all the
risks discussed in "Risk Factors" and elsewhere in this prospectus.
16
Forward-Looking Statements
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the offering to be approximately $41.0
million or $47.4 million if the underwriters' exercise their over-allotment
option in full, assuming an initial public offering price of $13.00 per share
and after deducting estimated underwriting discounts and commissions and
expenses of the offering.
We expect to use the net proceeds from the offering to repay the debt
described below for investments in existing and future vertical trade
communities and for general corporate purposes. A portion of the net proceeds
may be used for consummation of strategic acquisitions. Although we are not
contemplating any specific acquisitions at this time, we expect that
acquisition candidates
would be operators of vertical trade communities or businesses with
complementary technologies. We expect to use $2.0 million of the net proceeds
to repay a note issued to Progress Bank. This note bears interest at the prime
rate plus 1.5%. As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the remaining net proceeds we will
have upon completion of the offering. Accordingly, our management will have
broad discretion in the application of the net proceeds.
Pending such uses, we intend to invest the net proceeds in interest-bearing,
investment-grade instruments, certificates of deposit, or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future
determination to pay cash dividends will be at the discretion of the board of
directors and will be dependent upon our financial condition, operating
results, capital requirements and such other factors as the board of directors
deems relevant.
17
Use of Proceeds/Dividend Policy
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1998.
Our capitalization is presented:
. on an actual basis;
. on a pro forma basis to give effect to:
. the automatic conversion of all outstanding shares of preferred
stock into common stock upon the consummation of the offering;
. the issuance and conversion of $5.0 million of convertible notes
into common stock upon the consummation of the offering at an
assumed initial public offering price of $13.00 per share;
. the issuance of the $2.0 million note to Progress Bank;
. the issuance of warrants valued at $200,000; and
. on a pro forma as adjusted basis to reflect our receipt of the
estimated net proceeds from the sale of 3,500,000 shares of common
stock offered in the offering at an assumed initial public offering
price of $13.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses and the repayment of the
$2.0 million note to Progress Bank.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................... $ -- $ 2,000 $ --
Long-term debt, less current portion.......... $ 374 $ 374 $ 374
Shareholders' equity:
Preferred stock, $.01 par value; 40,000,000
shares authorized; 7,805,667 shares issued
and outstanding, actual; none issued and
outstanding, pro forma and pro forma as
adjusted................................... 78 -- --
Common stock, $.01 par value; 40,000,000
shares authorized; 2,629,999 shares issued
and outstanding, actual; 12,749,460 shares
issued and outstanding, pro forma; and
16,249,460 outstanding, pro forma as
adjusted................................... 26 127 162
Additional paid-in capital.................... 18,837 24,014 64,994
Deferred compensation......................... (139) (139) (139)
Accumulated deficit........................... (14,033) (14,233) (14,233)
Treasury stock (at cost)...................... (60) (60) (60)
-------- -------- --------
Total shareholders' equity................ 4,709 9,709 50,724
-------- -------- --------
Total capitalization.................... $ 5,083 $ 12,083 $ 51,098
======== ======== ========
</TABLE>
We expect there to be 16,260,252 shares of common stock outstanding after the
offering, which, in addition to the pro forma adjustments described above,
includes after September 30, 1998, shares issued upon option exercises and
2,200 shares earned but not distributed to the former Informatrix shareholders
under the terms of a purchase agreement with Informatrix. See "Prospectus
Summary--Shares that May Be Issued After the Offering Upon the Exercise of
Options and Warrants."
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements included in this prospectus.
18
CAPITALIZATION
<PAGE>
DILUTION
As of September 30, 1998, our net tangible book value on a pro forma basis
giving effect to the $5.0 million in convertible notes that convert into common
stock upon the consummation of the offering based on an issued initial public
offering price of $13.00 per share and the conversion of our convertible
preferred stock was $7.0 million or $0.55 per share of common stock. "Net
tangible book value" per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities, divided by the number of
shares of common stock outstanding. As of September 30, 1998, our net tangible
book value, on a pro forma basis as adjusted for the sale of the 3,500,000
shares offered in the offering and application of the net proceeds from such
sale of $41.0 million (based on an assumed initial public offering price of
$13.00 per share and after deducting the underwriting discounts and commissions
and other estimated offering expenses), would have been approximately $2.96 per
share. This represents an immediate increase of $2.41 per share to existing
shareholders and an immediate dilution of $10.04 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $13.00
Pro forma net tangible book value per share as of
September 30, 1998........................................ $ .55
Increase per share attributable to new investors........... 2.41
------
Net tangible book value per share after the offering......... 2.96
------
Dilution per share to new investors.......................... $10.04
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30, 1998
the differences between the total consideration paid and the average price per
share paid by the existing shareholders and the new investors with respect to
the number of shares of common stock purchased from us based on an assumed
initial public offering price of $13.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 12,749,460 78% $24,602,908 35% $1.93
New investors............... 3,500,000 22 45,500,000 65% 13.00
---------- --- ----------- --- -----
Total..................... 16,249,460 100% $70,102,908 100%
========== === =========== ===
</TABLE>
Options available for issuance under our stock option plan may be granted
with exercise prices as low as 80% of the market value of the common stock on
the grant date. If we grant options below fair market value it would be
dilutive to investors who purchase shares at the initial public offering price.
19
Dilution
<PAGE>
SELECTED FINANCIAL DATA
We derived the selected historical and pro forma financial data presented
below from our historical and pro forma financial statements and related notes
included in another part of this prospectus. You should read the selected
financial data together with our historical and pro forma financial statements
and the section of the prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
KPMG LLP, independent certified public accountants, audited our historical
financial statements for the period from July 28, 1995 (inception) to December
31, 1995, for the years ended December 31, 1996 and December 31, 1997 and for
the nine months ended September 30, 1998. Their report appears in another part
of this prospectus. Our historical financial statements for the nine months
ended September 30, 1997 are unaudited, and in our opinion include all
adjustments, consisting of normal adjustments, necessary for a fair
presentation of the results for the unaudited period. You should not rely on
interim results as being indicative of results we may expect for the full year.
We prepared the unaudited pro forma financial information for the year ended
December 31, 1997 and for the nine months ended September 30, 1998 by combining
the historical results of the two companies we acquired, RF Globalnet and
Informatrix, with our historical results using the purchase method of
accounting. This is described in the notes accompanying the information below.
We have presented this information to give you a better picture of what our
business might have looked like if we had owned RF Globalnet since January 1,
1997 and Informatrix since October 15, 1997 (inception). These companies may
have performed differently if they had actually been combined with our
operations. You should not rely on the unaudited pro forma information as being
indicative of the historical results that we would have had or the future
results that we will experience after the acquisitions.
20
Selected Financial Data
<PAGE>
SELECTED FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
July 28, 1995 Year Ended December 31, Nine Months Ended September 30,
(Inception) to ---------------------------------- ------------------------------------
December 31, 1997 1998
1995 1996 1997 Pro Forma 1997 1998 Pro Forma
-------------- ---------- ---------- ---------- ---------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................ $ 16 $ 285 $ 792 $ 1,118 $ 551 $ 1,862 $ 2,332
Expenses:
Editorial and
operational............ 24 214 1,056 1,234 674 2,101 2,296
Product development..... 22 214 711 740 451 798 874
Sales and marketing..... 147 268 2,301 2,464 1,348 4,405 4,955
General and
administrative......... 33 292 1,388 2,354 891 2,907 4,020
---------- ---------- ---------- ---------- ---------- ----------- -----------
Operating loss.......... (210) (703) (4,664) (5,674) (2,813) (8,349) (9,813)
Interest, net........... (1) (6) (115) (115) (29) 15 12
---------- ---------- ---------- ---------- ---------- ----------- -----------
Net loss................ $ (211) $ (709) $ (4,779) $ (5,789) $ (2,842) $ (8,334) $ (9,801)
========== ========== ========== ========== ========== =========== ===========
Basic and diluted net
loss per share......... $ (0.19) $ (0.27) $ (1.89) $ (2.28) $ (1.12) $ (3.27) $ (3.77)
Shares outstanding used
in basic and diluted
net loss per share
calculation............ 1,096,679 2,583,648 2,526,865 2,536,480 2,526,865 2,550,619 2,596,604
Pro forma basic and
diluted net loss per
share.................. $ (0.19) $ (0.21) $ (0.77) $ (0.93) $ (0.50) $ (0.83) $ (0.97)
Shares outstanding used
in pro forma basic and
diluted net loss per
common share
calculation............ 1,096,679 3,326,284 6,184,326 6,193,941 5,677,540 10,052,180 10,098,165
</TABLE>
The following balance sheet data is presented:
. on an actual basis;
. on a pro forma basis to give effect to the issuance and conversion of
$5.0 million of convertible notes into common stock upon the
consummation of the offering, the issuance of the $2.0 million note to
Progress Bank and the issuance of warrants valued at $200,000; and
. on a pro forma as adjusted basis to reflect the repayment of the $2.0
million note to Progress Bank and the net proceeds from the sale of
3,500,000 shares of common stock in the offering at an assumed initial
offering price of $13.00 per share, after deducting the estimated
underwriting discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
As of
December 31, As of September 30, 1998
------------ ----------------------------
Pro Forma
1996 1997 Actual Pro Forma As Adjusted
---- ------- ------ --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......... $329 $ 755 $3,794 $10,794 $49,809
Working capital (deficit).......... 150 (2,536) 1,122 6,122 47,137
Total assets....................... 637 2,104 9,158 16,158 55,173
Short-term borrowings.............. -- 2,500 -- 2,000 --
Deferred revenues.................. 216 710 1,507 1,507 1,507
Long-term debt, less current
portion........................... 167 400 374 374 374
Total shareholders' equity
(deficit)......................... 105 (2,424) 4,709 9,709 50,724
</TABLE>
21
Selected Financial Data
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read together with the financial statements and the related notes
included in another part of this prospectus and which are deemed to be
incorporated into this section. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in those forward-looking statements as a
result of certain factors, including but not limited to, those set forth under
and included in other portions of this prospectus.
We own and operate 33 vertical trade communities. From our founding and
incorporation on July 28, 1995 to October 1995, our principal operating
activities consisted primarily of recruiting employees, performing product and
technology development, raising capital and engaging in marketing activities.
Advertising revenues and Web site development fees contributed most of the
revenues for the period from July 28, 1995 to December 31, 1995 (the "Inception
Period") and in the years ended December 31, 1996 and December 31, 1997.
Currently, most of our revenues are generated from selling advertisements to
industry suppliers in our vertical trade communities.
We sell storefront and banner advertising and event sponsorships on our
vertical trade communities. The duration of a storefront advertisement is
typically for a period of one year, while banner advertisements are typically
for a period of three months. All advertising revenues are recognized ratably
in the period in which the advertisement is displayed, provided that the
collection is reasonably assured. As of September 30, 1998, we had
approximately $1.5 million of deferred revenue. We also generate revenues from
career services, education and electronic commerce, specifically the sale of
books and third party software for which we receive a transaction fee.
Our relationship with Junglee allows us to sell to our visitors books,
software, travel bookings and other goods offered by third party Web sites. We
receive a portion of the revenue from the products sold on our "store," which
is operated for us by Junglee. This type of revenue sharing or commission
sharing relationship is typical of electronic commerce transactions and
relationships on the Internet.
We plan to expand our electronic commerce relationships to include:
. selling goods and services promoted on our advertisers' storefronts;
. selling goods and services from our owned and operated virtual store; and
. auctioning goods posted on our Web sites by inventory-liquidators.
We expect to receive either a fee per transaction, a percentage of sales
revenue or some other minimum guaranteed payment.
We incurred net losses of approximately $211,000 for the Inception Period,
$709,000 for the year ended December 31, 1996, $4.8 million for the year ended
December 31, 1997, and $8.3 million for the nine months ended September 30,
1998 on an actual basis and $9.8 million for the nine months ended September
30, 1998 on a pro forma basis. At September 30, 1998, we had an accumulated
deficit of $14.0 million. The net
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
losses and accumulated deficit resulted from our lack of substantial revenues,
the costs of the significant infrastructure and other costs incurred for the
development and initial rollout of our vertical trade communities. Because of
our aggressive expansion plans, we expect to incur significant operating
losses for the foreseeable future. Although we have experienced revenue growth
in recent periods, such growth may not be sustainable and, therefore, these
recent periods should not be considered indicative of future performance. We
may never achieve significant revenues or profitability, or if we achieve
significant revenues they may not be sustained.
Results of Operations
Nine Months Ended September 30, 1997 and September 30, 1998
Revenues. Revenues increased from $551,000 for the nine months ended
September 30, 1997 to $1.9 million for the nine months ended September 30,
1998. The increase in revenues was due primarily to an increase in the number
of advertisers as a result of our marketing efforts and the increase in the
number of vertical trade communities from 16 as of September 30, 1997 to 29 as
of September 30, 1998. Advertising revenues, including the development of the
storefronts, accounted for the majority of revenues for the periods ended
September 30, 1997 and September 30, 1998. At September 30, 1998, we had
deferred revenues of $1.5 million. We expect that advertising revenue will
continue to account for a substantial share of revenues for the foreseeable
future.
Editorial and Operational Expenses. Editorial and operational expenses
primarily consist of Internet connection charges, cost of acquired content,
depreciation, salaries and benefits of operating and editorial personnel and
other related operating costs. These expenses increased from $674,000 for the
nine months ended September 30, 1997 to $2.1 million for the nine months ended
September 30, 1998. For these periods, expenses increased by $7,000 for
Internet connection charges, $69,000 for cost of acquired content, $102,000
for depreciation, $1.0 million for salaries and benefits of operating and
editorial personnel and $200,000 for other related operating costs. The
increases were primarily related to the increased number of personnel and
amount of equipment required to maintain and operate our increased number of
vertical trade communities.
Product Development Expenses. Product development expenses consist primarily
of salaries and benefits, consulting expenses and related equipment. These
costs increased from $451,000 as of September 30, 1997 to $798,000 for the
nine months ended September 30, 1998. For these periods, expenses increased by
$214,000 for salaries and benefit costs and by $133,000 for consulting and
equipment costs. This increase in expenses was due to increased staffing and
the costs of enhancing the features, content and services of our vertical
trade communities, as well as increasing the overall number of trade
communities. To date, we have charged to expense all of the product
development costs when such costs have been incurred. We believe that
continued investment in product development is critical to attaining our
goals, and therefore expect product development expenses to increase
significantly.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of salaries and commissions for sales and marketing personnel, advertising,
and travel and entertainment, including costs of attending trade shows. These
expenses increased from $1.3 million for the nine months ended September 30,
1997 to $4.4 million for the nine months ended September 30, 1998. For these
periods, expenses increased by $1.6 million for
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
advertising, $1.1 million for salary, commissions and benefits, and $464,000
for travel and entertainment expenses, including costs of attending trade
shows. This was primarily due to increasing the number of sales and marketing
personnel, increasing sales commissions and increased expenses related to
promoting our vertical trade communities. We expect these expenses will
continue to grow significantly, as we pursue an aggressive growth strategy and
hire additional sales/marketing personnel.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for our executive,
administrative, finance, human resources and business development personnel, as
well as support services and professional service fees. These expenses
increased from $891,000 for the nine months ended September 30, 1997 to $2.9
million for the nine months ended September 30, 1998. For these periods,
expenses increased by $1.2 million for general and administrative personnel,
$110,000 for depreciation, $359,000 for professional fees, $250,000 for
facility costs and $6,000 for other general and administrative costs. The
increase was primarily due to increases in the number of personnel to support
and grow our business. We expect these expenses to grow as additional personnel
are hired and additional expenses are incurred. These expenses relate to
growing our business and operating as a public company.
Interest, Net. Interest income net of expense includes income from our cash
and cash equivalents and from investments and expenses related to our financing
obligations. Interest income net of interest expense increased from an expense
of $29,000 for the nine months ended September 30, 1997 to income of $15,000
for the nine months ended September 30, 1998. The increase was primarily due to
a higher investment balance as a result of our sale of preferred stock, which
was partially offset by increased interest expense due to borrowings on our
line of credit, and increased amounts of capital lease obligations in May and
June of 1998. Currently, we invest our cash balances in money market funds.
Inception Period and Years ended December 31, 1996 and December 31, 1997
Revenues. Revenues were $16,000 for the Inception Period, $285,000 for the
year ended December 31, 1996 and $792,000 for the year ended December 31, 1997.
The increases in advertising revenues were due to an increasing number of
advertisers on our vertical trade communities and an increase in the number of
vertical trade communities.
Editorial and Operational Expenses. Editorial and operational expenses were
$24,000 for the Inception Period, $214,000 for the year ended December 31, 1996
and $1.1 million for the year ended December 31, 1997. From the Inception
Period to the year ended December 31, 1996, expenses increased by $21,000 for
Internet connection charges, $1,000 for cost of acquired content, $28,000 for
depreciation, $137,000 for salaries and benefits of operating and editorial
personnel and $3,000 for other related operating costs. From the year ended
December 31, 1996 to the year ended December 31, 1997, expenses increased by
$60,000 for Internet connection charges, $46,000 for cost of acquired content,
$224,000 for depreciation, $469,000 for salaries and benefits of operating and
editorial personnel and $12,000 for other related operating costs. Increases
were primarily related to additional personnel and equipment required to
maintain a larger number of vertical trade communities.
Product Development Expenses. Product development expenses were $22,000 for
the Inception Period, $214,000 for the year ended December 31, 1996 and
$711,000 for the year
24
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
ended December 31, 1997. From the Inception Period to December 31, 1996,
expenses increased by $68,000 for salaries and benefit costs and $124,000 for
consulting and equipment costs. From the year ended December 31, 1996 to
December 31, 1997, expenses for salaries and benefit costs increased by
$643,000 and consulting and equipment costs decreased by $146,000. This
increase in expenses was primarily due to increased staffing and associated
costs related to enhancing the features, content and services of our vertical
trade communities and increasing the overall number of trade communities.
Sales and Marketing Expenses. Sales and marketing expenses were $148,000 for
the Inception Period, $268,000 for the year ended December 31, 1996 and $2.3
million for the year ended December 31, 1997. From the Inception Period to the
year ended December 31, 1996, expenses for advertising decreased by $28,000.
Salary, commissions and benefits increased by $98,000 and travel and
entertainment expenses, including costs of attending trade shows, increased by
$50,000. From the year ended December 31, 1996 to December 31, 1997, expenses
increased by $555,000 for advertising, $1.1 million for salary, commissions
and benefits, and $329,000 for travel and entertainment expenses, including
costs of attending trade shows. These increases were primarily due to an
increased sales force and participation in additional trade shows. We expect
these expenses will continue to increase as we expand our direct sales force,
hire additional marketing personnel and increase expenditures for marketing
and promotional activities.
General and Administrative Expenses. General and administrative expenses
were $33,000 for the Inception Period, $292,000 for the year ended December
31, 1996 and$1.4 million for the year ended December 31, 1997. From the
Inception Period to December 31, 1996, expenses increased by $78,000 for
salaries and benefit costs, $28,000 for depreciation, $78,000 for professional
fees, $45,000 for facility costs and $30,000 for other general and
administrative costs. From the year ended December 31,1996 to December 31,
1997, expenses increased by $492,000 for salaries and benefit costs, $249,000
for professional fees, $258,000 for facility costs and $209,000 for other
general and administrative costs. These increases were due primarily to
increased staffing levels, higher facility costs and professional fees to
support the growth of our infrastructure. We expect to hire additional support
personnel and will incur additional costs related to being a public company,
including insurance for directors and officers, investor relations programs
and other related professional fees.
Interest, Net. Interest income net of expense consists primarily of interest
expense on our line of credit and capital lease obligations. We incurred net
interest expense of $1,000 for the Inception Period, $6,000 for the years
ended December 31, 1996 and $115,000 for the year ended December 31, 1997.
Currently, we invest our cash balances in money market funds.
Income Taxes. As of September 30, 1998, we had approximately $12.4 million
of federal net operating loss carryforwards and $12.7 million of state net
operating loss carryforwards for tax reporting purposes to offset future
taxable income. Our federal net operating loss carryforwards expire beginning
2013 and our state net operating loss carryforwards expire beginning 2000. Due
to the change in our ownership interest in 1997 and 1998, our net operating
loss carryforwards should be subject to certain limitations or annual
restrictions. See Note 12 of Notes to the Financial Statements.
25
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Quarterly Results of Operations
The following table sets forth certain statement of operations data for the
quarters ended March 31, 1997, June 30, 1997, September 30, 1997, December 31,
1997, March 31, 1998, June 30, 1998 and September 30, 1998. The information for
each quarter has been prepared on substantially the same basis as the audited
statements included in other parts of this prospectus and, in the opinion of
management, includes all adjustments, consisting of only normal recurring
adjustments necessary for a fair presentation of the results of operations for
such periods. Historical results are not necessarily indicative of the results
to be expected in the future, and the results of the interim periods are not
indicative of results of any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1997 1997 1997 1997 1998 1998 1998
--------- --------- ------------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 163,263 $ 196,561 $ 190,824 $ 241,174 $ 377,371 $ 587,422 $ 897,006
Operating loss.......... (551,416) (907,733) (1,354,081) (1,850,453) (2,008,935) (2,885,803) (3,454,845)
Interest income
(expense).............. (2,778) (12,493) (13,913) (85,922) (75,934) 14,291 76,809
--------- --------- ----------- ----------- ----------- ----------- -----------
Net loss................ $(554,194) $(920,226) $(1,367,994) $(1,936,375) $(2,084,869) $(2,871,512) $(3,378,036)
========= ========= =========== =========== =========== =========== ===========
</TABLE>
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future. In addition,
the results of any quarter do not indicate results to be expected for a full
fiscal year. Finally, as a result of the foregoing factors, our annual or
quarterly results of operations may be below the expectations of public market
analysts or investors, in which case the market price of the common stock could
be materially adversely affected.
Liquidity and Capital Resources
Since our inception, we have primarily financed our operations through the
private placement of our preferred stock, borrowings under a line of credit
with a commercial bank and capital equipment leases. To date, we have raised
approximately $19.2 million from the sale of preferred stock. At September 30,
1998, we had approximately $3.8 million in cash and cash equivalents. We have
had significant negative cash flows from operating activities for each fiscal
and quarterly period to date. Net cash used in operating activities was $48,000
for the Inception Period, $663,000 for the year ended December 31, 1996, $3.8
million for the year ended December 31, 1997; and was $2.3 million for the nine
months ended September 30, 1997 and $6.7 million for the nine months ended
September 30, 1998. Cash used in operating activities from inception through
September 30, 1998 consisted mostly of net operating losses and increases in
accounts receivable and prepaid expenses, partially offset by increases in
deferred revenues, accrued expenses, and accounts payable.
Net cash used in investing activities was $57,000 for the Inception Period,
$64,000 for the year ended December 31, 1996, $396,000 for the year ended
December 31, 1997; and was $148,000 for the nine months ended September 30,
1997 and $2.8 million for the nine months ended September 30, 1998. Net cash
used in investing activities in these periods consisted mostly of capital
expenditures for purchased software, office equipment and leasehold
improvements. Net cash provided by financing was $136,000 for the Inception
Period, $1.0 million for the year ended December 31, 1996 and $4.6 million for
the year ended December 31, 1997; and was $2.3 million for the nine months
ended September 30, 1997 and $12.5 million for the nine months ended September
30, 1998. Cash provided by financing activities consisted primarily of sales of
our preferred stock and borrowings from Internet Capital Group and Progress
Bank,
26
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
which was partially offset by payment on our capital lease obligations. Net
cash used for acquisitions for the nine months ended September 30, 1998 was
approximately $1.9 million.
We have a line of credit with a commercial bank for $500,000, which expires
on June 30, 1999. The line of credit is primarily used for working capital
purposes. As of December 31, 1997, we were in technical default on the line of
credit for failing to meet specified financial ratios. The bank waived these
covenants for the year ended December 31, 1997. As of September 30, 1998,
there were no borrowings under the line of credit. The line bears interest at
the bank's prime rate of interest plus 1.5%. Any borrowings under the line of
credit will be secured by most of our assets.
We have several capital leases with various financial institutions for
computer and communications equipment used in our operations with lease terms
ranging from three to five years. The interest rates under the leases range
from 8% to 20% and we are required to make monthly payments of $27,722 under
the terms of these leases. As of September 30, 1998, the remaining aggregate
obligation under these capital leases is $676,000.
We believe that the net proceeds from the offering, together with our
existing cash and cash equivalents, will be sufficient to meet our working
capital and capital expenditure requirements for at least the next 12 months.
Thereafter, we may be required to raise additional funds. We may also be
required to raise additional financing before such time. If additional funds
are raised through the issuance of equity securities, our existing
shareholders may experience significant dilution. Furthermore, additional
financing may not be available when needed or, if available, such financing
may not be on terms favorable to us or our shareholders. If such financing is
not available when required or is not available on acceptable terms, we may be
unable to develop or enhance our products or services. In addition, we may be
unable to take advantage of business opportunities or to respond to
competitive pressures. Any of these events could have a material adverse
effect on our business, financial condition or results of operations.
In November 1998, we issued convertible notes to Internet Capital Group and
certain holders of our Series D Preferred Stock in an aggregate principal
amount of $5.0 million. The convertible notes are required to be repaid in six
months, or upon the closing of the offering, if earlier. At each holder's
option, a holder can convert the principal balance of the convertible note
into our common stock at the initial public offering price. All holders have
elected to convert their notes into our common stock. In connection with the
issuance of the convertible notes, we granted the holders of the notes
warrants to purchase an aggregate of 82,051 shares of our common stock at the
initial public offering price.
In November 1998, we issued a note to Progress Bank in an aggregate
principal amount of $2.0 million. The note is required to be repaid in six
months or upon the closing of the offering, if earlier. In connection with the
issuance of the note, we granted Progress Capital, an affiliate of Progress
Bank, warrants to purchase 20,513 shares of our common stock at the initial
public offering price. We valued the warrants at the date of grant to Internet
Capital Group and certain holders of our Series D Preferred Stock and Progress
Capital and will amortize the cost over the period we expect the warrants to
be outstanding.
Year 2000 Compliance
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant.
27
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
Our potential areas of exposure include products purchased from third parties,
information technology including computers and software, and non-information
technology including telephone systems and other equipment used internally.
Additionally, all of the internally developed production and operation systems
for our Web sites are undergoing a complete re-engineering. All new programs
are being tested and validated for Year 2000 compliance.
We have taken steps to ensure that phone systems and other non-information
technology are Year 2000 compliant. We believe all non-information technology
upon which we are materially dependent is Year 2000 compliant. Additionally,
with respect to information technology, we expect to resolve any Year 2000
compliance issues primarily through normal upgrades of our software or, when
necessary, through replacement of existing software with Year 2000 compliant
applications. The cost of these upgrades or replacements is included in our
capital expenditure budget and is not expected to be material to our financial
position or results of operations. We estimate that our total cost to become
Year 2000 compliant will not exceed $250,000, which we expect will be funded
from working capital raised in this offering or borrowings under our bank line
of credit. However, such upgrades and replacements may not be completed on
schedule or within estimated costs or may not successfully address our Year
2000 compliance issues.
We have completed our Year 2000 compliance assessment plan. Based on this
assessment, we believe that 80% of our technology is Year 2000 compliant. We
believe that the remaining 20% of our technology that is not Year 2000
compliant is not critical to our business. We intend to complete the
replacement or remediation of these non-compliant technologies, as well as the
testing of any replacement or corrected technologies, by the end of the second
quarter of 1999.
In addition, we are in the process of seeking verification from our key
distributors, vendors and suppliers that they are Year 2000 compliant or, if
they are not presently compliant, to provide a description of their plans to
become so. As of January 15, 1999, we have received certification from 80% of
our distributors, vendors and suppliers that they are either Year 2000
compliant or are taking the necessary steps to become Year 2000 compliant. We
expect to receive the remaining certifications by April 30, 1999. To the extent
that vendors fail to provide certification that they are Year 2000 compliant by
July 1999, we will seek to terminate and replace those relationships.
In the event that our production and operational facilities that support our
Web sites are not Year 2000 compliant, small portions of our Web sites may
become unavailable. Our review of our systems has shown that there is no single
application that would make our Web sites totally unavailable and we believe
that we can quickly address any difficulties that may arise.
In the event that our Web-hosting facilities are not Year 2000 compliant, our
Web sites would be unavailable and we would not be able to deliver services to
our users.
We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies we are dependent upon are not Year
2000 compliant and fail to operate effectively after the Year 2000. We intend
to develop a plan for this scenario by the end of the second quarter of 1999.
If our present efforts to address the Year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties
28
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
with which we conduct business do not successfully address such issues, our
business, operating results and financial position could be materially and
adversely affected.
Acquisitions
In September 1998, we acquired all of the outstanding capital stock of RF
Globalnet for $1.8 million in cash. Also in September 1998, we acquired all of
the outstanding capital stock of Informatrix for 46,154 shares of our common
stock. Under the purchase agreement, former Informatrix shareholders earned an
additional 2,200 shares because Informatrix achieved sales targets for the
three months ended September 30, 1998. In addition, if Informatrix achieves
sales of $183,965 for the three months ended December 31, 1998, the former
shareholders can earn 5,770 shares; for sales below that target, the former
shareholders would earn fewer shares based upon the percentage of the sales
goal achieved. The sales targets are based on selling advertisements in the
period, not the profitability of the site. The per share value was $3.32 for
the additional shares, based on the value assigned to option grants made to
our employees during the same period. The date of the issuance was October
1998. Those Informatrix employees who remained after the acquisition are now
our employees. See "Certain Transactions and Stock Issuances with Executive
Officers, Directors and Our Largest Shareholder."
We have reported pro forma results of operations as if we had consummated
the acquisition of RF Globalnet on January 1, 1997 and the acquisition of
Informatrix on October 15, 1997 (inception). The pro forma net loss for the
year ended December 31, 1997 was $5.8 million compared to the actual net loss
of $4.8 million. The increase in the net loss results from the net losses of
the acquired companies and the pro forma amortization of the goodwill
associated with the acquisitions. The pro forma net loss for the nine months
ended September 30, 1998 was $9.8 million compared to the actual net loss of
$8.3 million. The increase in the net loss is primarily related to the losses
of the companies acquired and the pro forma amortization of the goodwill
associated with the acquisitions.
On January 13, 1999, we purchased the online business, operated as safety
online, from Coastal Video Communication Corp. for $260,000 in cash and a
$50,000 note which is payable without interest no earlier than 90 days from
such date. We also provided Coastal with an advertising commitment on our Web
site, which will be subsequently valued. This Web site is used by
professionals in the safety industry.
Other Commitments
Our financial commitments for our marketing and distribution agreements with
Excite and AltaVisa are $2.3 million in 1999, $2.3 million in 2000 and $2.0
million in 2001. These agreements renew automatically unless terminated by
either party upon 30 days notice prior to the anniversary of the agreement.
Recent Accounting Pronouncements
In June 1997, Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 offers
alternatives for presentation of disclosures required by the standard. The
adoption of SFAS No. 130 will have no impact
29
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
on our results of operations, financial position or cash flows.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 is not
expected to have an impact on our results of operations, financial position or
cash flows.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits," which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 is not expected to have an impact on our results of operations,
financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." Statement of Position 98-1 is
effective for financial statements for years beginning after December 15, 1998.
Statement of Position 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. We do not expect
this standard to have a material effect on our capitalization policy.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
Statement of Position 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start up activities and
organization costs to be expensed as incurred. As we have expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on our results of operations, financial position or cash
flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. As we do not currently engage or plan to engage
in derivative or hedging activities, there will be no impact to our results of
operations, financial position or cash flows upon the adoption of this
standard.
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<PAGE>
OUR BUSINESS
Industry Overview
Growth of the Internet, Online Advertising and Electronic Commerce
The Internet has emerged as a mass communications and commerce medium
enabling millions of people worldwide to share information, create community
among individuals with similar interests and conduct business electronically.
International Data Corporation projects that the number of Internet users will
grow from 100 million in 1998 to 320 million in 2002. In addition to its
emergence as a mass communications medium, the Internet has features and
functions that are unavailable in traditional media, which enable online
merchants to communicate effectively with customers and advertisers to target
users with specific needs and interests. As a result, the Internet has emerged
as an attractive medium for advertising and electronic commerce.
Along with the impressive overall growth of the Internet, business-to-
business usage is also growing rapidly, as businesses are increasingly
leveraging the Internet's ability to reach customers globally, deliver
personalized content and open new distribution channels.
Internet advertising and electronic commerce are projected to experience
significant growth in the future:
. Internet advertising, according to Jupiter Communications, is projected to
grow from $1.9 billion in 1998 to $7.7 billion in 2002;
. Business-to-business Internet advertising, according to Forrester Research,
is projected to grow from $290 million in 1998 to $2.6 billion in 2002;
. Business-to-business electronic commerce, according to Forrester Research, is
projected to grow from $17 billion in 1998 to $327 billion in 2002; and
. Online business auctions, according to Forrester Research, are projected to
grow from $8.7 billion in 1998 to $52.6 billion in 2002.
Traditionally, companies have employed a variety of well-recognized media in
business-to-business advertising, information delivery and communications to
identify, qualify and facilitate commerce with customers. Veronis, Suhler &
Associates estimates that advertising and specialty media spending on the
business-to-business market was more than $70.0 billion in 1998. Business-to-
business buyers and sellers use several advertising and specialty media,
including trade magazines, trade shows, buyer's guides, direct mail, catalogs
and others. In many industries, particularly in highly specialized,
technically-oriented industries, these media have performed a role in the
distribution channel by enabling buyers and sellers to meet, exchange
information and ultimately conduct business with one another.
Need for Online Vertical Trade Communities
While traditional media have historically served a valuable purpose in
facilitating commerce, information delivery, and communications between buyers
and sellers, they have inherent inefficiencies. We believe that:
. Trade magazines have limited circulation and are not published in real-time;
. Trade shows are held infrequently and are expensive for attendees and
exhibitors;
. Buyer's guides are cumbersome to search and provide limited depth of product
and vendor content;
. Direct mail responses often provide limited information about the prospective
customer; and
31
Our Business
<PAGE>
. Trade journal advertising can be cost prohibitive for smaller advertisers.
The Internet provides a new medium to meet the specific needs of businesses
and professionals through vertical trade communities. These communities offer
highly targeted content and services. Electronic commerce is a natural
extension of these communities which cannot be easily replicated through
traditional media.
Our Solution
We own and operate a portfolio of 33 industry-specific communities of
commerce on the Internet. These vertical trade communities are business-to-
business Web sites that act as comprehensive sources of information,
interaction and electronic commerce.
Our solutions move traditional "off-line" trade services to the Internet. Our
portfolio of vertical trade communities target separate industrial sectors to
provide businesses and professionals with high quality content, community and
commerce that include the following attributes:
. Comprehensive content, services and features: The editors of our vertical
trade communities provide valuable information on products, technology,
industry regulations, news and management. We archive historical content,
enabling users to research through large databases of information. We also
operate requests for proposals and related posting and response areas.
. Active community participation: We provide features and services such as "Ask
the Expert," discussion forums, chat rooms, bulletin boards and career
centers, all of which foster active community participation among our users.
We believe active community participation creates loyalty and affinity among
our users.
. Targeted cost-effective medium for business-to-business advertising: The
narrow focus of our communities and the attractive demographics of our
audiences permit us to command premium advertising rates. Comparative
statistics show that advertisers pay more for targeted ads than for general
ones. We also attract small to mid-sized advertisers due to our cost-
effective advertising reach and highly targeted user base.
. High quality sales leads: Our communities generate high quality sales leads
that are timely and effective and contain detailed buyer information. Robust
sales leads left by buyers allow sellers to respond more effectively.
. Connects buyers and sellers globally: Vertical trade communities provide an
online market place that we believe will allow buyers and sellers worldwide
to exchange information, source products and execute online transactions.
We believe that targeted content, focused audiences and robust sales leads,
combined with our interactive platform, create a premier market place for
electronic commerce.
Our Strategies
Our objective is to be the leading owner and operator of industry specific
communities of commerce. Key strategies to achieve our objective include:
Expand User Base and Enhance User Experience with New Features, Services and
Content
We intend to continue increasing the number of users that visit each
community by:
. introducing additional services and features that appeal to the specific
needs of professionals using the Internet;
32
Our Business
<PAGE>
. continuing to direct users to our vertical trade communities through
marketing relationships with search engine providers;
. providing professionals the opportunity to buy products online that satisfy
their product-sourcing needs; and
. creating brand awareness through industry trade shows, conferences,
advertising campaigns with trade publications and alliances with important
industry trade associations.
As our user base grows, we anticipate advertisers and suppliers will find our
vertical trade communities an attractive cost-effective medium for advertising
and sales.
Establish and Expand Multiple Revenue Streams
. Advertising. To date, most of our revenues have been derived from selling
storefronts to the industry suppliers to our communities. We also have sold,
and intend to grow our sales of, banner advertisements and newsletter
sponsorships delivered by e-mail. For the nine months ended September 30,
1998, we generated approximately 96% of our revenues from the sales of
storefronts, banner advertisements and sponsorships.
. Electronic Commerce. We believe that electronic commerce is a natural
extension of our vertical trade communities. Revenues from electronic
commerce differ from advertising based revenues because they depend on a
purchase being completed over the Internet. We expect to generate electronic
commerce revenues by receiving a transaction fee for products sold in our
communities. Transaction fees are typically paid by the supplier.
In addition, we expect to pursue electronic commerce opportunities through
marketing relationships with retailers and service providers focused on
product distribution. For example, we currently sell books and software in our
communities where we receive credit for the sale less amounts owed to the
distributor. For the nine months ended September 30, 1998, we generated
approximately 2% of our revenues from electronic commerce. See "Risk Factors--
We may not develop additional revenue sources."
. Career Services. We sell sponsorships in our career center and charge
employers to post help wanted advertisements. We believe recruiters and
employers specializing in each industry are natural advertisers and sponsors
in this area. For the nine months ended September 30, 1998, we generated less
than 1% of our revenues from the sale of career services.
. Education. We have partnered with content providers for various engineering
courses, and are paid a transaction fee for every student taking the course.
With the acquisition of RF Globalnet, we acquired technology that allows
professionals to complete educational courses over the Internet. We are in
the process of using this technology on other vertical trade communities and
expect to form partnerships with courseware providers for industry
professionals. For the nine months ended September 30, 1998, we generated
approximately 1% of our revenues from education.
Continue to Identify and Rapidly Develop New Vertical Trade Communities
We intend to expand our portfolio by building and launching new vertical
trade communities in industry segments that we believe possess significant
opportunities for advertising and electronic commerce.
We determine whether or not a potential vertical trade community fits our
strategy by
33
Our Business
<PAGE>
looking for specific industry characteristics including:
. a substantial number of buyers and suppliers;
. a high degree of fragmentation on both the supply and demand sides;
. defined target audiences (e.g. chemical engineers) with similar product and
informational needs;
. meaningful growth in trade advertising spending;
. significant new product introductions;
. online access;
. growth in trade show attendance; and
. international components both on the buyer and supplier side.
Leverage the Benefits of a Portfolio Approach
We believe that operating a portfolio of vertical trade communities permits
us to:
. offer a comprehensive, consistent set of services and features;
. attract a large business-to-business audience, in aggregate, making our
individual sites appealing to a broad array of advertisers and electronic
commerce suppliers; and
. realize cost savings and operating efficiencies in our technology, marketing,
infrastructure and management resources.
Form Marketing and Distribution Alliances for Distribution, Technology, and
New Services
To extend our vertical trade community brands and increase visits to our Web
sites, we intend to form additional marketing and distribution alliances with
search engine providers and other distribution partners.
Pursue Strategic Acquisitions
We intend to pursue acquisitions of companies that operate vertical trade
communities which would fit into our portfolio. Companies considered for
acquisition are evaluated based on the criteria outlined above under "Continue
to Identify and Rapidly Develop New Vertical Trade Communities." However, we
may also acquire other companies with complementary communities or technologies
such as electronic commerce solutions or other Web-based technologies.
Presently, we are not contemplating any specific acquisitions.
Expand Globally
We believe that the anticipated growth of Internet usage internationally
presents significant opportunities to extend the global reach of our
communities. For the nine months ended September 30, 1998, more than 25% of the
visits to our vertical trade communities originated outside the United States.
As is shown by their usage levels, international users represent significant
opportunity to our domestic advertisers, providing both sources of leads and,
eventually, purchasers of their products and services. Our vertical trade
communities also provide foreign advertisers access to our targeted audience in
the United States. We intend to expand globally by pursuing strategic
partnerships.
34
Our Business
<PAGE>
Our Vertical Trade Communities
As of January 12, 1999, we had established 33 vertical trade communities that
target the industries identified beneath each community:
Process Group
chemical online ( chemicalonline.com)
Manufacturing and Processing Chemicals
semiconductor online (semiconductoronline.com)
Applications, Manufacturing and Processing of Semiconductor Components
hydrocarbon online (hydrocarbononline.com)
Processing Hydrocarbons and Petrochemicals
pharmaceutical online (pharmaceuticalonline.com)
Development, Design and Manufacturing of Pharmaceuticals
adhesives and sealants online (adhesivesandsealants.com)
Manufacturing and Production of Adhesive, Sealant, and Grout Materials
food online (foodonline.com)
Manufacturing and Processing of Food Products
oil and gas online (oilandgasonline.com)
Production and Exploration of Oil and Gas
paint and coatings online (paintandcoatings.com)
Manufacturing and Production of Paint Coatings, Inks and Thick Film Printable
Conductors
Communications Group
fiber optics online (fiberopticsonline.com)
Design and Production of Fiber Optic Networks and Network Components
photonics online (photonicsonline.com)
Design and Manufacturing of Lasers, Optics, Optoelectronics, Fiber Optics and
Imaging Devices
RF Globalnet (rfglobalnet.com)
Information, Bookstore and Educational Center for Radio Frequency, Wireless and
Microwave Engineers
premises networks.com (premisesnetworks.com)
Facilities and Network Infrastructure Design and Administration
wireless design online (wirelessdesignonline.com)
Design and Development of Wireless Communications Systems and Equipment
Electronics Group
computerOEM online (computeroemonline.com)
Design and Manufacturing of Computers and Computerized Electronics Devices
medical design online (medicaldesignonline.com)
Design, Manufacturing and Procurement of Medical Devices
plant automation.com (plantautomation.com)
Hardware and Software Used in Industrial Manufacturing Including Robotics and
Automated Control Systems
test and measurement (testandmeasurement.com)
Design, Manufacturing and Procurement of Test, Measurement, Data Acquisition,
Data Analysis and Instrumentation Equipment
35
Our Business
<PAGE>
Environmental Group
pollution online (pollutiononline.com)
Industrial Pollution Control
public works online (publicworks.com)
Services Public Works and Municipal Maintenance Professionals
water online (wateronline.com)
Municipal Water Supply and Municipal and Wastewater Treatment
power online (poweronline.com)
Power generation, Electric Utility Deregulation, Emissions Control, Alternative
Fuels, Power Industry Legislation
solid waste online (solidwaste.com)
Disposal of Solid Waste
pulp and paper online (pulpandpaperonline.com)
Manufacturing, Processing and Treatment of Pulp and Paper
Food & Packaging Group
bakery online (bakeryonline.com)
Production and Procurement of Baking Ingredients
beverage online (beverageonline.com)
Production and Procurement of Equipment used in the Production of Beverages
dairy network.com (dairynetwork.com)
Production, Procurement and Distribution of Dairy Products
food ingredients online (foodingredientsonline.com)
Manufacturing and Processing of Food Ingredients
meat and poultry online (meatandpoultryonline.com)
Production, Procurement and Distribution of Meat and Poultry Products
packaging network.com (packagingnetwork.com)
Production, Purchase, Design and Marketing of Packaging for all Consumer and
Industrial Products
Sciences Group
bioresearch online (bioresearchonline.com)
Provides information on Drug Discovery, Research and Development, University
Industry Collaborations and Regulatory Issues Relating to Worldwide Bioresearch
and Life Sciences
laboratory network.com (laboratorynetwork.com)
Production and Manufacturing of Laboratory Equipment, Chemicals and Supplies
Services Group
property and casualty.com (propertyandcasualty.com)
Property and Casualty Insurance
safety online (safetyonline.com)
Industrial and Environmental Safety
36
Our Business
<PAGE>
Features of Our Vertical Trade Communities
Listed below is a selection of features of a vertical trade community which
correspond to the home page illustrated on the opposite page. Most of the
services listed below are available in each community.
1 Marketplace: Shopping resource containing books, software and video products.
Professionals are able to purchase these products over the Internet.
2 Online Buyer's Guide and Search Engine: Comprehensive buyer's guide fully
searchable by product name and supplier. In response to a key word search,
companies serving the industry are listed with storefront advertisers
presented first. Links to company storefronts allow users to research
advertisers' products and services, and send direct inquiries to advertisers
about pricing, delivery and product specifications (i.e., ultimately submit
sales leads).
3 News & Analysis: Current news and commentary by the vertical trade
community's editorial team. Includes feature articles and product case
studies; daily update of press releases and news stories targeted to each
respective industry.
4 Product Center: Comprehensive resource for industry professionals with
information on the latest products in the industry. Site editors act as third
parties with objective analysis of products and their uses.
5 Community: Suite of interactive features: real-time discussion forums for
industry professionals; bulletin boards; trade show information and other
useful industry events.
6 Resources: "Freeware" and demo-software download library and industry
association guides.
7 Career Center: Resume postings for job seekers, help-wanted listings and
career support material.
8 Requests for Proposals/Quotations/Bids: Internationally posted projects open
to bid.
Recent Enhancements
We have created a series of products and services for users of our vertical
trade communities.
Education/Training: We offer a series of products in the continuing
professional education, licensing/certification maintenance, and skills upgrade
markets, specifically:
. online courses/courseware: books, software, focused content and research
available for use or purchase in conjunction with courses offered by third
party vendors; and
. company-specific: customized intranet or extranet-based educational/training
services for specific clients by vertical trade community.
Career Center: Career centers currently active on each of our vertical trade
communities include such services as: resume bundling, e.g., selling or
offering certain groups of candidate types to specific employers for a fee, and
career planning/assistance, e.g., market reports on companies a candidate is
investigating, resume software, salary surveys, etc.
"Push" Newsletters: We offer subscription-based e-mail services with specific
content focus. Subscribers are able to receive e-mail-based newsletters on
topics of interest to them.
37
Our Business
<PAGE>
[GRAPHIC SHOWING CHEMICAL ONLINE HOMEPAGE]
38
Our Business
<PAGE>
Planned and Expanded Services
We plan to offer and expand the following services:
Electronic Commerce: As part of our long term strategy, we plan to increase
our commerce-related services for our advertisers and users of our vertical
trade communities, specifically:
. online stores: through simple-to-use store creation software we plan to
offer any current or future advertiser an interactive platform to sell
certain products in easy to manage environments;
. catalog-platforms: we plan to work with current and future advertisers as
well as industry-specific distributors to create and populate Internet-based
catalogs;
. classifieds: we plan to launch classified sections in each vertical trade
community listing individual products and a path to the specific seller; and
. auctions: we plan to launch online industrial auctions for each vertical
trade community. We expect that new and used equipment will be listed for
bid.
E-mail Service: We plan to offer free e-mail accounts to users/registrants
in each vertical trade community. We expect that the actual address will be
indicative of the specific vertical trade community (e.g.,
[email protected]). We believe that this service will be provided by a
third-party partner, and will be supported by the sale of advertising on the e-
mail pages.
Features of Our Storefronts
The following are descriptions of the features of a typical advertiser's
storefront which correspond to the boxes on the storefront on the opposite
page.
1 Corporate Profile: Information on advertiser's background and overview of
its products.
2 Contact Us: Enables buyers and specifiers to request further information via
e-mail. Requests are often regarded as sales leads by advertisers. Requests
are typically for product pricing and other inquiries about advertisers'
products.
3 Career Center: Advertisers list open employment opportunities.
4 Purchase Online: Advertisers with electronic commerce capabilities sell
their products online.
5 Associated Articles: Feature articles, case studies and other informational
materials about the advertiser.
6 Product Releases/More Products: New product announcements.
7 Press Releases: Advertiser-issued press releases.
8 For more ...: Hyperlinked gateway into advertiser's Web site.
Our Virtual Office
Our Virtual Office feature offers storefront advertisers the ability to
monitor and evaluate storefront activity. Advertisers can track the number of
visitors and leads generated from a storefront or banner advertisement. Virtual
Office also serves as an inquiry management tool for advertisers.
39
Our Business
<PAGE>
[GRAPHIC SHOWING THE FEATURES OF OUR STOREFRONTS]
40
Our Business
<PAGE>
Case Studies of Three Vertical Trade Communities
Set forth below is certain information about three of our fastest growing
vertical trade communities based on unique visits.
Visitor traffic information is provided by our Web server log files. Unique
visits are defined as the number of times individuals accessed our Web sites
during the month. In December 1998, our Web sites attracted approximately
650,000 unique visits.
Water Online (www.wateronline.com)
Target Audience: Engineers and environmental managers in the water and
wastewater industry in the United States and around
the world.
History: Our first vertical trade community, launched in
October 1995; currently, the largest Internet
community for the water and wastewater industry.
Editorial Director: Ian Lisk has two decades of experience as editor of
two of the industry's trade publications.
<TABLE>
<CAPTION>
For the Month of
December
1998
Usage and Advertising Statistics: ----------------
<S> <C>
. Unique Visits: 70,915
. Storefront Advertisers: 246
. Sales Leads: 2,744
</TABLE>
Chemical Online (www.chemicalonline.com)
Target Audience: Engineers and environmental managers in the chemical
processing industry in the United States and around
the world.
History: Our fourth vertical trade community, launched in May
1997; currently, the largest Internet community for
the chemical processing industry.
Editorial Director: Nick Basta has 17 years of experience as editor with
McGraw Hill's Chemical Engineering magazine.
<TABLE>
<CAPTION>
For the Month of
December
1998
Usage and Advertising Statistics: ----------------
<S> <C>
. Unique Visits: 60,016
. Storefront Advertisers: 161
. Sales Leads: 3,708
</TABLE>
41
Our Business
<PAGE>
Wireless Design Online (www.wirelessdesignonline.com)
Target Audience: Engineers and business managers involved in the
design of wireless electronic components in the
United States and around the world.
History: Our tenth vertical trade community, launched in
September 1997.
Managing Editor: Rob Keenan, formerly associate editor with Penton
Publishing's Wireless System Design.
<TABLE>
<CAPTION>
For the Month of
December
1998
Usage and Advertising Statistics: ----------------
<S> <C>
. Unique Visits: 37,766
. Storefront Advertisers: 34
. Sales Leads: 1,400
</TABLE>
----------------
For the Inception Period and the years ended 1996 and 1997, water online was
the only vertical trade community that accounted for more than 15% of our
revenues. Water online represented 100% of our revenues for the Inception
Period and the year ended 1996, and 40% of our revenues for the year ended
1997. For the year ended December 31, 1998, water online was the only vertical
trade community to account for more than 15% of our revenues, accounting for
20% of the revenues for such period.
Marketing and Distribution Alliances
We have recently entered into the following alliances:
Excite Agreement
We have entered into a three-year renewable sponsorship agreement with
Excite, a leading Internet navigational service provider, to build and operate
an industrial "channel" on the Excite service for each of up to 30 of our
vertical trade communities. These channels are highlighted summaries of much of
the content and features of the home page of each of our vertical trade
communities, and provide a preview of the content and services offered on each
vertical trade community. For an annual fee, Excite will deliver guaranteed
minimum performance levels for exposures (or impressions) in each year. As part
of the Excite agreement, we and Excite have committed to provide advertising on
each others' Web sites.
AltaVista Agreement
We recently entered into a renewable one year agreement with AltaVista, a
leading search engine company, to develop at least thirty-one co-branded Web
sites. AltaVista has guaranteed us minimum levels of visits to our Web sites in
exchange for an annual fee of $1.0 million. In addition, advertising revenues
generated from the co-branded Web sites will be shared between us and AltaVista
and the parties have agreed to provide $300,000 in advertising to each other
during the term of the agreement.
Other Relationships--Motorola
In October 1998, we entered into an agreement with Motorola pursuant to which
we provide intranet-based educational services to engineers at Motorola. The
content in our course portfolio is available via the Internet and/or Motorola's
corporate intranet to
42
Our Business
<PAGE>
authorized students registered by Motorola. The contract requires Motorola to
purchase from us pre-defined minimum education services. The contract expires
on June 30, 1999.
Customers
As of December 31, 1998, approximately 700 companies, who have purchased
approximately 1,300 storefronts, advertised in one or more of our vertical
trade communities.
As of December 31, 1998, our customers included:
Asea Brown Boveri Ltd.
Bailey-Fisher & Porter
BetzDearborn Inc.
Calgon Corporation
Canon U.S.A., Semiconductor
Culligan Water Technologies, Inc.
Dresser Instruments Division
Rosemont Analytical
FMC Corporation
Hewlett-Packard Company
Ionics, Incorporated
ITT Standard
Koch Industries
Milltronics, Inc.
Motorola, Inc.
Nokia Group, Inc.
Osmonics, Inc.
Richardson Electronics, Ltd.
Schlumberger Industries
Siemens Microelectronics, Inc.
U.S. Filter
Waterlink
Wheelabrator Air Pollution Control, Inc.
Zurich-American Insurance Group
For the years ended December 31, 1996, December 31, 1997 and the nine months
ended September 30, 1998, no single customer accounted for more than 10% of our
revenues.
Sales and Marketing
Sales and Distribution
We use a variety of programs to stimulate demand for our products, including
telesales, a direct sales force and reseller arrangements with advertising
agencies.
Direct Sales. Our direct sales force targets organizations that sell the
products and services that are utilized and purchased by the professionals that
visit our vertical trade communities. As of December 31, 1998, we had 44 direct
sales and support personnel. We often employ individuals with a background in
advertising sales with trade publishing companies.
Telesales. We currently maintain an in-house telesales group for use in
customer prospecting, lead generation and lead follow-up. As of December 31,
1998, we had 15 people in our telesales group and we are expanding the products
sold by the group, such as job listings and banner advertisements.
International. We intend to market our products and services to international
markets directly over the Internet, as well as through resellers and affiliate
relationships. Currently, we derive less than 3% of revenues from international
customers. For the nine months ended September 30, 1998, more than 25% of the
visits to our vertical trade communities originated outside the United States.
We believe that the large percentage of international users are attractive to
advertisers who want to reach customers globally. See""--Our Strategies--
Establish and Expand Multiple Revenue Streams."
43
Our Business
<PAGE>
Marketing
We use a variety of marketing programs to increase brand awareness. Our
marketing goals are to create and enhance the awareness of each branded
vertical trade community as a destination for professionals in each industry
sector and to promote the VerticalNet brand with suppliers, media buyers, and
interactive services companies. Our marketing strategy for each contains a mix
of print advertising, outbound e-mail, telemarketing, new media banner
campaigns, trade shows and direct mail. We also participate in industry
specific events, industry association activities and partnerships with
interactive services companies. We believe that forming strategic marketing and
distribution alliances with partners in the Internet, print publishing and
industry associations will be important for rapid market penetration.
Technology
We have developed and implemented a broad array of technologies including
site management, search, customer interaction and transaction processing
systems using a combination of our own proprietary technologies and
commercially available, licensed technologies. Approximately 20% of the
technology we currently use is licensed technology; the remaining 80% is
proprietary technology. To develop proprietary technology, we spent
approximately $21,000 in 1995, $213,000 in 1996, $711,000 in 1997 and $798,000
during the nine months ended September 30, 1998.
For example, we recently developed an application available on our Web sites
which allows our clients to track the success of their advertising campaigns.
We also developed an application using the Microsoft Site Server Suite of
development tools which allows clients to sell products over the Internet. Our
current strategy is to license commercially available technology whenever
possible rather than seek internally developed systems. We expect that
commercially licensed technology will continue to be available at reasonable
costs.
Scalability. The scalable structure of our hardware and software is designed
to allow for rapid deployment of multiple vertical trade communities while
maintaining desired user performance standards. In the rapidly changing
Internet environment, the ability to update an application to stay current with
new technologies is important. The system's template technology and generic
database design allow for the addition, modification, or replacement of Web
site based applications in a cost-efficient and expeditious manner.
Reliability and Security. We use CheckPoint's Firewall-1 software to protect
our Web servers. We also use Netscape software as our Web server. Our
production machines are located at Exodus Communications Inc. and at Icon CMT
Corp., which provide professional data center hosting facilities and redundant
high-speed Internet connectivity. Exodus and Icon provide monitoring and
support 24 hours a day, seven days a week supplementing our system
administrators.
We have developed our own content and Web site management tools to facilitate
the maintenance and updating of our vertical trade communities. Our Web site
management tools allow our editors to update our Web sites from remote
locations throughout the day.
Proprietary Rights
Proprietary rights are important to our success and our competitive position.
To protect our proprietary rights, we rely generally on copyright, trademark,
and trade secret laws, confidentiality agreements with employees and third
parties, and license agreements with
44
Our Business
<PAGE>
consultants, vendors, and customers. Despite such protections, a third party
could, without authorization, copy or otherwise appropriate information from
our vertical trade community sites. Our agreements with employees, consultants
and others who participate in development activities could be breached, we may
not have adequate remedies for any breach, and our trade secrets may otherwise
become known or independently developed by competitors.
We rely upon license agreements for the majority of our content and
technology. Such license agreements may not continue to be available to us on
acceptable terms, or at all. We do not, however, believe that we are dependent
upon any single licensor of technology or content.
We have applied for numerous trademarks, none of which have been issued to
date. We currently have two pending applications for trademarks. Generally, we
cannot protect our Web addresses for our vertical trade communities as
trademarks due to the fact that they are too generic. The laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the United States, and effective copyright, trademark and trade secret
protection may not be available in such jurisdictions.
There have been substantial amounts of litigation in the computer industry
regarding intellectual property assets. Third parties may claim infringement by
us with respect to current and future products, trademarks or other proprietary
rights, or we may counterclaim against such parties in such actions. Any such
claims or counterclaims could be time-consuming, result in costly litigation,
diversion of management's attention, cause product release delays, require us
to redesign our products or require us to enter into royalty or licensing
agreements, any of which could have a material adverse effect upon our
business, financial condition and operating results. Such royalty and licensing
agreements, if required, may not be available in terms acceptable to us, or at
all.
Government Regulations and Legal Uncertainties
We are subject to various laws and regulations relating to our business. Few
laws or regulations are currently directly applicable to access to the
Internet. However, because of the Internet's popularity and increasing use, new
laws and regulations may be adopted. Such laws and regulations may cover issues
such as:
. user privacy;
. pricing;
. content;
. copyrights;
. distribution; and
. characteristics and quality of products and services.
In addition, the growth of the Internet and electronic commerce, coupled with
publicity regarding Internet fraud, may lead to the enactment of more stringent
consumer protection laws. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations may impede the
growth of the Internet, which could decrease our potential revenues from
electronic commerce or otherwise adversely affect our business, financial
condition and operating results.
Laws and regulations directly applicable to electronic commerce or Internet
communications are becoming more prevalent. The most recent session of Congress
enacted Internet laws regarding on-line copyright infringement. Although not
yet enacted,
45
Our Business
<PAGE>
Congress is considering laws regarding Internet taxation. The European Union
recently enacted new privacy regulations. These are all recent enactments, and
there is uncertainty regarding their marketplace impact. In addition, various
jurisdictions already have enacted laws that are not specifically directed to
electronic commerce but that could affect our business. The applicability of
many of these laws to the Internet is uncertain and could expose us to
substantial liability.
Any new legislation or regulation regarding the Internet, or the application
of existing laws and regulations to the Internet, could materially adversely
affect us. If we were alleged to violate federal, state or foreign, civil or
criminal law, even if we could successfully defend such claims, it could
materially adversely affect us.
We believe that our use of third party material on our vertical trade
communities is permitted under current provisions of copyright law. However,
because legal rights to certain aspects of Internet content and commerce are
not clearly settled, our ability to rely upon exemptions or defenses under
copyright law is uncertain.
Several telecommunications carriers are seeking to have telecommunications
over the Internet regulated by the Federal Communications Commission in the
same manner as other telecommunications services. Additionally, local telephone
carriers have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on such providers.
If either of these petitions are granted, the costs of communicating on the
Internet could increase substantially. This, in turn, could slow the growth of
use of the Internet. Any such legislation or regulation could materially
adversely affect our business, financial condition and operating results.
Competition
The market for vertical trade communities is new and rapidly evolving.
Competition for advertising, electronic commerce and business users is intense
and is expected to increase significantly in the future. Technological barriers
to entry are relatively insubstantial. We believe that the principal
competitive factors for companies seeking to create vertical trade communities
on the Internet are targeted advertising, services and features, real-time
information access, quality sales leads, detailed user information, global
reach and business user affinity and loyalty. Several companies are primarily
focused on operating business-to-business trade communities on the Internet,
but most existing online competition is ancillary to the traditional business
of trade publishers, industry and trade associations and directory companies.
We will likely face intensified competition in the future from traditional
trade publishers, such as McGraw Hill and Reed Elsevier, directory registry
companies, such as Thomas Register, as well as from Internet search engine
companies, trade associations and electronic commerce technology suppliers.
Further, our potential competitors may develop vertical trade communities that
are equal or superior to ours. We also compete with traditional forms of
business-to-business advertising and commerce, such as trade magazines, trade
shows, and trade associations for advertisers and advertising revenue.
We believe that the principal competitive factors in attracting advertisers
include the demographics of our users, our ability to offer targeted audiences
and the overall cost-
46
Our Business
<PAGE>
effectiveness of the advertising medium offered by us. We believe that the
number of business-to-business Internet companies relying on Internet-based
advertising revenue will increase greatly in the future, which would increase
pricing pressure on our advertising rates.
Employees
As of December 31, 1998, we had 187 full-time employees. We consider our
relationships with our employees to be good. None of our employees are covered
by collective bargaining agreements.
Properties
Our corporate headquarters are located at 2 Walnut Grove Drive in an office
facility in Horsham, Pennsylvania, where we lease approximately 16,343 square
feet for a monthly fee of $19,423 under a lease that expires February 1, 2001.
We also maintain a sales and editorial office in Parsippany, New Jersey, under
a lease that expires July 15, 1999 for a monthly fee of $1,506. We also lease a
small corporate facility in Washington, D.C. for a monthly fee of $2,290 under
a lease that expires April 14, 2000 and a sales and editorial office in
Deerfield, Illinois for a monthly fee of $3,178 under a lease that expires July
31, 2001. We also lease a corporate office for RF Globalnet in Boulder,
Colorado, for a monthly fee of $400 under a lease that expires February 28,
1999.
We maintain most of our computer systems in two leased Web-hosting facilities
in New Jersey. We entered into a one year services agreement with Exodus on
July 31, 1998 and an agreement with Icon CMT Corp on July 1, 1997 for Web-
hosting facilities and services. The Exodus agreement automatically renews for
additional one year terms unless terminated by prior written notice. Because
Exodus provides us with additional benefits and services, we expect that we
will allow the Icon agreement to expire this year by its terms.
Legal Proceedings
We are not a party to any material legal proceedings.
47
Our Business
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
Directors and Executive
Officers
-----------------------
<S> <C> <C>
President, Chief Executive Officer and
Mark L. Walsh............. 44 Director
Senior Vice President, Co-Founder and
Michael J. Hagan.......... 36 Director
Michael P. McNulty........ 35 Senior Vice President, Co-Founder
Barry E. Wynkoop.......... 47 Senior Vice President
Gene S. Godick............ 33 Vice President and Chief Financial Officer
Blair LaCorte............. 35 Senior Vice President
Mario V. Shaffer.......... 36 Vice President of New Business Development
Douglas A. Alexander...... 37 Chairman of the Board and Director
Jeffrey C. Ballowe........ 43 Director
Walter W. Buckley, III.... 38 Director
Matthew J. Warta.......... 29 Director
<CAPTION>
Key Employees
-------------
<S> <C> <C>
C.H. Low.................. 38 Vice President and Chief Technology Officer
George Jankovic........... 31 Vice President of Product Development
Nicholas Basta............ 44 Vice President of Editorial Services
Christopher G. Kuhn....... 47 General Counsel
</TABLE>
Mark L. Walsh has served as our President and Chief Executive Officer and as
one of our directors since August 1997. Prior to joining us, he was a Senior
Vice President and corporate officer at America Online, Inc. from 1995 to 1997.
He founded and managed AOL Enterprise, the business-to-business division of
AOL. Prior to his position with AOL, Mr. Walsh was the President of GEnie,
General Electric's online service from 1994 to 1995. He also was the President
of Information Kinetics, Inc., a venture capital backed interactive information
company focusing on the recruitment and classified advertising market from 1993
to 1994. He received his MBA from Harvard Business School and B.A. from Union
College of Schenectady, N.Y. He is the past chairman of the Interactive
Services Association. Mr. Walsh was a board member of the Information Industry
Association, a 500 member-company trade group for the business information
market.
Michael J. Hagan co-founded VerticalNet in 1995 and currently serves as our
Senior Vice President of Merger and Acquisitions and Product Development. He
also serves as one of our directors. Prior to our founding, Mr. Hagan was Vice
President and Senior Manager at Merrill Lynch Asset Management from 1990 to
1995. He served at Merrill Lynch in the areas of finance, technology and
accounting. Prior to that time, Mr. Hagan worked for Bristol Myers Squibb from
1988 to 1990. Mr. Hagan received a B.S. from St. Joseph's University and is a
Certified Public Accountant.
Michael P. McNulty co-founded VerticalNet in 1995 and currently serves as our
Senior Vice President of Audience Development. Prior to 1995, Mr. McNulty
worked from 1985 to 1995 in the trade publishing industry. He held both sales
and sales management positions for the Raben Publishing Company, Scranton
Gillete Communications, and the PennWell Publishing Company. Mr. McNulty
received a B.S. from St. Joseph's University.
Barry E. Wynkoop has served as our Senior Vice President of Sales and Market
Management 48
<PAGE>
Development since August 1998. Prior to joining us, Mr. Wynkoop worked for Bell
Atlantic Corporation. From 1993 to 1998 he was the Vice President of Marketing,
National Accounts and Customer Services, for Bell Atlantic Directory Services,
Inc. From 1991 to 1993, he was the Vice President and General Manager of Bell
Atlantic Mobile Services, Inc.'s New England division. Mr. Wynkoop served as
the General Manager for U.S. Sales for the GEC Business Systems Group of
General Electric Company plc, from 1986 to 1991. From 1983 to 1986, Mr. Wynkoop
served as the Vice President of U.S. Operations for Krone GmbH, a West German
telecommunications manufacturer, and from 1973 to 1983 he held several
positions, ultimately becoming Director of Marketing from 1979 to 1983, for
Phelps Dodge Corporation, an industrial copper mining and fabricating company.
Mr. Wynkoop received a B.A. from Iona College, and graduated from the Program
for Management Development at the Harvard Business School.
Gene S. Godick has served as our Vice President of Finance and Chief
Financial Officer since June 1998. Prior to joining us, he worked from 1997
until 1998 as a senior manager at KPMG LLP, where he worked in their
information, communications and entertainment practice, with a focus on high
technology companies. During 1997, prior to joining KPMG LLP, Mr. Godick
provided consulting services advising companies on financing and turnaround
strategies. Prior thereto, Mr. Godick was hired in early 1994 as CFO of
Industrial Construction, Inc., a privately owned environmental remediation
firm, to help that firm remedy its financial problems. Industrial Construction
began experiencing financial difficulty in late 1993 due to poor project
management and a slowdown in the environmental remediation industry as a whole.
Mr. Godick was President and CFO of Industrial from 1996 until 1997. Industrial
filed for Chapter 7 bankruptcy in May 1997 after failing to achieve
profitability or generate enough cash to continue operations. From 1987 until
1994, Mr. Godick was an accountant and manager for Arthur Andersen LLP's
Enterprise Group, which provided services to emerging growth companies in high
technology, biotechnology and software. Mr. Godick also serves on the board of
directors of Novasoft Information Technology Corp. Mr. Godick received a B.S.
from Villanova University and is a Certified Public Accountant.
Blair LaCorte has served as our Senior Vice President of Strategy and
Electronic Commerce since January 1999, and has been a consultant for us since
October 1998. From 1997 to 1998, Mr. LaCorte was the President of the Internet
Technology Group and Senior Vice President of Partnerships at CADIS Inc., a
software company specializing in electronic commerce and procurement in
business-to-business markets. From 1993 to 1997 Mr. LaCorte held positions at
Autodesk where he founded three divisions, the last of which was Autodesk Data
Publishing, an electronic business-to-business publisher of engineering
graphics for design and procurement. Prior to his employment with Autodesk,
from 1992 to 1993 Mr. LaCorte was Manager of Worldwide Strategy and Market
Planning for Sun Microsystems, and a Senior Consultant at Gemini Consulting
specializing in process engineering. In 1996, Mr. LaCorte was named one of the
top ten business-to-business marketers of the year by Business Marketing and
Advertising Age. He received a B.A. from the University of Maine, holds a FMP
degree from General Electric and an MBA from the Amos Tuck School at Dartmouth
College.
Mario V. Shaffer has served as our Vice President of New Business Development
since May 1998. From 1995 to 1998 he served as
49
Management
<PAGE>
Group Director of Marketing and Business Development at AOL where he was
responsible for membership marketing and strategic relationships. Previously,
Mr. Shaffer was Vice President of ContentWare, Inc. From 1992 to 1994, he was
Director of Business Development of EON Corporation and from 1988 to 1992 he
was regional sales manager of RR Donnelley Financial. Mr. Shaffer received a
B.A. from the College of William and Mary.
Douglas A. Alexander has served as one of our directors since September 1996
and has served as the Chairman of the Board since 1997. Mr. Alexander is a
Managing Director of Internet Capital Group. He co-founded Reality Online, Inc.
in 1986 and later sold it to Reuters in 1994. Reality Online developed
financial planning tools and online services aimed at the individual investor
and then later became a provider of Internet solutions to the retail brokerage
industry. Prior to co-founding Reality Online, Mr. Alexander was a partner with
Strategic Management Group, a corporate training firm. Mr. Alexander sits on
the boards of several Internet companies including DejaNews, Linkshare, and
SageMaker. Mr. Alexander was also chairman of WiseWire, which was sold to
Lycos, Inc. in April 1998. Mr. Alexander received a B.A.S. from the University
of Pennsylvania and B.S. from the Wharton School of Business.
Jeffrey C. Ballowe has served as one of our directors since July 1998. Mr.
Ballowe retired at the end of 1997 from Ziff-Davis, Inc., where during his 11
years at the company he worked to transform Ziff-Davis into an international,
integrated media company. At Ziff-Davis he held several magazine publishing
roles, including Publisher of PC Magazine and a number of corporate posts in
which he was responsible for establishing Ziff-Davis's European operations,
managing Ziff-Davis's largest magazine group, launching Ziff-Davis's Internet
publications, creating ZDNet, and launching ZDTV. At his retirement he was
President, Interactive Media and Development Group, in charge of Ziff-Davis's
Internet publications, ZDNet, ZDTV, and all development at the company. His
development activities included spearheading Ziff-Davis's and Softbank's
investments in Yahoo!, USWeb, Gamespot, and Herring Communications. Prior to
joining Ziff-Davis, Mr. Ballowe worked as a marketing executive at various
technology and marketing services companies. Currently Mr. Ballowe is Chairman
of DejaNews, Inc. and serves as a director on the boards of USWeb,
Personalogic, Inc. and Xoom.com, Inc. He received an MBA from the University of
Chicago, a master's degree from the University of Wisconsin-Madison and a
bachelor's degree from Lawrence University.
Walter W. Buckley, III has served as one of our directors since 1996. Mr.
Buckley is a co-founder and the President and CEO of Internet Capital Group.
Prior to co-founding Internet Capital Group, Mr. Buckley worked for Safeguard
Scientifics, Inc. as Vice President of Acquisitions. Prior to joining
Safeguard, Mr. Buckley was President and co-founder of Centralized Management
Systems, Inc., a medical supply company, which was sold in 1987. Prior thereto,
he was a commercial loan officer at CoreStates Bank, N.A. Mr. Buckley sits on
the boards of Internet Capital Group, Sky/Alland Marketing, Who? Vision
Systems, Inc., Syncra Software, Inc. and e-Chemicals, Inc. Mr. Buckley received
his B.A. from the University of North Carolina, Chapel Hill.
Matthew J. Warta has served as one of our directors of since June 1998. In
his current position, Mr. Warta is a Director of Koch Ventures, Inc., a
subsidiary of Koch Industries, Inc. where he is responsible for investing in
and managing the firm's applied technology investments. From 1996 through 1997,
he was with Koch's Capital Services Group, where he
50
Management
<PAGE>
provided advisory services on mergers and acquisitions, strategic consulting,
and corporate partnering to various Koch companies. Prior to joining Koch, Mr.
Warta worked as a management consultant at Deloitte & Touche Consulting Group
from 1995 to 1996, where he provided strategic and operational consulting
services to clients. Prior thereto, Mr. Warta served as an account executive
for Valentine Radford Communications, Inc., an advertising and marketing agency
in Kansas City, Missouri. Mr. Warta received an MBA and a B.S. from the
University of Kansas.
C.H. Low has served as our Vice President and Chief Technology Officer of
Product Development and Engineering since February 1998. From 1988 to 1998 he
was Senior Vice President with Reality Online, a Reuters company, where he was
responsible for designing and developing over 30 projects and gained expertise
in defining host data systems, features and architectures. Previously, Mr. Low
was co-owner of Gnosis, Inc., where he developed a job-shop manufacturing
control system for small to medium sized companies. Mr. Low received a B.A.S.
from the University of Pennsylvania and a B.S. from the Wharton School of
Business.
George Jankovic has served as our Vice President of Product Development since
September 1998. Prior to joining us, he was President and founder of RF
Globalnet, which we acquired in September 1998. Prior to founding RF Globalnet,
Mr. Jankovic was Director of Business Development and Marketing Manager for
Boulder Microwave Technology Inc. (now part of Ansoft Corp.), a start-up
focused on software for radio frequency engineers. Mr. Jankovic holds a
M.S.E.E. degree from University of Colorado at Boulder.
Nicholas Basta has served as our Vice President of Editorial Services since
June 1997. Mr. Basta was a senior editor and conference manager at McGraw-Hill,
Inc. where he was employed since 1980. Prior to joining us, he launched the
Chemputers Conferences, a semi-annual meeting on trends in software and
information technology for the chemical process industries. During 1990, he was
an adjunct professor at the Columbia University School of Journalism and
remains an adjunct teacher at the New School for Social Research in New York.
Since 1980, Mr. Basta has been a contributing editor for several trade
publications and has published several career guides. Mr. Basta received a
B.S.E. from Princeton University.
Christopher G. Kuhn has served as our General Counsel since December 1998.
Prior to joining VerticalNet, he was a senior attorney with the law firm of
Silberman & DiFilippo from 1989 to 1998, where he practiced general business
law, including commercial transactions, acquisitions and insolvency law. Prior
to 1989, he was an associate and partner at the law firm of Pincus, Verlin,
Hahn, Reich & Weinberg. Mr. Kuhn received a B.A. from West Chester State
College and a J.D. from the Delaware Law School.
Classes of the Board
Our board of directors are divided into three classes that serve staggered
three-year terms as follows:
<TABLE>
<CAPTION>
Class Expiration Member
- ----- ---------- ------
<S> <C> <C>
Class I 2000 Buckley, Warta
Class II 2001 Ballowe, Hagan
Class III 2002 Alexander, Walsh
</TABLE>
Committees of the Board of Directors
The board of directors recently created a compensation committee and an audit
committee. The compensation committee of the board of directors evaluates our
compensation policies and administers our stock option plan.
51
Management
<PAGE>
The members of the compensation committee are Messrs. Alexander and Warta. The
audit committee will review the scope of our audit, the engagement of our
independent auditors and their audit reports. The audit committee will also
meet with the financial staff to review accounting procedures and reports. The
audit committee currently consists of Messrs. Ballowe and Buckley. We intend to
appoint another board member to the audit committee.
Director Compensation
We do not pay directors cash compensation, however they are reimbursed for
the expenses they incur in attending meetings of the board or board committees.
Non-employee directors are eligible to receive options to purchase common stock
awarded under our equity compensation plan. See "--Stock Option Plan."
Compensation Committee Interlocks and Insider Participation
Upon completion of this offering, the compensation committee will make all
compensation decisions. Messrs. Alexander and Warta have served as the only
members of the compensation committee since we formed the committee in June
1998. Prior to that time, our full board made compensation decisions. None of
our executive officers, directors or compensation committee members presently
serve, or in the past served, on the compensation committee of any other
company whose directors or executive officers served on our compensation
committee. A member of the compensation committee, Mr. Alexander, is a Managing
Director of Internet Capital Group, which will beneficially own 38.4% of our
common stock after the offering.
Executive Compensation
The following table sets forth information for the fiscal years ended
December 31, 1997 and 1998 concerning compensation we paid to the chief
executive officer and our other four most highly compensated executive officers
during the fiscal year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
--------------------------
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
Mark L. Walsh,
President and Chief
Executive Officer..................... 1998 $233,333 $100,000 --
1997(1) 70,833 33,333 --
Michael J. Hagan,
Senior Vice President................. 1998 $112,916 $ 25,000 --
1997 101,933 -- --
Michael P. McNulty,
Senior Vice President................. 1998 $112,916 $ 25,000 --
1997 101,516 -- --
Mario V. Shaffer,
Vice President(2)..................... 1998 $ 80,473 $ 25,000 --
Barry E. Wynkoop,
Senior Vice President(3).............. 1998 $ 72,916 $ 35,000 $1,600
</TABLE>
- --------
(1) Mr. Walsh commenced employment with us in August, 1997.
(2) Mr. Shaffer commenced employment with us in May, 1998.
(3) Mr. Wynkoop commenced employment with us in August, 1998.
52
Management
<PAGE>
Stock Option Information
The following table sets forth certain information regarding options granted
in 1998 to the executive officers named in the Summary Compensation Table
above.
Option Grants During Year Ended December 31, 1998
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of Stock Price
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term (3)
Options in Fiscal Price Expiration ----------------------------
Name Granted Year Per Share Date 5% 10%
- ---- ---------- ---------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Walsh........... 196,481(1) 12.6% $0.80 1/30/08 $4,003,424 $6,467,890
231,530(2) 14.9% 2.63 6/18/08 4,293,870 7,197,956
Michael J. Hagan........ 76,923(2) 4.9% 0.80 1/30/08 1,567,355 2,532,201
Michael P. McNulty...... 76,923(2) 4.9% 0.80 1/30/08 1,567,355 2,532,201
Mario V. Shaffer........ 35,897(1) 2.3% 2.63 6/18/08 665,732 1,115,989
2,564(1) 0.2% 2.63 7/20/08 47,551 79,711
12,821(2) 0.8% 3.32 11/11/08 228,927 389,741
Barry E. Wynkoop........ 123,077(1) 7.9% 2.63 6/18/08 2,282,541 3,826,298
</TABLE>
- --------
(1) Vests at 28% on the employee's one year employment anniversary, in equal
increments of 2% per month for 36 months and fully vests 48 months from the
employee's initial date of employment.
(2) Vests at 28% on the first anniversary of the grant date, in equal
increments of 2% per month for 36 months and fully vests 48 months from the
grant date.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon an assumed initial public offering price
of $13.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
The following table sets forth certain information concerning option
exercises by executive officers named in the Summary Compensation Table during
1998.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Options at Fiscal Year End Fiscal Year-End (1)
----------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark L. Walsh......... 181,501 554,202 $2,214,312 $6,337,565
Michael J. Hagan...... 0 76,923 0 938,461
Michael P. McNulty.... 0 76,923 0 938,461
Mario V. Shaffer...... 0 51,282 0 522,948
Barry E. Wynkoop...... 0 123,077 0 1,276,308
</TABLE>
- --------
(1) Based on an assumed initial public offering price of $13.00 per share,
minus the exercise price, multiplied by the number of shares underlying the
option.
53
Management
<PAGE>
Stock Option Plan
We have adopted the Amended and Restated 1996 Equity Compensation Plan,
effective as of December 18, 1996. The plan provides for grants of incentive
stock options, nonqualified stock options, and restricted stock to our
designated employees, advisors and consultants, and to non-employee directors.
By encouraging stock ownership, we seek to motivate such individuals to
contribute materially to our success.
General. The plan authorizes up to 3,600,000 shares of common stock for
issuance under the terms of the plan. No more than 500,000 shares in the
aggregate may be granted to any individual in any calendar year. If options
granted under the plan expire or are terminated for any reason without being
exercised, or shares of restricted stock are forfeited, the shares of common
stock underlying such grant will again be available for purposes of the plan.
Administration of the Plan. The compensation committee of the board of
directors administers and interprets the plan. The compensation committee will
consist of two or more persons appointed by the board of directors from among
its members, each of whom must be a "non-employee director" as defined by Rule
16b-3 under the Securities Exchange Act of 1934, and an "outside director" as
defined by Section 162(m) of the Internal Revenue Code of 1986 and related
Treasury regulations. The compensation committee has the sole authority to:
. determine the individuals to whom grants shall be made under the plan;
. determine the type, size and terms of the grants to be made to each such
individual;
. determine the time when the grants will be made and the duration of any
applicable exercise or restriction period, including the criteria for
vesting and the acceleration of vesting;
. determine the total number of shares of common stock available for grants;
and
. deal with any other matters arising under the plan.
The compensation committee may require that a grantee execute a
shareholder's agreement, with such terms as the compensation committee deems
appropriate.
Grants. Grants under the plan may consist of:
. options intended to qualify as incentive stock options within the meaning
of Section 422 of the Internal Revenue Code;
. nonqualified stock options that are not intended to so qualify; and
. restricted stock.
Eligibility for Participation. Grants may be made to any employees of
VerticalNet or any of its subsidiaries and to any non-employee member of the
board of directors. Key consultants and advisors who perform services for us
or any of our subsidiaries are eligible if they render bona fide services, not
as part of the offer or sale of securities in a capital-raising transaction.
As of December 31, 1998, 2,083,861 options were outstanding under the plan.
Options. Incentive stock options may be granted only to employees. Non-
qualified stock options may be granted to employees, non-employee directors,
and key advisors. The exercise price of common stock underlying an option
shall be determined by the compensation committee, and may be equal to,
greater than, or less than the fair market value but in no event less than 80%
of fair market value; provided that
54
Management
<PAGE>
(a) the exercise price of an incentive stock option shall be equal to or
greater than the fair market value of a share of common stock on the
date such incentive stock option is granted and
(b) the exercise price of an incentive stock option granted to an employee
who owns more than 10% of the common stock may not be less than 110% of
the fair market value of the underlying shares of common stock on the
date of grant.
The participant may pay the exercise price:
(1) in cash;
(2) with the approval of the compensation committee, by delivering shares of
common stock owned by the grantee and having a fair market value on the
date of exercise equal to the exercise price of the grant; or
(3) by such other method as the compensation committee shall approve,
including payment through a broker in accordance with procedures
permitted by Regulation T of the Federal Reserve Board.
Options vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument.
The compensation committee will determine the term of each option up to a
maximum of ten years from the date of grant except that the term of an
incentive stock option granted to an employee who owns more than 10% of the
common stock may not exceed five years from the date of grant. The compensation
committee may accelerate the exercisability of any or all outstanding options
at any time for any reason.
Restricted Stock. The compensation committee shall determine the number of
shares of restricted stock granted to a participant, but may not exceed the
maximum plan limit described above. Grants of restricted stock will be
conditioned on such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the compensation committee
may determine in its sole discretion. The restrictions shall remain in force
during a restricted period set by the compensation committee. If the grantee is
no longer employed by us during the restriction period or if any other
conditions are not met, the restricted stock grant will terminate as to all
shares covered by the grant for which the restrictions are still applicable,
and those shares must be immediately returned to us.
Amendment and Termination of the Plan. The compensation committee may amend
or terminate the plan at any time; except, that, it may not make any amendment
that requires stockholder approval pursuant to Rule 16b-3 of the Securities
Exchange Act of 1934 or Section 162(m) of the Internal Revenue Code without
stockholder approval. The plan will terminate on the day immediately preceding
the tenth anniversary of its effective date, unless the compensation committee
terminated earlier or extends it with approval of the stockholders.
Adjustment Provisions. Upon certain transactions identified in the plan, the
compensation committee may appropriately adjust:
. the maximum number of shares available for grants;
. the maximum number of shares that any participant may be granted in any
year;
. the number of shares covered by outstanding grants;
55
Management
<PAGE>
. the kind of shares issued under the plan; and
. the price per share or the applicable market value of such grants.
Change of Control. Upon a change of control, the compensation committee may
determine that:
(1) all outstanding options shall immediately vest; and
(2) the restrictions and conditions on all outstanding restricted stock shall
immediately lapse.
Upon a change of control where we are not the surviving entity or where we
survive only as a subsidiary of another entity, unless the compensation
committee determines otherwise, all outstanding grants shall be assumed by or
replaced with comparable options or stock by the surviving corporation. In
addition, the compensation committee may
(a) require that grantees surrender their outstanding options in exchange
for payment by us, in cash or common stock, at an amount equal to the
amount by which the then fair market value of the shares of common
stock subject to the grantee's unexercised options exceeds the
exercise price of those options, and/or
(b) after giving grantees an opportunity to exercise their outstanding
options, terminate any or all unexercised options.
A "change of control" is defined to have occurred if:
(1) any "person" other than persons who are our shareholders as of the
effective date of the plan becomes a "beneficial owner," directly or
indirectly, of common stock representing more than 50% of the voting
power of the then-outstanding shares of common stock; the terms "person"
and "beneficial owner" are each defined in the Securities Exchange Act of
1934; or
(2) the shareholders or the directors, as appropriate, approve:
(a) any merger or consolidation of us with another corporation where the
shareholders, immediately prior to such transaction, will not
beneficially own, immediately after the transaction, shares entitling
such shareholders to more than 50% of all votes to which all
shareholders of the surviving corporation would be entitled in the
election of directors, without consideration of the rights of any
class of stock to elect directors by a separate class vote;
(b) the sale or other disposition of all or substantially all our assets;
or
(c) our liquidation or dissolution.
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may be
precluded from claiming a federal income tax deduction for total remuneration
in excess of $1.0 million paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total
remuneration would include amounts received upon the exercise of stock options
granted under the plan and the value of shares received when the shares of
restricted stock became transferable or such other time when income is
recognized. An exception does exist, however, for "performance-based
compensation," including amounts received upon the exercise of stock options
pursuant to a plan approved by stockholders that meets certain requirements.
56
Management
<PAGE>
The plan has been approved by stockholders and is intended to make grants of
options thereunder meet the requirements of "performance-based compensation."
Awards of restricted stock generally will not qualify as "performance-based
compensation."
Employment Agreements
Under an employment letter dated August 1997, Mark L. Walsh agreed to be our
President and Chief Executive Officer. Under this employment letter, Mr. Walsh
receives a base salary of $200,000 per year, and a bonus of up to $100,000 per
year based on performance objectives established at the sole discretion of the
compensation committee. In connection with the employment letter, we granted
Mr. Walsh stock options to purchase 735,703 shares of common stock. The
employment letter has no term, however, if Mr. Walsh is terminated for any
reason other than for cause, he is entitled to a severance payment equal to one
year of his base salary. Internet Capital Group has guaranteed up to $500,000
of any such severance payment.
Under an employment letter dated July 1998, agreed to be a Senior Vice
President. Under the employment letter, Mr. Wynkoop is entitled to receive an
annual salary of $175,000, and a bonus of up to $100,000, 30% of which is
attributable to us meeting overall revenue and margin objectives established by
the compensation committee and 70% of which is attributable to our attainment
of annual sales targets established by the compensation committee. If we exceed
annual sales targets, Mr. Wynkoop may receive an additional bonus based on the
percentage that actual sales exceeded the sales targets. Under the employment
letter we granted Mr. Wynkoop stock options to purchase 123,077 shares of
common stock. The employment letter has no term, however, if Mr. Wynkoop is
terminated for any reason other than for cause, he is entitled to a severance
payment equal to six months of his base salary.
We may enter into new employment agreements with our executive officers, but
no terms have been established. In addition, we are in the process of
developing a bonus program that would be based on company performance targets
and individual performance targets focusing on profitability and customer
satisfaction goals.
Employee Stock Purchase Plan
Concurrently with the offering, we intend to establish an employee stock
purchase plan under which a total of 300,000 shares of common stock will be
made available for sale to our employees. We intend the purchase plan to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code of 1986. The board of directors, or by a committee
appointed by the board will administer the purchase plan. Employees are
eligible to participate if they are employed by us or a designated subsidiary
for at least 20 hours per week and for more than five months in any calender
year. The purchase plan permits eligible employees to purchase common stock
through payroll deductions, which, subject to certain limitations, may not
exceed 10% of an employee's compensation.
The purchase plan will be implemented in a series of consecutive offering
periods, each approximately six months long. Offering periods will begin on the
first trading day after March 31 and September 30 of every year and end on the
last trading day in the period six months later. However, the first offering
period will be the period of approximately eight months beginning on the date
the registration statement relating to this prospectus is declared effective by
the Securities and Exchange
57
Management
<PAGE>
Commission and ending on the last trading day in the period ending September
30, 1999. Each participant will be granted an option to purchase stock on the
first day of the six-month purchase period and such option will be
automatically exercised on the last date of each offering period. The purchase
price of each share of common stock under the purchase plan will be equal to
85% of the lesser of the fair market value per share of common stock on the
start date of that offering period or on the date of purchase. Employees may
modify or end their participation in the offering at any time during the
offering period. Participation ends automatically upon termination of
employment. The purchase plan will terminate in 2009 unless the board of
directors terminates it sooner.
58
Management
<PAGE>
CERTAIN TRANSACTIONS AND STOCK ISSUANCES WITH EXECUTIVE OFFICERS, DIRECTORS AND
OUR LARGEST SHAREHOLDER
Both Michael J. Hagan and Michael P. McNulty, executive officers of
VerticalNet, were involved in our founding and organization and may be
considered as our promoters. At our inception in July 1995, we issued 685,479
shares of common stock to Mr. Hagan and 685,479 shares of common stock to Mr.
McNulty. Mr. Hagan and Mr. McNulty each contributed a nominal amount of capital
for our initial capitalization. In January 1998, each of Mr. Hagan and Mr.
McNulty received an incentive stock option grant under the equity compensation
plan to purchase 76,923 shares of common stock.
In 1996, we borrowed an aggregate principal amount of $100,000 evidenced by
four unsecured term notes from four individuals. Along with the notes, we
issued 672,038 shares of common stock to these individuals. One of these
individuals was a member of our board of directors, Walter Buckley, who also
serves as an officer and director of Internet Capital Group, our largest
shareholder. The notes bore interest at a rate of 7%. The notes were to mature
on February 2001, however, all of the notes were repaid in full, including
interest of $15,771, in May 1998.
During 1996 and 1997, Internet Capital Group made loans to us, pursuant to a
total of 15 demand notes, in an aggregate principal amount of $3.2 million. We
have subsequently repaid $1.0 million of these loans and interest of $28,803
and exchanged $2.2 million of these loans for 833,333 shares of Series B
Preferred Stock and 441,595 shares of Series D Preferred Stock.
In 1997, Internet Capital Group guaranteed repayment of up to $2.0 million of
a line of credit with our bank under the line of credit agreement. We repaid
all amounts outstanding under this facility in May 1998 and consequently, our
bank released the guarantee from Internet Capital Group.
In 1997, in conjunction with our entering into an employment letter agreement
with Mark L. Walsh, Internet Capital Group guaranteed the payment of
approximately $500,000 in potential severance payments in the event his
employment is terminated for any reason other than cause. See "Management--
Employment Agreements."
During 1997, we entered into a $250,000 Web site development contract with
Informatrix. In addition, under the contract we were to maintain the Web site
for a monthly fee of $20,000. In conjunction with this contract, we advanced
Informatrix $160,000 in 1997, as evidenced by a demand note. During the nine
months ended September 30, 1998, we advanced an additional $555,000 to
Informatrix as part of the demand note. Mr. McNulty's brother was a member of
the board of directors of Informatrix. Subsequently, in September 1998, we
acquired all of the outstanding capital stock of Informatrix.
In May 1998, we issued warrants to Internet Capital Group that will, in the
aggregate, entitle Internet Capital Group to purchase 85,470 shares of common
stock at $3.51 per share. We issued the warrants in conjunction with certain
guarantees of our bank debt by Internet Capital Group. Such warrants are
currently exercisable, and will expire on November 30, 2008. The exercise price
and number of shares of common stock issuable upon the exercise of each of the
warrants may be adjusted upon the occurrence of certain
59
Certain Transactions and Stock Issuances with Executive Officers, Directors and
Our Largest Shareholder
<PAGE>
events, including stock splits, stock dividends, reorganization,
recapitalization, merger or sale of all or substantially all of our assets. All
shares of common stock issuable upon exercise of all warrants have certain
registration rights. See "Description of Capital Stock--Registration Rights."
Since inception, we have issued, in private placement transactions, shares of
preferred stock that will automatically convert into an aggregate of 9,734,846
shares of common stock upon or immediately before the closing of the offering.
To date, we do not owe and have never paid dividends on our preferred stock.
The holders of such converted shares of common stock are entitled to certain
demand and piggy-back registration rights. See "Description of Capital Stock--
Registration Rights."
The following table sets forth information about our preferred stock that was
outstanding before the offering. All these shares of preferred stock convert
into common stock upon the closing of the offering.
<TABLE>
<CAPTION>
Series B Series C Series D
Series A Preferred Preferred Preferred Preferred
------------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Date of issuance........ September 1996 July 1997 October 1997 May/June 1998
Shares of preferred
stock issued........... 512,821 2,579,580 154,861 4,558,405
Aggregate purchase price
for preferred stock.... $1.0 million $2.0 million $200,000 $16.0 million
Shares of common stock
to be received upon
conversion............. 2,442,000 2,579,580 154,861 4,558,405
</TABLE>
Prior to the offering, Internet Capital Group owns all of the shares of
Series A Preferred Stock, 2,427,811 shares of Series B Preferred Stock and
1,139,602 shares of Series D Preferred Stock. The purchase price for the shares
of Series A, Series B and Series D Preferred Stock was paid by Internet Capital
Group in cash and/or by the exchange of the principal amount plus accrued
interest of notes. Douglas A. Alexander, our Chairman of the Board, is a
Managing Director of Internet Capital Group. Walter W. Buckley, III, one of our
directors, is the President and CEO of Internet Capital Group. He joined our
board of directors in September 1996 after the completion of the issuance of
the Series A Preferred Stock. After the offering, Internet Capital Group's
right to elect directors terminates when their preferred stock converts to
common stock.
Of the $5.0 million of convertible notes issued in November 1998, we issued
$4.1 million to Internet Capital Group. In conjunction with the issuance of the
convertible note to Internet Capital Group, we issued warrants to purchase
68,370 shares of common stock at the initial public offering price per share.
60
Certain Transactions and Stock Issuances with Executive Officers, Directors and
Our Largest Shareholder
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to beneficial
ownership of the common stock after the offering by each person who
beneficially owns more than 5% of the common stock; by each of our executive
officers named in the Summary Compensation Table; by each of our directors; and
by all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Shares of Percent of Ownership
Common Stock ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------ ------------------- --------------- --------------
<S> <C> <C> <C>
Internet Capital
Group(1)(6)(7)............. 6,297,208 48.9% 38.4%
800 Safeguard Building,
435 Devon Park Drive,
Wayne, PA 19087
Koch Ventures, Inc.......... 854,701 6.7 5.3
4111 East 37th Street North
Wichita, KS 67220
Wheatley Partners, L.P.(2).. 882,160 6.9 5.4
80 Cuttermill Rd., Suite
311
Great Neck, NY 11021
Mark L. Walsh(3)............ 201,668 1.6 1.2
Michael J. Hagan(4)......... 612,628 4.8 3.8
Michael P. McNulty(4)....... 506,113 4.0 3.1
Mario V. Shaffer............ -- * *
Barry E. Wynkoop............ -- * *
Douglas A. Alexander(5)(6).. 159,974 1.3 *
Jeffrey C. Ballowe.......... -- * *
Walter W. Buckley, III(7)... 12,898 * *
Matthew J. Warta............ -- * *
All executive officers and
directors as a group
(11 persons)(3)(4)(8)...... 1,504,050 11.5% 9.1%
</TABLE>
- --------
* Less than 1%
(1) Includes common stock issued upon automatic conversion of all shares of
preferred stock and convertible notes owned by Internet Capital Group and
119,656 shares of common stock issuable upon the exercise of warrants
exercisable within 60 days of December 31, 1998.
(2) Includes shares held by Wheatley Foreign Partners, L.P. Includes 4,828
shares of common stock issuable upon the exercise of warrants exercisable
within 60 days of December 31, 1998.
(3) Includes 201,668 shares of common stock issuable upon the exercise of
options exercisable within 60 days of December 31, 1998. Excludes options
to purchase 534,035 shares of common stock which are not currently
exercisable.
(4) Includes 23,077 shares of common stock issuable upon the exercise of
options exercisable within 60 days of December 31, 1998. Excludes options
to purchase 53,846 shares of common stock which are not currently
exercisable.
(5) Includes 8,205 shares of common stock issuable upon exercise of options
exercisable within 60 days of December 31, 1998.
(6) Douglas A. Alexander is a managing director of Internet Capital Group. Mr.
Alexander disclaims beneficial ownership of shares held by Internet Capital
Group and Internet Capital Group disclaims beneficial ownership of shares
owned by Mr. Alexander.
(7) Walter W. Buckley, III is the President and Chief Executive Officer of
Internet Capital Group. Mr. Buckley disclaims beneficial ownership of
shares held by Internet Capital Group and Internet Capital Group disclaims
beneficial ownership of shares owned by Mr. Buckley.
(8) Includes 10,769 shares of common stock issuable upon the exercise of stock
options exercisable within 60 days of December 31, 1998.
Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares beneficially owned
by them.
61
Principal Shareholders
<PAGE>
DESCRIPTION OF CAPITAL STOCK
At the closing of the offering our authorized capital stock will consist of
90,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. VerticalNet is a
Pennsylvania corporation and is subject to the Pennsylvania Business
Corporation Law of 1988.
Common Stock
Holders of the common stock are entitled to receive, as, when and if declared
by the board of directors from time to time, such dividends and other
distributions in cash, stock or property from our assets or funds legally
available for such purposes subject to any dividend preferences that may be
attributable to preferred stock that may be authorized. Holders of common stock
are entitled to one vote for each share held of record on all matters on which
shareholders may vote, except with respect to the election of directors in
which case shareholders are entitled to multiply the number of shares held of
record by the number of directors to be elected and distribute such number of
votes for one or among two or more nominees.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and non-assessable. In the event of our liquidation, dissolution or
winding up, holders of common stock are entitled to share ratably in the assets
available for distribution.
Preferred Stock
Our board of directors, without further action by the shareholders, is
authorized to issue an aggregate of 10,000,000 shares of preferred stock. No
shares of preferred stock are outstanding and we have no plans to issue a new
series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights and
any other preferences, which rights and preferences could adversely affect the
voting power of the holders of common stock. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions or
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or could discourage or delay a third party from
acquiring, a majority of our outstanding stock. See "Certain Transactions and
Stock Issuances with Executive Officers, Directors and Our Largest
Shareholder."
Common Stock Warrants
We have warrants outstanding for the purchase of 235,871 shares of our common
stock with a weighted average exercise price of $5.37 per share.
Warrants issued to Progress Capital on April 30, 1997 will entitle Progress
Capital to purchase 19,347 shares of common stock for $0.76 per share. Warrants
issued to Internet Capital Group on May 12, 1998 will, in the aggregate,
entitle Internet Capital Group to purchase 85,470 shares of common stock at
$3.51 per share. Warrants issued to Progress Capital on May 12, 1998 will
entitle Progress Capital to purchase 28,490 shares of common stock for $3.51
per share. Such warrants are currently exercisable, and expire on November 30,
2008.
We issued additional warrants to purchase an aggregate of 82,051 shares of
common stock in November 1998 to Internet Capital Group
62
Description of Capital Stock
<PAGE>
and other persons who were holders of our Series D Preferred Stock. The
exercise price for the warrants is equal to the initial public offering price
per share.
Additional warrants to purchase 20,513 shares of common stock at the initial
public offering price per share were issued to Progress Capital in November,
1998.
The exercise price and number of shares of common stock issuable upon the
exercise of each of the warrants may be adjusted upon the occurrence of
certain events, including stock splits, stock dividends, reorganization,
recapitalization, merger, or sale of all or substantially all of our assets.
All warrants and shares of stock issuable upon exercise of all warrants have
certain registration rights as described under "Registration Rights" below.
Classified Board of Directors
Our bylaws, as amended and restated, divide our board of directors into
three classes, with regular three-year staggered terms and initial terms of
one year for the class I directors, two years for the class II directors and
three years for the class III directors. This could prevent a party who
acquires control of the majority of the outstanding voting stock from
obtaining control of the board of directors.
Our shareholders do not have the right to cumulative voting in the election
of directors.
Shareholder Action by Written Consent
Under Pennsylvania law, any action that may be taken at a meeting of the
shareholders may be taken without a meeting if such action is authorized by
the unanimous written consent of all shareholders entitled to vote at a
meeting for such purposes.
Special Meetings
Our articles of incorporation and bylaws provide that special meetings of
our shareholders may be called only by the board or by our chairman or chief
executive officer. This provision may make it more difficult for shareholders
to take action opposed by the board.
Amendments to Our Bylaws
Our bylaws provide that the vote of a majority of all directors or the vote
of the majority of the outstanding stock entitled to vote is required to
alter, amend or repeal our bylaws.
Indemnification of Directors and Officers
Section 1741 of the Pennsylvania corporate laws provides the power to
indemnify any officer or director acting in his capacity as our representative
who was, is or is threatened to be made a party to any action or proceeding
for expenses, judgments, penalties, fines and amounts paid in settlement in
connection with such action or proceeding. The indemnity provisions apply
whether the action was instituted by a third party or arose by or in our
right. Generally, the only limitation on our ability to indemnify our officers
and directors is if the act violates a criminal statute or if the act or
failure to act is finally determined by a court to have constituted willful
misconduct or recklessness.
Our bylaws provide a right to indemnification to the full extent permitted
by law for expenses, attorney's fees, damages, punitive damages, judgments,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by any director or officer whether or not the indemnified liability
arises or arose from any threatened, pending or completed proceeding by or in
our right by reason of the fact that such director or officer is or was
serving as our director, officer or employee or, at our request, as a
director, officer, partner, fiduciary or trustee of another corporation,
partnership, joint venture, trust,
63
Description of Capital Stock
<PAGE>
employee benefit plan or other enterprise, unless the act or failure to act
giving rise to the claim for indemnification is finally determined by a court
to have constituted willful misconduct or recklessness. Our bylaws provide for
the advancement of expenses to an indemnified party upon receipt of an
undertaking by the party to repay those amounts if it is finally determined
that the indemnified party is not entitled to indemnification.
Our bylaws authorize us to take steps to ensure that all persons entitled to
the indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
Limitation of Liability
Our articles of incorporation provide that none of our directors shall be
personally liable to us or our shareholders for monetary damages for a breach
of fiduciary duty as a director, except for liability:
. for any breach of such person's duty of loyalty;
. for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
. for the payment of unlawful dividends and certain other actions prohibited
by Pennsylvania corporate law; and
. for any transaction resulting in receipt by such person of an improper
personal benefit.
We maintain directors and officers' liability insurance to provide directors
and officers with insurance coverage for losses arising from claims based on
breaches of duty, negligence, error and other wrongful acts. At present, there
is no pending litigation or proceeding, and we are not aware of any threatened
litigation or proceeding, involving any director, officer, employee or agent
where indemnification will be required or permitted under the articles of
incorporation or our bylaws.
Pennsylvania Control-Share Acquisitions Law
Generally, subchapters 25E, F, G, H, I and J of the Pennsylvania corporate
laws place certain procedural requirements and establish certain restrictions
upon the acquisition of voting shares of a corporation which would entitle the
acquiring person to cast or direct the casting of a certain percentage of votes
in an election of directors. Subchapter 25E of the Pennsylvania corporate laws
provides generally that, if a company were involved in a "control transaction,"
shareholders of the company would have the right to demand from a "controlling
person or group" payment of the fair value of their shares. For purposes of
subchapter 25E, a "controlling person or group" is a person or group of persons
acting in concert that, through voting shares, has voting power over at least
20% of the votes which shareholders of the company would be entitled to cast in
the election of directors. A control transaction arises, in general, when a
person or group acquires the status of a controlling person or group.
In general, Subchapter 25F of the Pennsylvania corporate laws delays for five
years and imposes conditions upon "business combinations" between an
"interested shareholder" and us. The term "business combination" is defined
broadly to include various merger, consolidation, division, exchange or sale
transactions, including transactions utilizing our assets for purchase price
amortization or refinancing purposes. An "interested shareholder," in general,
would be
64
Description of Capital Stock
<PAGE>
a beneficial owner of at least 20% of our voting shares.
In general, Subchapter 25G of the Pennsylvania corporate laws suspends the
voting rights of the "control shares" of a shareholder that acquires for the
first time 20% or more, 33 1/3% or more, or 50% or more of a company's shares
entitled to be voted in an election of directors. The voting rights of the
control shares generally remain suspended until such time as the
"disinterested" shareholders of the company vote to restore the voting power
of the acquiring shareholder.
Subchapter 25H of the Pennsylvania corporate laws provides in certain
circumstances for the recovery by a company of profits made upon the sale of
its common stock by a "controlling person or group" if the sale occurs within
18 months after the controlling person or group became such and the common
stock was acquired during such 18 month period or within 24 months before such
period. In general, for purposes of Subchapter 25H, a "controlling person or
group" is a person or group that:
(1) has acquired;
(2) offered to acquire; or
(3) publicly disclosed or caused to be disclosed an intention to acquire
voting power over shares that would entitle such person or group to cast
at least 20% of the votes that shareholders of the company would be
entitled to cast in the election of directors.
If the disinterested shareholders of a company vote to restore the voting
power of a shareholder who acquires control shares subject to Subchapter 25G,
such company would then be subject to subchapters 25I and J of the
Pennsylvania corporate laws. Subchapter 25I generally provides for a minimum
severance payment to certain employees terminated within two years of such
approval. Subchapter 25J, in general, prohibits the abrogation of certain
labor contracts prior to their stated date of expiration.
The above descriptions of subchapters of the Pennsylvania corporate laws
summarize the material anti-takeover provisions contained in the Pennsylvania
corporate laws but are not a complete discussion of those provisions.
Certain Anti-Takeover Provisions
The ability of the board of directors to establish the rights of, and to
issue, substantial amounts of Preferred Stock without the need for shareholder
approval, may have the effect of discouraging, delaying or preventing a change
in control. Such Preferred Stock, among other things, may be used to create
voting impediments with respect to any changes in control or to dilute the
stock ownership of holders of common stock seeking to obtain control. See
"Risk Factors--Anti-takeover provisions and our right to issue preferred stock
could make a third-party acquisition of us difficult," "--Common Stock" and
"--Preferred Stock."
Registration Rights
After the consummation of the offering, the holders of warrants to purchase
235,871 shares of common stock or their transferees, holders of 9,734,846
shares of common stock issuable upon conversion of the preferred stock and
holders of 384,615 shares of common stock issuable upon conversion of the
convertible notes, assuming an initial public offering price of $13.00 per
share will be entitled to certain registration rights with respect to the
registrable securities. These rights are provided under the terms of the
registrable securities and agreements between us and the holders of such
65
Description of Capital Stock
<PAGE>
securities. Such agreements and registrable securities provide, in certain
instances, demand registration rights. In addition, pursuant to these
agreements, the holders are entitled, subject to certain limitations, to
require us to include their registrable securities in future registration
statements we file under the Securities Act of 1933. In accordance with the
terms of such piggyback registration rights, we have elected to exclude all
registrable securities from the offering. The Holders also are entitled,
subject to certain limitations, to require us to register their registrable
securities on a registration statement on Form S-3 once we are eligible to use
a Form S-3 in connection with such registrations. However, Holders of all of
these shares will be restricted from exercising such rights until 180 days
after the date of this prospectus. Registration of shares of common stock
pursuant to the exercise of demand registration rights, piggyback registration
rights or S-3 registration rights under the Securities Act of 1933 would result
in such shares becoming freely tradable without restriction under the
Securities Act of 1933 immediately upon the effectiveness of such registration.
"Risk Factors--Shares eligible for future sale by our current shareholders may
adversely affect our stock price," "Shares Eligible for Future Sale" and
"Certain Transactions and Stock Issuances with Executive Officers, Directors
and Our Largest Shareholder."
Transfer Agent
The transfer agent for our common stock is American Stock Transfer & Trust
Company.
66
Description of Capital Stock
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
adversely affect our ability to raise capital at a time and on terms favorable
to us.
Of the 16,260,252 shares to be outstanding after the offering (assuming that
the underwriters do not exercise their over-allotment option), the 3,500,000
shares of common stock offered hereby and an additional 942,723 shares of
common stock will be freely tradeable without restriction in the public market
unless such shares are held by "affiliates," as that term is defined in Rule
144(a) under the Securities Act of 1933. For purposes of Rule 144, an
"affiliate" of an issuer is a person that, directly or indirectly through one
or more intermediaries, controls, or is controlled by or is under common
control with, such issuer. The remaining shares of common stock to be
outstanding after the offering are "restricted securities" under the Securities
Act of 1933 and may be sold in the public market upon the expiration of certain
holding periods under Rule 144, subject to the volume, manner of sale and other
limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least two years, including an "affiliate," as
that term is defined in the Securities Act, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of our common stock
(approximately 164,204 shares immediately following the offering), or
. the average weekly trading volume during the four calendar weeks preceding
filing of notice of such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability
of current public information about us. A shareholder who is deemed not to
have been an "affiliate" of ours at any time during the 90 days preceding a
sale, and who has beneficially owned restricted shares for at least two
years, would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions or public
information requirements.
In addition, as of December 31, 1998, there were outstanding warrants to
purchase 235,871 shares of common stock and options to purchase 2,083,861
shares of common stock, of which 366,162 options were fully vested and
exercisable. An additional 5,754 shares were reserved for issuance under our
equity compensation plan. We intend to register the shares of common stock
issued, issuable or reserved for issuance under the plan as soon as practicable
following the date of this prospectus.
Holders of warrants to purchase 235,871 shares of common stock, holders of
9,307,495 shares of common stock issuable upon conversion of the preferred
stock and holders of 384,615 shares of common stock issuable upon conversion of
the convertible notes, assuming an initial public offering price of $13.00 per
share, are entitled to registration rights with respect to such shares for
resale under the Securities Act. If such holders, by exercising their
registration rights, cause a large number of shares to be registered and sold
in the public market, such sales could have an adverse effect on the market
price for the common stock. Such rights may not be exercised prior to the
expiration of 180 days from the date of this
67
Shares Eligible for Future Sale
<PAGE>
prospectus. See "Description of Capital Stock--Registration Rights."
Lock-Up Arrangements
Along with our officers and directors, and all of the holders of the
preferred stock, the warrants and certain holders of options and shares of
common stock, we have agreed not to sell or otherwise dispose of any shares of
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of Lehman Brothers.
68
Shares Eligible for Future Sale
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Hambrecht & Quist LLC and Volpe Brown
Whelan & Company, LLC are acting as representatives, and Wit Capital
Corporation is facilitating online distribution as e-Manager(TM), have each
agreed to purchase from us the respective number of shares of common stock
shown opposite its name below:
<TABLE>
<CAPTION>
Number of
Shares of
Underwriters Common Stock
------------ ------------
<S> <C>
Lehman Brothers Inc...........................................
Hambrecht & Quist LLC.........................................
Volpe Brown Whelan & Company, LLC.............................
Wit Capital Corporation.......................................
---------
Total....................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at such public offering price less a selling concession not
in excess of $ per share. The underwriters may allow, and the dealers may
reallow, a concession not in excess of $ per share to brokers and dealers.
After the offering, the underwriters may change the offering price and other
selling terms.
We have granted to the underwriters an option to purchase up to an aggregate
of 525,000 additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
69 Underwriting
<PAGE>
We have agreed that, without the prior consent of Lehman Brothers, we will
not directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities which may be converted into or exchanged for any
such shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and certain other
shareholders have agreed under lock-up agreements that, without the prior
written consent of Lehman Brothers, they will not, directly or indirectly,
offer, sell or otherwise dispose of any shares of common stock or any
securities which may be converted into or exchanged for any such shares for the
period ending 180 days after the date of this prospectus. See "Shares Eligible
for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and
capital structure, estimates of our business potential and earning prospects,
an overall assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "VERT."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase shares of common
stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
70
Underwriting
<PAGE>
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
The representatives have informed us that they do not intend to confirm the
sales of shares of common stock offered by this prospectus to any accounts over
which they exercise discretionary authority.
At our request, the underwriters have reserved up to 175,000 shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees and their family members and to business associates of VerticalNet at
the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
At our request the underwriters have reserved for sale at the initial public
offering price up to shares of common stock to visitors and users of the
VerticalNet services or to its Web site who express an interest in purchasing
such shares. Purchases of the reserved shares are to be made through an account
at Wit Capital in accordance with Wit Capital's procedures for opening an
account and transacting in securities. Any reserved shares not purchased by
visitors and users of VerticalNet's services or to its Web site will be offered
by the underwriters on the same basis as other shares offered in this
prospectus.
Wit Capital is making a prospectus in electronic format available on its
Internet Web site. All dealers purchasing shares from Wit Capital in the
offering similarly have agreed to make a prospectus in electronic format
available on Web sites maintained by each of the dealers. The information on
these Web sites relating to the VerticalNet offering is filed as an exhibit to
the registration statement. Please see the exhibit for a more complete
description of the information relating to the offering contained on those Web
sites.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters and as the e-
Manager. The National Association of Securities Dealers, Inc. approved the
membership of Wit Capital on September 4, 1997. Since that time, Wit Capital
has acted as an underwriter, e-Manager or selected dealer in over 45 public
offerings. Robert Lessin, the Chairman, Chief Executive Officer and a
substantial shareholder of Wit Capital, owns 154,861 shares of VerticalNet's
Series C Preferred Stock, which will convert into 154,861 shares of common
stock prior to consummation of the offering. Except for its participation as e-
Manager in this offering or as otherwise disclosed in this underwriting
section,
71
Underwriting
<PAGE>
Wit Capital has no relationship with VerticalNet or any of its founders or
significant shareholders. Lehman Brothers Venture Capital Partners I, L.P., an
affiliate of Lehman Brothers, owns 569,980 shares of VerticalNet's Series D
Preferred Stock, which will convert into 569,980 shares of common stock prior
to consummation of the offering.
In connection with VerticalNet's private placement of Series D Preferred
Stock in May and June 1998, Lehman Brothers received cash and 56,980 shares of
common stock as a placement fee for acting as placement agent.
EXPERTS
The consolidated financial statements and schedule of VerticalNet, Inc. as of
December 31, 1996 and 1997 and September 30, 1998 and for the period from July
28, 1995 (inception) through December 31, 1995, the years ended December 31,
1996 and 1997, and the nine month period ended September 30, 1998, the
financial statements of Boulder Interactive Technology Services Co. as of
December 31, 1996 and 1997 and for the period from March 22, 1996 (inception)
through December 31, 1996 and for the year ended December 31, 1997, and the
financial statements of Informatrix Worldwide, Inc. as of December 31, 1997 and
for the period from October 15, 1997 (inception) through December 31, 1997,
have been included herein and in the registration statement in reliance upon
the reports of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Chadbourne & Parke LLP, New York, New York.
72
Underwriting/Experts/Legal Matters
<PAGE>
ADDITIONAL INFORMATION
We file annual, quarterly, and special reports, proxy statements, and other
information with the Securities and Exchange Commission. Such reports, proxy
and other information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 7 World Trade Center, New York, New York 10048 and Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates.
Our common stock is quoted on The Nasdaq National Market. Reports, proxy
statements and other information concerning VerticalNet can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains a Web site that contains all
information filed electronically by us. The address of the Commission's Web
site is (http://www.sec.gov.).
This prospectus constitutes a part of a registration statement on Form S-1
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") filed by us with the Commission under the Securities
Act, with respect to the securities offered in this prospectus. This prospectus
does not contain all the information which is in the Registration Statement.
Certain parts of the Registration Statement are omitted as allowed by the rules
and regulations of the Commission. We refer to the Registration Statement and
to the exhibits to such Registration Statement for further information with
respect to VerticalNet and the securities offered in this prospectus. Copies of
the Registration Statement and the exhibits to such Registration Statement are
on file at the offices of the Commission and may be obtained upon payment of
the prescribed fee or may be examined without charge at the public reference
facilities of the Commission described above. Statements contained in this
prospectus concerning the provisions of documents are necessarily summaries of
the material provisions of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by Jupiter Communications, Veronis, Suhler & Associates,
International Data Corporation and Forrester Research. These industry
publications generally indicate that they have obtained information from
sources believed to be reliable, but do not guarantee the accuracy and
completeness of such information. While we believe those industry publications
to be reliable, we have not independently verified such data. We also have not
sought the consent of any of these organizations to refer to their reports in
this prospectus.
REPORTS TO SECURITY HOLDERS
We intend to distribute to our shareholders annual reports containing audited
financial statements and will make available copies of quarterly reports for
the first three quarters of each fiscal year containing unaudited interim
financial information.
73
Additional Information/Reports to Security Holders
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
VerticalNet, Inc.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 and September
30, 1998 .............................................................. F-3
Consolidated Statements of Operations for the period from July 28, 1995
(inception) through December 31, 1995, the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 (unaudited)
and 1998 .............................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period
from July 28, 1995 (inception) through December 31, 1995, the years
ended December 31, 1996 and 1997, and the nine months ended September
30, 1998 .............................................................. F-5
Consolidated Statements of Cash Flows for the period from July 28, 1995
(inception) through December 31, 1995, the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 (unaudited)
and 1998 .............................................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
Boulder Interactive Technology Services Company
Independent Auditors' Report............................................ F-24
Balance Sheets at December 31, 1996 and 1997 and June 30, 1998
(unaudited)............................................................ F-25
Statements of Operations for the period from March 22, 1996 (inception)
through December 31, 1996, the year ended December 31, 1997, and the
six months ended June 30, 1997 and 1998 (unaudited).................... F-26
Statements of Shareholders' Equity for the period from March 22, 1996
(inception) through December 31, 1996, the year ended December 31, 1997
and the six months ended June 30, 1998 (unaudited)..................... F-27
Statements of Cash Flows for the period from March 22, 1996 (inception)
through December 31, 1996, the year ended December 31, 1997 and the six
months ended June 30, 1997 and 1998 (unaudited)........................ F-28
Notes to Financial Statements........................................... F-29
Informatrix Worldwide, Inc.
Independent Auditors' Report............................................ F-34
Balance Sheets at December 31, 1997 and September 30, 1998 (unaudited).. F-35
Statements of Operations for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-36
Statements of Shareholders' Deficit for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-37
Statements of Cash Flows for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended
September 30, 1998 (unaudited)......................................... F-38
Notes to Financial Statements........................................... F-39
Unaudited Pro Forma Combined Financial Statements
VerticalNet, Inc. and subsidiaries
Unaudited Pro Forma Financial Information Basis of Presentation......... F-43
Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997...................................................... F-44
Unaudited Pro Forma Combined Statement of Operations for the nine months
ended
September 30, 1998..................................................... F-45
Notes to Pro Forma Condensed Combined Financial Statements.............. F-46
</TABLE>
F-1
Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
VerticalNet, Inc.:
We have audited the accompanying consolidated balance sheets of VerticalNet,
Inc. and subsidiaries as of December 31, 1996 and 1997, and September 30, 1998
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the period from July 28, 1995 (inception) to
December 31, 1995, for the years ended December 31, 1996 and 1997, and the nine
months ended September 30, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
VerticalNet, Inc. and subsidiaries as of December 31, 1996 and 1997, and
September 30, 1998, and the results of their operations and their cash flows
for the period from July 28, 1995 (inception) through December 31, 1995, for
the years ended December 31, 1996 and 1997, and the nine months ended September
30, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
December 22, 1998,
except as to the last paragraph
of Note 14, which is as of February 7, 1999
Philadelphia, Pennsylvania
F-2
Financial Statements
<PAGE>
VERTICALNET, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, September 30, September 30,
1996 1997 1998 1998
------------ ------------ ------------- -------------
(Pro Forma)
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 329,451 $ 754,716 $ 3,793,964 $10,793,964
Accounts receivable,
net of allowance for
doubtful accounts of
$18,575, $30,000,
$58,066 and $58,066,
respectively.......... 178,942 607,611 1,064,777 1,064,777
Loan receivable, net of
allowance of $80,000
and $0 in 1997 and
1998, respectively.... -- 84,086 3,500 3,500
Prepaid expenses....... 6,474 145,678 335,011 335,011
---------- ----------- ------------ -----------
Total current as-
sets................ 514,867 1,592,091 5,197,252 12,197,252
---------- ----------- ------------ -----------
Property and equipment,
net..................... 106,409 491,853 1,003,541 1,003,541
Goodwill and other intan-
gibles, net of accumu-
lated amortization of
$103,565 and $103,565 in
1998 and pro forma, re-
spectively.............. -- -- 2,663,640 2,663,640
Deferred charges and
other assets............ 15,927 20,143 293,811 293,811
---------- ----------- ------------ -----------
Total assets......... $ 637,203 $ 2,104,087 $ 9,158,244 $16,158,244
========== =========== ============ ===========
Liabilities and Share-
holders' Equity (Defi-
cit)
Current liabilities:
Current portion of
long-term debt........ $ 26,515 $ 150,856 $ 301,570 $ 301,570
Line of credit......... -- 2,500,000 -- 2,000,000
Accounts payable....... 98,045 607,479 1,209,966 1,209,966
Accrued expenses....... 23,879 158,936 1,056,901 1,056,901
Deferred revenues...... 216,433 710,393 1,506,878 1,506,878
---------- ----------- ------------ -----------
Total current liabil-
ities............... 364,872 4,127,664 4,075,315 6,075,315
---------- ----------- ------------ -----------
Long-term debt, net of
current portion......... 167,067 399,948 374,128 374,128
---------- ----------- ------------ -----------
Commitments and contin-
gencies (Note 8)
Shareholders' Equity
(Deficit):
Preferred stock Series
A, B, C, and D: $.01
par value, 40,000,000
shares authorized,
512,821, 3,247,262,
7,805,667 and 0 shares
issued and outstanding
in 1996, 1997, 1998,
and proforma,
respectively.......... 5,128 32,473 78,057 --
Common stock $.01 par
value, 40,000,000
shares authorized
2,526,865, 2,526,865,
2,629,999 and
12,749,460 shares
issued and outstanding
in 1996, 1997, 1998,
and pro forma,
respectively.......... 25,269 25,269 26,300 127,495
Additional paid-in
capital............... 1,054,689 3,277,344 18,836,878 24,013,740
Deferred compensation.. -- -- (139,406) (139,406)
Accumulated deficit.... (919,822) (5,698,611) (14,033,028) (14,233,028)
---------- ----------- ------------ -----------
165,264 (2,363,525) 4,768,801 9,768,801
Treasury stock at cost,
161,289 shares........ (60,000) (60,000) (60,000) (60,000)
---------- ----------- ------------ -----------
Total shareholders'
equity (deficit).... 105,264 (2,423,525) 4,708,801 9,708,801
---------- ----------- ------------ -----------
Total liabilities and
shareholders' equity
(deficit)........... $ 637,203 $ 2,104,087 $ 9,158,244 $16,158,244
========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
Financial Statements
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
July 28, 1995
(Inception) Year ended Nine months ended
to December 31, December 31, September 30,
--------------- ----------------------- ------------------------
1995 1996 1997 1997 1998
--------------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 15,642 $ 285,140 $ 791,822 $ 550,648 $ 1,861,799
---------- ---------- ----------- ----------- -----------
Costs and Expenses:
Editorial and
operational............ 23,949 213,544 1,055,725 673,784 2,100,885
Product development..... 21,550 213,926 711,292 451,008 797,815
Sales and marketing..... 147,609 268,417 2,300,365 1,348,318 4,405,407
General and
administrative......... 32,656 291,660 1,388,123 890,768 2,907,275
---------- ---------- ----------- ----------- -----------
Operating loss.......... (210,122) (702,407) (4,663,683) (2,813,230) (8,349,583)
---------- ---------- ----------- ----------- -----------
Interest and dividend
income ................ -- 7,491 10,999 7,714 164,535
Interest expense........ (853) (13,931) (126,105) (36,898) (149,369)
---------- ---------- ----------- ----------- -----------
Interest, net........... (853) (6,440) (115,106) (29,184) 15,166
---------- ---------- ----------- ----------- -----------
Net loss................ $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
---------- ---------- ----------- ----------- -----------
Basic and diluted net
loss per share......... $ (0.19) $ (0.27) $ (1.89) $ (1.12) $ (3.27)
========== ========== =========== =========== ===========
Weighted average shares
outstanding used in
per-share calculation
(basic and diluted).... 1,096,679 2,583,648 2,526,865 2,526,865 2,550,619
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
Financial Statements
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Preferred Preferred Preferred Common Stock
-------------- ----------------- -------------- ----------------- -----------------
Additional
Paid-In Deferred
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July
28, 1995 (in-
ception)....... -- $ -- -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ --
Issuance of com-
mon stock...... -- -- -- -- -- -- -- -- 1,962,403 19,624 50,462 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1995... -- -- -- -- -- -- -- -- 1,962,403 19,624 50,462 --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of com-
mon stock...... -- -- -- -- -- -- -- -- 564,462 5,645 9,355 --
Issuance of
Series A
preferred
stock, net of
issuance cost.. 512,821 5,128 -- -- -- -- -- -- -- -- 994,872 --
Repurchase of
common stock... -- -- -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1996... 512,821 5,128 -- -- -- -- -- -- 2,526,865 25,269 1,054,689 --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of Se-
ries B pre-
ferred stock... -- -- 2,579,580 25,796 -- -- -- -- -- -- 1,974,204 --
Issuance of Se-
ries C pre-
ferred stock... -- -- -- -- 154,861 1,549 -- -- -- -- 198,451 --
Issuance of
warrants in
connection with
debt
financing...... -- -- -- -- -- -- -- -- -- -- 50,000 --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Decem-
ber 31, 1997... 512,821 5,128 2,579,580 25,796 154,861 1,549 -- -- 2,526,865 25,269 3,277,344 --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Issuance of
Series D
preferred
stock, net of
transaction
costs.......... -- -- -- -- -- -- 4,558,405 45,584 -- -- 15,089,770 --
Issuance of
common stock as
consideration
for private
placement
fees........... -- -- -- -- -- -- -- -- 56,980 570 149,430 --
Issuance of
fully vested
options to non
employees...... -- -- -- -- -- -- -- -- -- -- 19,095 --
Consideration
for purchase of
Informatrix.... -- -- -- -- -- -- -- -- 46,154 461 152,539 --
Unearned
compensation... -- -- -- -- -- -- -- -- -- -- 148,700 (148,700)
Amortization of
unearned
compensation... -- -- -- -- -- -- -- -- -- -- -- 9,294
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
Balance, Septem-
ber 30, 1998... 512,821 $5,128 2,579,580 $25,796 154,861 $1,549 4,558,405 $45,584 2,629,999 $26,300 $18,836,878 $(139,406)
------- ------ --------- ------- ------- ------ --------- ------- --------- ------- ----------- ---------
<CAPTION>
Accumulated Treasury Total shareholders'
deficit stock equity(deficit)
------------- --------- -------------------
<S> <C> <C> <C>
Balance, July
28, 1995 (in-
ception)....... $ -- $ -- $ --
Issuance of com-
mon stock...... -- -- 70,086
Net loss........ (210,975) -- (210,975)
------------- --------- -------------------
Balance, Decem-
ber 31, 1995... (210,975) -- (140,889)
------------- --------- -------------------
Issuance of com-
mon stock...... -- -- 15,000
Issuance of
Series A
preferred
stock, net of
issuance cost.. -- -- 1,000,000
Repurchase of
common stock... -- (60,000) (60,000)
Net loss........ (708,847) -- (708,847)
------------- --------- -------------------
Balance, Decem-
ber 31, 1996... (919,822) (60,000) 105,264
------------- --------- -------------------
Issuance of Se-
ries B pre-
ferred stock... -- -- 2,000,000
Issuance of Se-
ries C pre-
ferred stock... -- -- 200,000
Issuance of
warrants in
connection with
debt
financing...... -- -- 50,000
Net loss........ (4,778,789) -- (4,778,789)
------------- --------- -------------------
Balance, Decem-
ber 31, 1997... (5,698,611) (60,000) (2,423,525)
------------- --------- -------------------
Issuance of
Series D
preferred
stock, net of
transaction
costs.......... -- -- 15,135,354
Issuance of
common stock as
consideration
for private
placement
fees........... -- -- 150,000
Issuance of
fully vested
options to non
employees...... -- -- 19,095
Consideration
for purchase of
Informatrix.... -- -- 153,000
Unearned
compensation... -- -- --
Amortization of
unearned
compensation... 9,294
Net loss........ (8,334,417) -- (8,334,417)
------------- --------- -------------------
Balance, Septem-
ber 30, 1998... $(14,033,028) $(60,000) $ 4,708,801
------------- --------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
Financial Statements
<PAGE>
VERTICALNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
July 28, 1995
(Inception) Year ended Nine months ended
to December 31, December 31, September 30,
--------------- ----------------------- ------------------------
1995 1996 1997 1997 1998
--------------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net loss............... $(210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
--------- ---------- ----------- ----------- -----------
Adjustments to recon-
cile net loss to net
cash used in operating
activities:
Loss from disposal of
fixed assets.......... -- -- 3,278 -- --
Depreciation, amortiza-
tion and other noncash
charges............... 6,137 62,142 388,058 183,444 411,712
Change in assets:
Accounts receivable... (34,800) (144,142) (428,669) (703,741) (332,010)
Prepaid expenses and
other assets......... (3,092) (15,632) (143,420) (39,681) (459,021)
Change in liabilities:
Accounts payable...... 87,219 10,825 509,434 294,188 570,941
Accrued expenses...... 37,903 (14,024) 135,057 56,908 878,354
Deferred revenues..... 69,333 147,100 493,960 733,220 579,915
--------- ---------- ----------- ----------- -----------
Net cash used in operat-
ing activities......... (48,275) (662,578) (3,821,091) (2,318,076) (6,684,526)
--------- ---------- ----------- ----------- -----------
Cash flows from invest-
ing activities:
Acquisitions, net of
cash acquired......... -- -- -- -- (1,858,389)
Loan to Infomatrix
prior to acquisition.. -- -- -- -- (550,914)
Loan receivable........ -- -- (160,000) -- (4,086)
Capital expenditures... (56,720) (63,646) (235,671) (148,340) (399,038)
--------- ---------- ----------- ----------- -----------
Net cash used in invest-
ing activities......... (56,720) (63,646) (395,671) (148,340) (2,812,427)
--------- ---------- ----------- ----------- -----------
Cash flows from financ-
ing activities:
Borrowings under line
of credit............. -- -- 2,500,000 375,000 --
Repayment of line of
credit................ -- -- -- -- (2,500,000)
Loans from related par-
ties.................. 15,914 100,000 -- -- --
Loans from ICG......... -- -- 1,600,000 650,000 1,550,000
Repayment of loans from
related parties....... -- (20,000) -- -- (100,000)
Principal payments on
obligations under cap-
ital leases........... (139) (2,182) (48,834) (43,130) (122,909)
Borrowings under long-
term debt............. 50,000 -- -- -- --
Repayment of long-term
debt.................. -- (8,009) (9,139) (6,764) (32,852)
Repayment of loans from
ICG................... -- -- (950,000) -- --
Net proceeds from issu-
ance of preferred
stock................. -- 1,000,000 1,550,000 1,350,000 13,741,962
Proceeds from issuance
of common stock....... 70,086 15,000 -- -- --
Repurchase of treasury
stock................. -- (60,000) -- -- --
--------- ---------- ----------- ----------- -----------
Net cash provided by fi-
nancing activities..... 135,861 1,024,809 4,642,027 2,325,106 12,536,201
--------- ---------- ----------- ----------- -----------
Net increase (decrease)
in cash................ 30,866 298,585 425,265 (141,310) 3,039,248
Cash and cash equiva-
lents--beginning of pe-
riod................... -- 30,866 329,451 329,451 754,716
--------- ---------- ----------- ----------- -----------
Cash and cash equiva-
lents--end of period... $ 30,866 $ 329,451 $ 754,716 $ 188,141 $ 3,793,964
========= ========== =========== =========== ===========
Supplemental disclosure
of cash flow informa-
tion:
Cash paid during the
year for interest..... $ 853 $ 13,931 $ 52,925 $ 17,483 $ 57,079
========= ========== =========== =========== ===========
Supplemental schedule of
noncash investing and
financing activities:
Equipment acquired un-
der capital leases.... $ 4,407 $ 53,595 $ 415,195 $ 418,316 $ 353,479
Issuance of common
stock as consideration
for purchase of
Informatrix........... $ -- $ -- $ -- $ -- $ 153,000
Issuance of common
stock as consideration
of private placement
fees.................. $ -- $ -- $ -- $ -- $ 150,000
Issuance of warrants in
connection with debt
financing............. $ -- $ -- $ 50,000 $ -- $ --
Loans from ICG con-
verted to preferred
stock................. $ -- $ -- $ 650,000 $ 650,000 $ 1,550,000
========= ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with respect to September 30, 1997 is unaudited)
(1) Summary of Significant Accounting Policies
Description of Company
VerticalNet, Inc. (VerticalNet or the Company) is an owner and operator of
vertical trade communities, which are targeted business-to-business communities
of commerce on the Internet. The Company's vertical trade communities are Web
sites that act as industry-specific comprehensive sources of information,
interaction and electronic commerce. Vertical trade communities combine product
information; industry news; requests for proposals; directories; classifieds;
job listings; discussion forums; a variety of electronic commerce opportunities
for buyers and sellers; and other services, such as online professional
education courses and virtual trade shows. Each trade community is individually
branded, focuses on one business sector and caters to individuals with similar
professional interests. The virtual trade communities are designed to attract
technical and purchasing professionals with highly specialized product and
specification requirements and purchasing authority or influence. The Company
was founded on July 28, 1995 and as of September 30, 1998 operates 29 vertical
trade communities in seven major industry groups: environmental; electronics;
services; communications; process industries; sciences; and food & packaging.
The Company currently generates substantially all of its revenue from
Internet advertising including the development of "storefronts" (Web pages that
focus on advertisers products and provide a link to the advertisers Web sites).
Internet Capital Group (ICG) has a majority of the voting securities of the
Company through its ownership of preferred stock of the Company.
The Company has sustained significant net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations
in the ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financing, bank financing, or other sources of capital. During 1998 the
Company sold an additional $15.2 million of its preferred stock. Management
believes that its current funds combined with other available sources of
funding will be sufficient to enable the Company to meet its planned
expenditures through at least December 31, 1998. If financial resources are not
sufficient, management has the intent and believes it has the ability to reduce
expenditures as to not require additional financial resources if such resources
are not available on terms acceptable to the Company.
Unaudited Interim Financial Information
The interim financial statements of the Company for the nine months ended
September 30, 1997, included herein, have been prepared by the Company, without
audit, pursuant to the rules and regulations of the SEC. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations relating to interim financial
statements.
F-7
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of the Company's
operations and its cash flows for the nine months ended September 30, 1997. The
accompanying unaudited interim financial statements are not necessarily
indicative of full year results.
Principles of Consolidation
The consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, net of accumulated amortization
and depreciation. Leasehold improvements are amortized on a straight-line basis
over the lesser of the estimated useful life of the asset or the lease term.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software......................... 3 years
Office equipment and furniture.................................... 5 years
Trade show equipment.............................................. 7 years
Leasehold improvements............................................ 3 years
</TABLE>
Revenue and Editorial and Operational Expenses
The Company's revenues are derived principally from advertising contracts
which include the initial construction of storefronts. The advertising
contracts do not extend beyond one year. Advertising revenues are recognized
ratably over the period of the advertising contract.
Revenues from educational courses are recognized in the period in which the
course is completed and revenues from the sale of books are recognized in the
period in which the books are shipped.
Barter transactions are recorded at the lower of estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given. Barter revenue is recognized when the advertising impressions are
delivered to the customer and advertising expense is recorded when the
advertising impressions are received from the customer. If the advertising
impressions are received from the customer prior to the Company delivering the
advertising impressions a liability is recorded, and if the Company delivers
the advertising impressions to the customer prior to receiving
F-8
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
the advertising impressions a prepaid expense is recorded. From July 28, 1995
(inception) through the year ended December 31, 1997, barter transactions have
been immaterial. For the nine months ended September 30, 1998, the Company
recognized approximately $351,000 of advertising revenues from barter
transactions. The Company has recorded approximately $245,000 in prepaid
expenses as of September 30, 1998 for barter advertising delivered to customers
and approximately $129,000 is recorded as barter advertising expense for the
nine months ended September 30, 1998 for barter advertising provided to the
Company by its customers.
Editorial and operational expenses primarily consist of Internet connection
charges, depreciation, purchased content, salaries and benefits of operating
and editorial personnel, and other related operating costs.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations. No single customer accounted for greater than 10% of
total revenues during the period from July 28, 1995 (inception) through
December 31, 1995 and the years ended December 31, 1996 and 1997 and the nine
month periods ended September 30, 1997 and 1998.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital lease obligations that
are carried at cost which approximates fair value.
Product Development
Product development costs consists principally of salaries and related costs,
which are charged to expense as incurred.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
expense was approximately $38,000, $21,000 and $198,000 for the period from
July 28, 1995 (inception) through December 31, 1995 and the years ended
December 31, 1996 and 1997, respectively, and $126,000 and $1,323,000 for the
nine months ended September 30, 1997 and 1998, respectively.
Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases
F-9
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
and the tax effect of net operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded against deferred tax assets
if it is more likely than not that such assets will not be realized.
Accounting for Impairment of Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
Goodwill and Intangibles
Goodwill is amortized using the straight-line method from the date of
acquisition over the expected period to be benefited, estimated at 36 months.
The Company periodically assesses the recoverability of goodwill, as well as
other long-lived assets, based upon expectations of future undiscounted cash
flows.
Deferred Offering Costs
As of September 30, 1998, specific incremental costs directly attributable to
the planned initial public offering (IPO) process have been deferred. These
costs will be charged against additional paid-in-capital in connection with the
consummation of this offering.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Options
The Company accounts for the grant of employee options to purchase common
stock in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). SFAS 123 gives
companies the option to adopt the fair value method for expense recognition of
employee stock options or to continue to account for stock options and stock-
based awards using the intrinsic value method, as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25) and to make pro forma disclosures of net loss as if the fair value method
had been applied. The Company elected to apply APB 25 to account for stock
options and has disclosed the pro forma net loss as if the fair value method
had been applied.
F-10
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
Stock Splits
In February 1996 and February 1997, the Company's Board of Directors
authorized and implemented an 11,008 for one and a 4.7619-for-one, stock
split, respectively. All share amounts have been retroactively restated to
reflect these events in the accompanying financial statements.
Computation of Historical Net Loss Per Share and Pro Forma Net Loss Per Share
The Company adopted Computation of Earnings Per Share, (SFAS No. 128),
during the year ended December 31, 1997. In accordance with SFAS No. 128,
basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Dilutive earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants (using the treasury stock method) and the incremental
common shares issuable upon the conversion of the convertible preferred stock
(using the if-converted method). Common equivalent shares are excluded from
the calculation if their effect is anti-dilutive. Pursuant to SEC Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock
issued for nominal consideration, prior to the anticipated effective date of
an IPO, are required to be included in the calculation of basic and diluted
net loss per share as if they were outstanding for all periods presented. To
date, the Company has not had any issuances or grants for nominal
consideration.
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding, including common equivalent shares from
the convertible preferred stock (using the if-converted method), which will
automatically convert into common stock upon an IPO as if converted at the
original date of issuance, for both basic and diluted net loss per share, even
though inclusion is antidilutive.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
December 31, September 30,
----------------------- ------------------------
July 28, 1995 (inception)
Basic and Diluted net loss per share To December 31, 1995 1996 1997 1997 1998
- ------------------------------------ ------------------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Numerator: Net loss...... $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
Denominator:
Weighted-average shares
outstanding basic and
diluted............... 1,096,679 2,583,648 2,526,865 2,526,865 2,550,619
Basic and diluted net
loss per share.......... $ (0.19) $ (0.27) $ (1.89) $ (1.12) $ (3.27)
========== ========== =========== =========== ===========
Pro forma net loss per
share
Numerator: Net loss...... $ (210,975) $ (708,847) $(4,778,789) $(2,842,414) $(8,334,417)
Denominator:
Weighted-average shares
outstanding basic and
diluted............... 1,096,679 3,326,284 6,184,326 5,677,540 10,052,180
Basic and diluted net
loss per share.......... $ (0.19) $ (0.21) $ (0.77) $ (0.50) $ (0.83)
========== ========== =========== =========== ===========
</TABLE>
F-11
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows, as the amount of comprehensive loss is the same as the net loss for
all periods presented.
In June 1997 the FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 will not
have an impact on the Company's results of operations, financial position or
cash flows.
In February 1998 the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits (SFAS No. 132), which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not have an impact on the Company's results of operations,
financial position or cash flows.
In March 1998 the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance on accounting for computer software developed or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
In June 1998 the FASB issued Accounting for Derivatives and Hedging
Activities (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain
F-12
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not currently engage or plan to engage in derivative or hedging
activities, there will be no impact to the Company's results of operations,
financial position or cash flows upon the adoption of this standard.
(2) Unaudited Pro Forma Balance Sheet
The Company is planning on filing a registration statement with the
Securities and Exchange Commission (SEC) that would permit the Company to sell
shares of the Company's common stock in connection with a proposed IPO. In
addition, in November of 1998, the Company obtained $5.0 million of convertible
notes from ICG and certain holders of the Series D preferred stock and a $2.0
million note from a bank.
The unaudited pro forma balance sheet as of September 30, 1998 reflects:
(a) The Company's capitalization, if the IPO is consummated under terms
presently anticipated. Upon closing of the proposed IPO, all of the
then outstanding shares of the Company's convertible preferred stock
will automatically convert into 9,734,846 shares of common stock on the
basis that the Series A preferred stock converts to shares of common
stock on a ratio of 4.7619:1 and the Series B, C and D preferred stock
converts on a ratio of 1:1. The conversion of the convertible preferred
stock has been reflected in the accompanying unaudited pro forma
consolidated balance sheet as if it had occurred on September 30, 1998.
(b) The $5.0 million of convertible notes from ICG and certain holders of
the Series D preferred stock that convert into shares of common stock
at the consumation of the IPO and the $2.0 million note from a bank as
more fully described in Note 14. In connection with these loans the
Company issued warrants to purchase an aggregate of 102,564 shares of
the Company's common stock with an estimated fair value of $200,000.
(3) Acquisitions
In September 1998 the Company acquired all of the outstanding capital stock
of Boulder Interactive Technology Services Company (BITC) for $1.8 million in
cash. BITC operates a vertical trade community for professionals in the radio
frequency and wireless communications industry. The acquisition was accounted
for using the purchase method of accounting. The excess of the purchase price
over the fair value of the net assets acquired of approximately $1,864,000 was
recorded as goodwill and is being amortized over 36 months.
In September 1998 the Company acquired all of the outstanding capital stock
of Informatrix Worldwide, Inc. (Informatrix) for 46,154 shares of the Company's
common stock valued at $153,000. Informatrix operates a vertical community in
the property and casualty insurance industry that caters to risk managers,
agents, brokers and other professionals in the insurance industry. The
F-13
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
acquisition was accounted for under the purchase method of accounting. The
estimated excess of the purchase price over the fair value of the net assets
acquired of approximately $903,000 was recorded as goodwill and will be
amortized over 36 months. The purchase agreement also provides for the Company
to issue up to 11,538 additional shares of the Company's common stock to the
Informatrix shareholders in the event that Informatrix achieves certain sales
targets through December 1998. As of October 31, 1998, the former shareholders
of Informatrix earned 2,200 shares of common stock which was valued at $7,293.
The additional consideration was accounted for as additional goodwill.
The following unaudited pro forma financial information presents the combined
results of operations of VerticalNet, BITC and Informatrix as if the
acquisitions occurred on January 1, 1997, after giving effect to certain
adjustments including amortization of goodwill. The unaudited pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had VerticalNet, BITC and Informatrix constituted a
single entity during such periods.
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------- ------------------------
1997 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Revenues.............................. $ 1,118,030 $ 779,458 $ 2,331,869
=========== =========== ===========
Net loss.............................. $(5,789,177) $(3,405,718) $(9,800,563)
=========== =========== ===========
Net loss per share.................... $ (2.28) $ (1.35) $ (3.77)
=========== =========== ===========
</TABLE>
(4) Property and Equipment
<TABLE>
<CAPTION>
December 31, September 30,
------------------- -------------
1996 1997 1998
-------- --------- -------------
<S> <C> <C> <C>
Computer equipment and purchased soft-
ware................................... $148,028 $ 654,157 $ 1,417,280
Office equipment and furniture.......... 6,645 102,279 148,189
Trade show equipment.................... 19,605 34,079 40,587
Leasehold improvements.................. -- 29,401 43,198
-------- --------- -----------
174,278 819,916 1,649,254
Less: accumulated depreciation and amor-
tization............................... (67,869) (328,063) (645,713)
-------- --------- -----------
Property and equipment, net............. $106,409 $ 491,853 $ 1,003,541
======== ========= ===========
</TABLE>
(5) Line of Credit
The Company had a line of credit with a bank in the amount of $2,500,000 at
December 31, 1997. Borrowings under the facility were collateralized by a
security interest in all assets of the Company and required the Company to meet
specified financial ratios. As of December 31, 1997, the Company was in
technical default, as it did not meet the specified financial ratios. The bank
waived these violations for the year ended December 31, 1997. The facility
bears interest at prime plus 1.5% (10% at December 31, 1997). The weighted
average interest rate for borrowings under this facility was 10% for the year
ended December 31, 1997. In connection with obtaining these facilities, the
F-14
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
Company issued warrants to purchase its common stock (Note 9). ICG has
guaranteed repayment of $2.0 million under the line of credit agreement. The
Company repaid all amounts outstanding under this facility in May 1998 and
consequently, the guarantee from ICG was cancelled. Subsequently, the bank
provided a $500,000 line of credit, which expires on June 30, 1999 and is
collateralized by a security interest in all of the assets of the Company with
an interest rate prime plus 1.5%.
(6) Accrued Expenses
<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1996 1997 1998
------- -------- -------------
<S> <C> <C> <C>
Accrued compensation and related costs...... $ -- $ 90,833 $ 699,226
Accrued professional fees................... 14,500 25,698 282,499
Other....................................... 9,379 42,405 75,176
------- -------- ----------
$23,879 $158,936 $1,056,901
======= ======== ==========
</TABLE>
(7) Long-term Debt
<TABLE>
<CAPTION>
December 31, September 30,
------------------ -------------
1996 1997 1998
-------- -------- -------------
<S> <C> <C> <C>
Term notes with related parties............ $100,000 $100,000 $ --
Term bank note............................. 41,991 32,852 --
Capital leases............................. 51,591 417,952 675,698
-------- -------- --------
193,582 550,804 675,698
Less: current portion...................... (26,515) (150,856) (301,570)
-------- -------- --------
Long-term debt............................. $167,067 $399,948 $374,128
======== ======== ========
</TABLE>
The Company had a term loan with another bank with an interest rate at prime
plus 2.75% (11.25% at December 31, 1997) which was payable in 36 monthly
installments. This note was repaid in May 1998.
In May, June and July 1997, ICG lent an aggregate of $650,000 to the Company
at a rate of 9.5%. These amounts were converted to Series B preferred stock in
July 1997 (note 9).
In October, November and December 1997, ICG lent an aggregate of $950,000 to
the Company also at a rate of 9.5%. These amounts were repaid on December 30,
1997.
In February, March and April 1998, ICG lent an aggregate of $1,550,000 to the
Company, also at a rate of 9.5%. These amounts were converted to Series D
preferred stock in May 1998 (note 9).
The Company had three unsecured term notes due to shareholders with an
interest rate of 7%. The notes were to mature on February 2001. One of the
holders of these notes is a board member of ICG. These notes were repaid in May
1998.
F-15
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
The Company has several capital leases on its equipment with lease terms
ranging from three to five years. The interest rates implicit in the leases are
8% to 20%. At December 31, 1996, 1997 and September 30, 1998, the book value of
assets held under capital leases were approximately $49,000, $300,000 and
$514,000, respectively, and the aggregate remaining minimum lease payments at
September 30, 1998 were approximately $759,000 including interest of
approximately $83,000.
At September 30, 1998, long-term debt will mature as follows:
<TABLE>
<S> <C>
1999............................................................ $ 278,681
2000............................................................ 238,154
2001............................................................ 122,197
2002............................................................ 32,751
2003............................................................ 3,915
---------
Total......................................................... $ 675,698
=========
</TABLE>
(8) Commitments and Contingencies
The Company leases its facilities under operating lease agreements expiring
through 2001. Future minimum lease payments as of September 30, 1998 under the
leases are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 272,078
2000............................................................ 201,735
2001............................................................ 79,600
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$5,100, $24,300, and $81,200 for the period from July 28, 1995 (inception) to
December 31, 1995 and the years ended December 31, 1996 and December 31, 1997,
respectively, and $71,000 and $228,000 for the nine months ended September 30,
1997 and 1998, respectively.
On June 30, 1998, the Company entered into a three year Sponsorship Agreement
with Excite, Inc. (Excite). The Sponsorship Agreement provides for the Company
and Excite to sponsor and promote thirty co-branded Web pages and for each
company to sell advertising on the Web pages. Excite has guaranteed a minimum
number of advertising impressions for each of the three years. The agreement is
cancelable by either party, as defined, and requires the Company to pay Excite
$0.9 million, $2.0 million and $3.0 million, respectively, in year one, two and
three under the agreement. Such payments will be charged to expense as the
advertising impressions are provided by Excite. In addition, each Company will
provide the other with $200,000 in barter advertising during the term of the
Sponsorship Agreement.
F-16
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
The Company has entered into non-cancelable obligations with several content
service providers and Internet search engines. Under these agreements,
exclusive of the Excite agreement discussed above, the Company's obligations
are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,140,456
1999........................................................... 137,978
2000........................................................... 24,000
</TABLE>
The Company has entered into employment agreements with several employees.
The agreements are cancelable, but require severance upon termination. As of
December 31, 1997, the Company would be required to pay approximately $950,000
in severance (of which $500,000 has been guaranteed by ICG) in the event that
these employment agreements are cancelled. As part of the employment agreement
with the Company's president and chief executive officer, the Company had
committed to grant options to purchase 6% of the Company's common stock.
Pursuant to this agreement, the Company granted 307,692, 196,481 and 231,530
options in October 1997, January 1998 and June 1998, respectively, at an
exercise price of $0.80, $0.80 and $2.63, respectively, which was the then fair
value of the Company's common stock. At September 30, 1998, the Company has
satisfied its obligations under this agreement.
The Company is a party to legal proceedings and claims, which arise in the
ordinary course of business. In the opinion of management, the amount of the
ultimate liability with respect to these actions will not materially affect the
financial position, results of operations or cash flows of the Company.
(9) Capital Stock
The Company's restated Articles of Incorporation provides the Company with
the authority to issue 40,000,000 shares of common stock and 40,000,000 shares
of preferred stock.
Preferred Stock
In September 1996 the Company sold 512,821 shares of Series A preferred stock
(Series A) for $1,000,000. In July 1997 the Company sold 2,579,580 shares of
Series B preferred stock (Series B) for $2,000,000. In October 1997 the Company
sold 154,861 shares of Series C preferred stock (Series C) for $200,000.
On May 11, 1998 and June 10, 1998, the Company sold 3,988,604 and 569,801
shares of Series D preferred stock (Series D), respectively, for an aggregate
amount of approximately $15.2 million. If the Company does not complete an IPO
as defined, by May 1, 2000, the Series D has a cumulative dividend rate equal
to 6% of the original purchase price ($3.51 per share) which is due and payable
on May 1, 2000. Thereafter, the Series D cumulative dividends will continue to
accrue and are payable quarterly until the closing of an IPO. The holders of
the Series D preferred have demand and piggy-back registration rights as
defined.
F-17
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
Holders of preferred stock have the option to convert such shares into shares
of common stock on a 1:1 ratio, except for the Series A preferred stock which
converts on a ratio of 4.7619:1. The conversion rate on a particular series of
preferred stock is subject to an adjustment in the event that any additional
common stock, or other shares convertible into common stock, are issued for a
per share price less than the particular series conversion price. Mandatory
conversion occurs upon the closing of an IPO of the Company's common stock, as
defined. The Series D is senior to the Company's Series A, Series B and Series
C in liquidation and the holders of Series A, Series B and Series C are
entitled to receive an amount equal to their respective redemption price prior
to the distribution to the common shareholders.
The preferred stock votes on an as if converted basis. The Series A, Series B
and Series C, together have the right to elect two directors of the Company and
the Series D holders have the right to elect two directors of the Company. The
holders of preferred stock have no right to elect or appoint directors after
the shares convert into common stock upon the closing of an IPO.
Preferred stock consists of the following at December 31, 1996, 1997 and
September 30, 1998:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
Per share 1996 1997 1998
liquidation ------- --------- -------------
Preferred Class value Authorized Issued and outstanding
--------------- ----------- ---------- -------------------------------
<S> <C> <C> <C> <C> <C>
Series A............. $1.95 512,821 512,821 512,821 512,821
Series B............. .78 2,615,385 -- 2,579,580 2,579,580
Series C............. 1.31 205,128 -- 154,861 154,861
Series D............. 3.51 4,615,385 -- -- 4,558,405
--------- ------- --------- ---------
7,948,719 512,821 3,247,262 7,805,667
========= ======= ========= =========
</TABLE>
Common Stock
At September 30, 1998, 9,734,846 shares of common stock are reserved for the
conversion of preferred stock.
Warrants
On April 30, 1997, the Company issued a warrant to its bank (Note 5) to
purchase 19,347 shares of common stock at a price $0.76 per share. The warrant
expires on April 1, 2007.
In connection with the Company obtaining additional financing from its bank,
in December 1997, the Company issued to its bank a warrant to purchase a
maximum of 77,430 shares of common stock at an exercise price of $1.29 per
share. The exercise price and number of shares to be purchased are subject to
adjustment, based upon the Company's next round of equity financing. The
warrant expires on November 30, 2008.
In December 1997 the Company issued a warrant to ICG, the Company's majority
shareholder, to purchase a maximum 154,861 shares of common stock at an
exercise price of $1.29 per share. In
F-18
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
March 1998 the Company issued an additional warrant to ICG to purchase a
maximum of 77,430 shares of common stock at an exercise price of $1.29 per
share. The warrants were issued in connection with certain guarantees of the
Company's bank debt by ICG. The exercise price and number of shares are subject
to adjustment, based upon the Company's next round of equity financing. The
warrant expires on November 30, 2008.
In May 1998 in connection with the Company's equity financing, the Company
cancelled the warrants issued to ICG and its bank in December 1997 and issued
new warrants to purchase an aggregate of 113,960 shares of common stock at an
exercise price of $3.51 per share.
The estimated fair value of the warrants issued to the Company's bank and ICG
is $50,000 and was recorded as interest expense in the accompanying statement
of operations for the year ended December 31, 1997.
(10) Stock Option Plan
In December 1996 the Company's Board of Directors adopted the 1996 stock
option plan (the Plan). A total of 615,385 shares of common stock were reserved
for issuance under this Plan and this amount was increased to 1,846,154 in
January 1998 and 2,025,641 in August 1998.
The exercise price for the options is determined by the Board of Directors,
but shall not be less than 100% of the fair market value of the common stock on
the date the option is granted. Generally, the options vest over a four-year
period after the date of grant and expire ten years after the date of grant.
Option holders that terminate their employment with the Company generally
forfeit all non-vested options. Employees, key advisors and non-employee
directors of the Company are eligible to receive awards under the Plan.
The following table summarizes the activity of the Company's stock option
plan:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997..................... -- $ --
Options granted.................................... 555,213 0.64
Options cancelled.................................. -- --
--------- ------
Outstanding at December 31, 1997................... 555,213 0.64
Options granted.................................... 1,404,412 1.99
Options cancelled.................................. (52,051) 1.42
--------- ------
Outstanding at September 30, 1998 ................. 1,907,574 $ 1.62
========= ======
</TABLE>
F-19
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
The following table summarizes information about stock options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted-
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (years) Price Outstanding Price
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.29..................... 178,417 8.48 $0.29 74,193 $0.29
0.80..................... 844,681 9.20 0.80 167,381 0.80
0.98..................... 61,667 9.46 0.98 7,326 0.98
2.63..................... 639,734 9.74 2.63 34,102 2.63
3.32..................... 183,075 9.91 3.32 19,231 3.32
--------- -------
1,907,574 302,233
========= =======
</TABLE>
The Company applies APB 25 and related interpretations in accounting for its
stock option plan. Had compensation cost been recognized pursuant to SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Nine months
Year ended ended
December 31, September
1997 30, 1998
------------ ------------
<S> <C> <C>
Net loss:
As reported......................................... $(4,778,789) $(8,334,417)
Pro forma........................................... $(4,785,358) $(8,394,851)
Pro forma loss per share:
As reported......................................... $(1.89) $(3.27)
Pro forma........................................... $(1.89) $(3.29)
</TABLE>
The per share weighted-average fair value of options issued by the Company
during 1997 and 1998 was $0.20 and $1.59 respectively.
The following range of assumptions were used by the Company to determine the
fair value of stock options granted using the minimum value option-price model:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Dividend yield.................................................. 0% 0%
Expected volatility............................................. 0% 0%
Average expected option life.................................... 5 years 5 years
Risk-free interest rate......................................... 5.9% 4.62%
</TABLE>
(11) Defined Contribution Plan
In 1997 the Company established a defined contribution plan for qualified
employees as defined under the plan. Participants may contribute 1% to 15% of
pre-tax compensation, as defined. Under the plan, the Company can make
discretionary contributions. To date, the Company has not made any
contributions to the plan.
F-20
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
(12) Income Taxes
Prior to June 1996, the Company elected to be treated for federal income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code
(the Code). As a result, the Company's earnings for prior tax years and through
September 12, 1996, the date of termination of the Company's S Corporation
status (the termination date) had been taxed for federal income tax purposes
directly to the Company's shareholders, rather than to the Company.
The components of the net deferred tax assets as of December 31, 1996 and
1997 and September 30, 1998 consists of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
Deferred tax assets: 1996 1997 1998
-------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Net operating losses................ $ 52,803 $ 1,655,741 $ 4,912,191
Reserves............................ -- 103,200 23,498
Depreciation........................ 14,921 42,856 50,460
Deferred revenue and other.......... 128,603 287,979 885,534
--------- ----------- -----------
196,327 2,089,776 5,871,683
Valuation allowance................. (196,327) (2,089,776) (5,871,683)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 1996 and 1997 and September 30, 1998.
As of September 30, 1998, the Company has approximately $12,367,000 of net
operating loss carryforwards for federal tax purposes. These carryforwards will
begin expiring in 2013 if not utilized. In addition, the Company has net
operating loss carryforwards in certain states with various expiration periods
beginning in 2000.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation. Any unused annual limitation may be carried forward to future years
for the balance of the net operating loss carrryforward period.
(13) Informatrix Worldwide, Inc.
During 1997 the Company entered into a $250,000 non-refundable Web site
development contract with Informatrix. In addition, under the contract the
Company was to maintain the Web site
F-21
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
for $20,000 per month, until either the Company or Informatrix terminated the
agreement. The Company substantially completed all of its obligations under the
development portion of the contract as of December 31, 1997, but deferred
recognition of revenue until the amounts were deemed collectible from
Informatrix. No revenue was recorded by the Company under the above contracts
in 1997 and 1998. Such development costs were charged to expense, as incurred.
In addition, the Company advanced Informatrix $160,000 in 1997, as evidenced
by a demand note. The Company had provided a reserve of $80,000 against this
note. The note is unsecured and bears interest at prime plus 1.5% (10% at
December 31, 1997).
During the nine months ended September 30, 1998, the Company advanced an
additional $555,000 to Informatrix.
(14) Subsequent Events
Options Granted
On November 11, 1998, the Company granted 115,641 options, with an exercise
price of $3.32 per share for which the Company will record approximately
$500,000 in deferred compensation expense. On December 15, 1998, the Company
granted 143,084 options, at the IPO price.
Bank Note
On November 25, 1998 the Company executed a $2.0 million note with a bank.
The note has an interest rate of prime plus 1.5% and matures at the earlier of
March 31, 1999 or the completion of the Company's next financing. In connection
with the loan, the Company issued warrants to purchase 20,513 shares of the
Company's common stock with an estimated fair value of $40,000. The exercise
price of the warrants will be equal to the price in the Company's next
financing as defined.
Convertible Notes
On November 25, 1998, ICG and certain holders of the Series D preferred stock
(the note holders) lent the Company $5.0 million in convertible notes. The
notes mature on the earlier of (i) closing of an IPO or (ii) closing of the
next round of private equity financing or (iii) May 31, 1999. In addition, the
note holders have the right to convert the convertible notes into shares of the
Company's common stock at the price per share of common stock in the IPO or the
price per share in the next round of financing, whichever occurs first. The
note holders have consented to convert the $5.0 million in convertible notes in
the IPO. In connection with the notes, the Company issued warrants to purchase
82,051 shares of the Company's common stock with an estimated fair value of
$160,000. The exercise price of the warrants will be equal to the price in the
Company's next round of financing as defined.
Initial Public Offering
In November 1998 the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission (SEC) that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed IPO.
F-22
Financial Statements
<PAGE>
VERTICALNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1997 is unaudited)
Employee Stock Purchase Plan (unaudited)
In January 1999 the Board adopted an Employee Stock Purchase Plan and
reserved an additional 300,000 shares of common stock for issuance thereunder.
Stock Option Plan (unaudited)
In January 1999 the Board of Directors authorized an increase in the shares
reserved for issuance under the Company's Stock Option Plan from 2,025,641 to
3,600,000. In addition a total of 197,872 options were granted at the IPO
price.
Acquisition (unaudited)
In January 1999 the Company acquired certain assets and assumed certain
liabilities including the Safetyonline Web site from Coastal Video
Communications (Coastal). The Company paid $260,000 in cash, issued a $50,000
note, to be paid within 90 days of the closing of the purchase, and provided
Coastal an advertising commitment on the Company's Web sites which will be
subsequently valued. The results of operations from Safetyonline are not
material to the Company's financial position or results of operations.
AltaVista (unaudited)
On January 19, 1999 the Company entered into a one year agreement with Compaq
Computer Corporation (Compaq) and its Internet Web site known as AltaVista. The
agreement provides for the Company and AltaVista to sponsor and promote thirty-
one co-branded Web pages. The agreement requires the Company to pay Compaq $1.0
million over the term of the agreement based on the number of advertising
impressions delivered. Such amount will be charged to expense as the
advertising impressions are provided by AltaVista. In addition, each Company
will provide the other with $300,000 in barter advertising during the term of
the agreement.
Capital Stock (unaudited)
On January 19, 1999 the Board of Directors of the Company authorized the
Company to file for a Restated Articles of Incorporation. The Restated Articles
of Incorporation will become effective upon the closing of the IPO and
authorized an increase to 90,000,000 shares of common stock and 10,000,000
shares of blank check preferred stock.
Reverse Stock Split
On January 19, 1999 the Board of Directors of the Company approved a 1-for-
1.95 reverse stock split of the Company's common stock to be effective upon
receiving shareholder approval. On February 7, 1999 the Company's shareholders
approved the reverse stock split of the Company's common stock. All references
in the consolidated financial statements to shares, share prices and per share
amounts have been adjusted retroactively for the reverse stock split.
F-23
Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Boulder Interactive Technology Services Company:
We have audited the accompanying balance sheets of Boulder Interactive
Technology Services Company d/b/a Microwave Online Services Company and RF
Globalnet as of December 31, 1996 and 1997 and the related statements of
operations, shareholders' equity and cash flows for the period from March 22,
1996 (inception) through December 31, 1996 and for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Boulder Interactive Technology
Services Company d/b/a Microwave Online Services Company and RF Globalnet as of
December 31, 1996 and 1997, and the results of its operations and its cash flow
for the period from March 22, 1996 (inception) through December 31, 1996 and
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
KPMG LLP
August 21, 1998
Philadelphia, Pennsylvania
F-24
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY and RF GLOBALNET
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash................................... $ 60,657 $ 99,035 $ 85,727
Accounts receivable.................... -- 66,277 25,027
Prepaid expenses....................... -- -- 1,525
--------- --------- --------
Total current assets................. 60,657 165,312 112,279
--------- --------- --------
Property and equipment, net.............. 15,119 19,185 24,019
Other assets............................. 4,331 3,208 3,068
--------- --------- --------
Total assets......................... $ 80,107 $ 187,705 $139,366
========= ========= ========
Liabilities and Shareholders' Equity
Current liabilities:
Note payable--shareholder.............. 13,852 -- --
Current portion of lease obligation.... -- -- 937
Accounts payable....................... 91 14,108 9,890
Accrued expenses....................... 19,255 7,806 9,303
Deferred revenues...................... -- 85,909 84,523
--------- --------- --------
Total current liabilities............ 33,198 107,823 104,653
--------- --------- --------
Long-term portion of lease obligation.... -- -- 5,137
Commitments and contingencies (note 3)
Shareholders' equity:
Common stock $.01 par value, 10,000,000
shares authorized, 324,148 and 518,000
shares issued and outstanding in 1996
and 1997, respectively................ 3,241 5,180 5,180
Additional paid-in capital............. 196,167 388,080 410,230
Accumulated deficit.................... (152,499) (313,378) (385,834)
--------- --------- --------
Total shareholders' equity........... 46,909 79,882 29,576
--------- --------- --------
Total liabilities and shareholders'
equity.............................. $ 80,107 $ 187,705 $139,366
========= ========= ========
</TABLE>
See accompanying notes to financial statements.
F-25
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
March 22, 1996
(inception) Six months Six months
through Year ended ended ended
December 31, December 31, June 30, 1997 June 30, 1998
1996 1997 (unaudited) (unaudited)
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $ 14,661 $ 326,208 $119,335 $317,760
Costs and expenses:
Editorial and operation-
al..................... 16,738 157,645 54,946 84,450
Sales and marketing..... 34,274 78,218 34,749 95,199
General and administra-
tive................... 117,010 252,811 115,062 210,752
--------- --------- -------- --------
Operating loss.......... (153,361) (162,466) (85,422) (72,641)
Interest income, net of
interest expense....... 862 1,587 701 185
--------- --------- -------- --------
Net loss................ $(152,499) $(160,879) $(84,721) $(72,456)
========= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-26
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY and RF GLOBALNET
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock
--------------
Additional
paid-in Accumulated
Shares Amount capital deficit Total
------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock, at
par value................... 126,000 $1,260 $ -- $ -- $ 1,260
Issuance of common stock..... 198,148 1,981 196,167 -- 198,148
Net loss..................... -- -- -- (152,499) (152,499)
------- ------ -------- --------- ---------
Balance at December 31,
1996........................ 324,148 3,241 196,167 (152,499) 46,909
Issuance of common stock..... 193,852 1,939 191,913 -- 193,852
Net loss..................... -- -- -- (160,879) (160,879)
------- ------ -------- --------- ---------
Balance at December 31,
1997........................ 518,000 5,180 388,080 (313,378) 79,882
Compensation related to stock
options (unaudited)......... -- -- 22,150 -- 22,150
Net loss (unaudited)......... -- -- -- (72,456) (72,456)
------- ------ -------- --------- ---------
Balance at June 30, 1998
(unaudited)................. 518,000 $5,180 $410,230 $(385,834) $ 29,576
======= ====== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-27
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY AND RF GLOBALNET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
March 22, 1996
(inception)
through Year ended Six months Six months
December 31, December 31, ended ended
1996 1997 June 30, 1997 June 30, 1998
-------------- ------------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(152,499) $(160,879) $(84,721) $(72,456)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 2,792 9,077 4,716 5,964
Compensation expense
related to stock
options.............. -- -- -- 22,150
Change in assets:
Accounts
receivable......... -- (66,277) (31,762) 41,250
Prepaid expenses and
other assets....... (4,757) 510 510 (1,657)
Change in liabilities:
Accounts payable.... 91 14,017 13,447 (4,218)
Accrued expenses.... 19,255 (11,449) (9,919) 1,497
Deferred revenues... -- 85,909 21,477 (1,386)
--------- --------- -------- --------
Net cash used in
operating activities... (135,118) (129,092) (86,252) (8,856)
--------- --------- -------- --------
Cash flows from
investing activities:
Capital expenditures... (17,485) (12,530) (4,196) (3,883)
--------- --------- -------- --------
Net cash used in
investing activities... (17,485) (12,530) (4,196) (3,883)
--------- --------- -------- --------
Cash flows from
financing activities:
Increase in note
payable--shareholder.. 13,852 -- -- --
Principal payments on
obligations under
capital lease......... -- -- -- (569)
Proceeds from issuance
of common stock....... 199,408 180,000 95,000 --
--------- --------- -------- --------
Net cash provided by
(used in) financing
activities............. 213,260 180,000 95,000 (569)
--------- --------- -------- --------
Net increase in cash.... 60,657 38,378 4,552 (13,308)
Cash--beginning of
period................. -- 60,657 60,657 99,035
--------- --------- -------- --------
Cash--end of period..... $ 60,657 $ 99,035 65,209 85,727
========= ========= ======== ========
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest... $ 2 $ 13 $ -- $ 230
========= ========= ======== ========
Supplemental schedule of
noncash investing and
financing activities:
Issuance of stock in
repayment of note
payable............... $ -- $ 13,852 -- --
Equipment acquired
under capital lease... -- -- -- $ 6,643
Issuance of stock
options............... -- -- -- $ 22,150
========= ========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-28
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS
(Information with respect to June 30, 1997 and 1998 is unaudited)
(1) Summary of Significant Accounting Policies
Boulder Interactive Technology Services Company (d/b/a Microwave Online
Services Company and RF Globalnet) (the Company) was formed in March 1996. The
Company operates a Vertical trade community for professionals in the radio
frequency and wireless communications industry. This Web Site gives engineers
access to the latest product and technical information, leading edge education
resources, expert-hosted technical forums and career opportunities in the
field.
Property and Equipment
Property and equipment are stated at cost, net of depreciation. Property and
equipment are depreciated on a straight-line basis over the estimated useful
lives of the assets (three to five years).
Revenue and Cost Recognition
The Company's advertising revenues are derived principally from advertising
contracts which generally do not extend beyond one year. Advertising revenues
are recognized ratably over the term of the contract. Online courses, book
sales and other revenues are generally recognized upon delivery provided that
no significant Company obligations remain and collection of the receivable is
probable. In cases where there are significant remaining obligations, the
Company defers such revenues until those obligations are satisfied.
Barter transactions are recorded at the lower of estimated fair value of the
goods or services received or the estimated fair value of the advertisements
given. Revenue recorded under barter transactions for the year ended December
31, 1997 was $30,000 and $0 and $51,600 for the six months ended June 30, 1997
and 1998, respectively.
Editorial and operational expenses primarily consist of Internet connection
charges, depreciation, purchased content, salaries and benefits of operating
and editorial personnel and other related operating costs.
Concentration of Credit Risk
The Company does not require collateral on accounts receivable. The Company
maintains allowances for credit losses and such losses have been within
management's expectations. No single customer accounted for greater than 10% of
total revenues for the period from March 22, 1996 (inception) through December
31, 1996 and for the year ended December 31, 1997.
Advertising Costs
The Company expenses advertising costs as incurred. For the period from March
22, 1996 (inception) through December 31, 1996 and for the year ended December
31, 1997 and for the six months ended June 30, 1997 and 1998, advertising
expense was approximately $1,600, $34,000, $2,500 and $59,000, respectively.
F-29
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
Effective January 1, 1998, the Company records income taxes using the asset
and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and the tax effect of net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Accounting for Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121, the
Company records impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable and a loan payable that are carried at cost which
approximates fair value.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows.
In June 1997 the FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about
F-30
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 131 will not have an impact on the Company's results of operations,
financial position or cash flows.
In February l998 the FASB issued Employers' Disclosures about Pension and
Other Postretirement Benefits (SFAS No. 132), which revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not have an impact on the Company's results of operations,
financial position or cash flows.
In March l998 the American Institute of Certified Public Accounts (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position or cash flows.
Stock Options
The Company accounts for the grant of employee options to purchase common
stock in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123). This statement gives
companies the option to adopt the fair value method for expense recognition of
employee stock options or to continue to account for stock options and stock-
based awards using the intrinsic value method, as outlined under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and to make pro forma disclosures of net loss as if the fair value method
had been applied. The Company elected to apply APB 25 to account for stock
options and disclose the pro forma net loss as if the fair value method had
been applied (Note 5).
F-31
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1996 1997 1998
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Computer equipment and purchased software... $17,013 $ 29,543 $33,426
Office equipment and furniture.............. 472 472 7,115
------- -------- -------
17,485 30,015 40,541
Less: accumulated depreciation.............. (2,366) (10,830) (16,522)
------- -------- -------
Property and equipment, net................. $15,119 $ 19,185 $24,019
======= ======== =======
</TABLE>
(3) Commitments and Contingencies
The Company entered into a capital lease agreement in February 1998 for
office equipment. The lease has a term of five years and an implicit interest
rate of 11%. At June 30, 1998, the book value of assets held under capital
lease is approximately $6,000 and the aggregate remaining minimum lease
payments are approximately $8,000 including interest of approximately $1,000.
The Company leases its facility under an operating lease agreement expiring
in 1999. Future minimum lease payments as of December 31, 1997 under the lease
is as follows:
<TABLE>
<S> <C>
1998............................................................... $18,600
1999............................................................... 3,200
</TABLE>
Rent expense under this noncancelable operating lease was approximately
$7,600 and $17,000 for the period from March 22, 1996 (inception) through
December 31, 1996 and for the year ended December 31, 1997, respectively and
$8,800 and $9,200 for the six months ended June 30, 1997 and 1998,
respectively.
In addition, the Company has an advertising commitment from the period August
1998 through December 1998, totaling approximately $10,000.
(4) Stock Option Plan
In July 1998 the Company's board of directors adopted the 1998 stock option
plan (the 1998 Plan). A total of 80,000 shares of common stock were reserved
for issuance under this Plan.
The exercise price and the vesting period for the options is determined by
the board of directors. All options expire ten years after the date of grant.
On January 8, 1998, options for 9,750 shares of common stock were granted,
outside of the 1998 Plan, at an exercise price of $0.60 that vested
immediately. Compensation expense of $22,150 was recorded for these options as
they were granted to a non-employee of the Company. On July 2, 1998, options
for 15,832 shares of common stock were granted at an exercise price of $0.60,
under the 1998 Plan, that vest over a four-year period. Compensation expense of
$47,700 was recorded by the Company in July 1998 in connection with the
F-32
Financial Statements
<PAGE>
BOULDER INTERACTIVE TECHNOLOGY SERVICES COMPANY
d/b/a MICROWAVE ONLINE SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
options granted on July 2, 1998 as the vesting on these options was accelerated
due to the Company being acquired in September 1998 (Note 6).
(5) Income Taxes
The Company elected "C" corporation status in March 1998, effective on
January 1, 1998. Prior to that election, the Company was an "S" corporation.
(6) Subsequent Event
On September 1, 1998, the Company was acquired by VerticalNet, Inc.
(VerticalNet). Under the terms of that transaction, VerticalNet acquired all of
the outstanding stock of the Company in exchange for approximately $1.8 million
in cash.
F-33
Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Informatrix Worldwide, Inc.:
We have audited the accompanying balance sheet of Informatrix Worldwide, Inc.
as of December 31, 1997 and the related statements of operations, shareholders'
deficit and cash flows for the period from October 15, 1997 (inception) to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Informatrix Worldwide, Inc. as
of December 31, 1997 and the results of its operations and its cash flows for
the period from October 15, 1997 (inception) to December 31, 1997 in conformity
with generally accepted accounting principles.
KPMG LLP
August 21, 1998
Philadelphia, Pennsylvania
F-34
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
BALANCE SHEETS
(Information as of September 30, 1998 is unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash.............................................. $ 6,196 $ --
Accounts receivable............................... -- 53,200
Officer loan receivable........................... 3,500 3,500
--------- -----------
Total current assets............................ 9,696 56,700
--------- -----------
Computer equipment, net........................... 27,020 19,856
Other assets...................................... 1,003 1,003
--------- -----------
Total assets.................................... $ 37,719 $ 77,559
========= ===========
Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable and accrued expenses............. $ 17,750 $ 38,964
Accounts payable to related party................. 250,000 430,000
Current portion of lease obligation............... 8,298 9,336
Loans payable to related party.................... 160,000 751,994
Deferred revenues................................. -- 106,725
--------- -----------
Total current liabilities....................... 436,048 1,337,019
--------- -----------
Lease obligation, net of current portion.......... 19,052 11,915
--------- -----------
Commitments and contingencies
Shareholders' deficit:
Common stock no par value, 200 shares authorized,
issued and
outstanding...................................... -- --
Accumulated deficit............................... (417,381) (1,271,375)
--------- -----------
Total shareholders' deficit..................... (417,381) (1,271,375)
--------- -----------
Total liabilities and shareholders' deficit..... $ 37,719 $ 77,559
========= ===========
</TABLE>
See accompanying notes to financial statements.
F-35
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 15, 1997 Nine months
(inception) to ended
December 31, September 30,
1997 1998
---------------- -------------
(unaudited)
<S> <C> <C>
Revenues......................................... $ -- $ 32,442
--------- ---------
Cost and expenses:
Editorial and operational........................ 20,948 253,503
Product development.............................. 279,144 75,766
Sales and marketing.............................. 85,408 426,058
General and administrative....................... 29,162 93,131
--------- ---------
Operating loss................................... (414,662) (816,016)
Interest expense................................. (2,719) (37,978)
--------- ---------
Net loss......................................... $(417,381) $(853,994)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-36
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common stock
------------- Accumulated
Shares Amount deficit Total
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Issuance of common stock, October
15, 1997 (inception)............... 200 $-- $ -- $ --
Net loss............................ -- -- (417,381) (417,381)
--- ---- ----------- -----------
Balance at December 31, 1997........ 200 -- (417,381) (417,381)
--- ---- ----------- -----------
Net loss (unaudited)................ -- -- (853,994) (853,994)
--- ---- ----------- -----------
Balance at September 30, 1998 (unau-
dited)............................. 200 $-- $(1,271,375) $(1,271,375)
=== ==== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-37
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 15, 1997 Nine months
(inception) to ended
December 31, September 30,
1997 1998
---------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(417,381) $(853,994)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,592 7,164
Change in assets:
Accounts receivable......................... -- (53,200)
Officer loan receivable..................... (3,500) --
Other assets................................ (1,003) --
Change in liabilities:
Accounts payable and accrued expenses....... 17,750 21,214
Accounts payable to related party........... 250,000 180,000
Deferred revenues........................... -- 106,725
--------- ---------
Net cash used in operating activities........... (152,542) (592,091)
--------- ---------
Cash flows from financing activities:
Issuance of common stock....................... -- --
Loans from related party....................... 160,000 591,994
Payment of capital lease....................... (1,262) (6,099)
--------- ---------
Net cash provided by financing activities....... 158,738 585,895
--------- ---------
Net decrease in cash............................ 6,196 (6,196)
Cash at beginning of period..................... -- 6,196
--------- ---------
Cash at end of period........................... $ 6,196 $ --
========= =========
Supplemental disclosure of cash flow informa-
tion:
Cash paid during the year for interest......... $ 746 $ 2,957
========= =========
Supplemental schedule of noncash investing and
financing activities:
Equipment acquired under capital leases........ $ 28,612 $ --
========= =========
</TABLE>
See accompanying notes to financial statements.
F-38
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
(Information with respect to September 30, 1998 is unaudited)
(1) Organization
Informatrix Worldwide, Inc. (the Company) was formed in October 15, 1997. The
Company operates a vertical trade community in the property and casualty
insurance industry that caters to risk managers, agents, brokers and other
professionals in the insurance industry. A vertical trade community is a Web
site that acts as a source of information and dialogue for a particular
vertical market.
(2) Summary of Significant Accounting Policies
Computer Equipment
Computer equipment are stated at cost, net of accumulated amortization and
depreciation. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets (three years). Expenditures for
maintenance and repairs are charged to expense as incurred.
Revenue and Cost Recognition
The Company's advertising revenues are derived principally from advertising
contracts which generally do not extend beyond one year. Advertising revenues
are recognized ratably over the term of the contract.
Editorial and operational costs include editorial costs which are principally
payroll and related costs.
Product Development
Product development costs consists principally of salaries and related costs,
which are expensed as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
$0 for the period from October 15, 1997 (inception) to December 31, 1997 and
approximately $57,126 for the nine months ended September 30, 1998.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial
F-39
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1998 is unaudited)
statements or tax returns. The measurement of current and deferred tax
liabilities and assets are based on provisions of the enacted tax laws; the
effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
No federal or state income taxes are due as of December 31, 1997. The net
deferred tax asset, primarily related to net operating losses, is fully offset
by a valuation allowance at December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Financial Instruments
The Company's financial instruments principally consist of cash, accounts
receivable, accounts payable, loans payable and capital asset obligations that
are carried at cost which approximates fair value.
Recent Accounting Pronouncements
In June 1997 the Financial Accounting Standards Board (FASB) issued Reporting
Comprehensive Income (SFAS No. 130), which establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. SFAS No. 130 offers alternatives for
presentation of disclosures required by the standard. The adoption of SFAS No.
130 had no impact on the Company's results of operations, financial position or
cash flows.
In the June 1997 FASB issued Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 131 will not
have an impact on the Company's results of operations, financial position or
cash flows.
In February l998 FASB issued SFAS No. 132, Employers' Disclosures about
Pension and Other Postretirement Benefits (SFAS No. 132), which revises
employers' disclosures about pension and
F-40
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1998 is unaudited)
other postretirement benefit plans. SFAS No. 132 does not change the
measurement or recognition of those plans. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. The adoption of SFAS No. 132 will not
have an impact on the Company's results of operations, financial position or
cash flows.
In March l998 the American Institute of Certified Public Accounts (AICPA)
issued Statement of Position 98-1, Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a material effect on the Company's capitalization policy.
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for
fiscal years beginning after December 15, 1998, provides guidance on the
financial reporting of start-up costs and organization costs. It requires costs
of start up activities and organization costs to be expensed as incurred. As
the Company has expensed these costs historically, the adoption of this
standard is not expected to have a significant impact on the Company's results
of operations, financial position, or cash flows.
(3) Property and Equipment
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Computer equipment under capital leases........... $28,612 $28,612
Less: accumulated depreciation.................... (1,592) (8,756)
------- -------
Property and equipment, net....................... $27,020 $19,856
======= =======
</TABLE>
Amortization expense of equipment under capital lease is included in
depreciation expense.
(4) Capital Lease Obligation
The Company leases its computer equipment under a capital lease agreement
expiring in 2000. Future minimum lease payments as of December 31, 1997 under
the lease are as follows:
<TABLE>
<S> <C>
1998............................................................... $12,039
1999............................................................... 12,039
2000............................................................... 10,032
-------
Minimum lease payments............................................. 34,110
Less: amounts representing interest................................ 6,760
-------
Present value of minimum lease payments............................ 27,350
Less: current portion.............................................. 8,298
-------
Long-term portion.................................................. $19,052
=======
</TABLE>
F-41
Financial Statements
<PAGE>
INFORMATRIX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Information with respect to September 30, 1998 is unaudited)
(5) Debt-Related Party
The Company was acquired by VerticalNet, Inc. (VerticalNet) on September 30,
1998 (Note 7). At December 31, 1997, the Company had borrowed $160,000 from
VerticalNet and a total of $715,000 as of September 30, 1998. The interest rate
on the debt was prime plus 1.5% percent and the debt was payable on demand. No
interest was paid to VerticalNet as the Company was subsequently acquired by
VerticalNet.
The Company also had an accounts payable balance due to VerticalNet of
$250,000 at December 31, 1997 and $430,000 at September 30, 1998 for certain
Web site development and maintenance services.
(6) Related Party Transactions
The Company paid approximately $29,800 and $88,700 for the period from
October 15, 1997 (inception) through December 31, 1997 and the nine months
ended September 30, 1998, respectively, for consulting services to an entity
whose shareholders are also shareholders of the Company.
The Company paid $39,700 and $124,000 for the period from October 15, 1997
(inception) through December 31, 1997 and the nine months ended September 30,
1998, respectively, for advertising services to an entity whose shareholders
are also shareholders of the Company.
The Company recorded $250,000 in product development expense for Web site
development services provided by VerticalNet during the period from October 15,
1997 (inception) through December 31, 1997. In addition, the Company recorded
$180,000 in cost of revenues for Web site maintenance services provided by
VerticalNet for the nine months ended September 30, 1998.
(7) Subsequent Event
On September 30, 1998, the Company was acquired by VerticalNet. Under the
terms of that transaction, VerticalNet acquired all of the outstanding stock of
the Company in exchange for 46,154 (post split) shares of common stock of
VerticalNet.
F-42
Financial Statements
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
UNAUDITED PRO FORMA FINANCIAL INFORMATION BASIS OF PRESENTATION
The following unaudited pro forma data is filed herewith: Unaudited condensed
combined pro forma statements of operations for the year ended December 31,
1997 and nine months ended September 30, 1998.
The unaudited condensed combined pro forma statements of operations reflect
the acquisitions of Boulder Interactive Technology Services Company (BITC) as
if it occurred on January 1, 1997 and Informatrix as if it had occurred on its
inception of October 15, 1997. Since the pro forma financial statements which
follow are based upon the financial condition and operating results of the BITC
and Informatrix during periods when they were not under the control or
management of VerticalNet, Inc. (VerticalNet), the information presented may
not be indicative of the results which would have actually been obtained had
the acquisitions been completed as of January 1, 1997 nor are they indicative
of future financial or operating results. The unaudited pro forma financial
information does not give effect to any synergies that may occur due to the
integration of VerticalNet, BITC and Informatrix. The condensed combined pro
forma financial statements should be read in conjunction with the historical
audited financial statements of VerticalNet and the notes thereto, as well as
the audited historical financial statements of BITC and Informatrix and the
notes thereto included elsewhere in this prospectus. The acquisitions have been
accounted for by the purchase method of accounting. A pro forma balance sheet
as of September 30, 1998 has not been presented herein since both acquisitions
were completed in September of 1998 and have been reflected in VerticalNet's
consolidated balance sheet as of September 30, 1998 appearing elsewhere herein.
F-43
Financial Statements
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
VerticalNet BITC Informatrix Adjustments Combined
----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 791,822 $ 326,208 $ -- $ -- $ 1,118,030
----------- --------- --------- --------- -----------
Cost and Expenses:
Editorial and opera-
tional ................ 1,055,725 157,645 20,948 -- 1,234,318
Product development..... 711,292 -- 279,144 (250,000)(a) 740,436
Sales and marketing..... 2,300,365 78,218 85,408 -- 2,463,991
General and administra-
tive................... 1,388,123 252,811 29,162 684,102 (b) 2,354,198
----------- --------- --------- --------- -----------
Operating loss.......... (4,663,683) (162,466) (414,662) (434,102) (5,674,913)
----------- --------- --------- --------- -----------
Interest income, net of
interest expense....... (115,106) 1,587 (2,719) 1,974 (c) (114,264)
----------- --------- --------- --------- -----------
Net loss................ $(4,778,789) $(160,879) $(417,381) $(432,128) $(5,789,177)
=========== ========= ========= ========= ===========
Pro forma net loss per
share:
Basic and diluted..... $ (1.89) $ (2.28)
=========== ===========
Weighted average
shares outstanding
(basic and diluted).. 2,526,865 2,536,480
=========== ===========
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
F-44
Financial Statements
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
VerticalNet BITC Informatrix Adjustments Combined
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 1,861,799 $ 437,628 $ 32,442 $ -- $ 2,331,869
------------ ---------- ---------- ---------- ------------
Costs and expenses:
Editorial and operation-
al..................... 2,100,885 121,726 253,503 (180,000)(d) 2,296,114
Product development..... 797,815 -- 75,766 -- 873,581
Sales and marketing..... 4,405,407 123,542 426,058 -- 4,955,007
General and administra-
tive................... 2,907,275 327,879 93,131 691,801 (e) 4,020,086
------------ ---------- ---------- ---------- ------------
Operating loss.......... (8,349,583) (135,519) (816,016) (511,801) (9,812,919)
------------ ---------- ---------- ---------- ------------
Interest income, net of
interest expense....... 15,166 143 (37,978) 35,025 (f) 12,356
------------ ---------- ---------- ---------- ------------
Net loss................ $ (8,334,417) $ (135,376) $ (853,994) $ (476,776) $ (9,800,563)
============ ========== ========== ========== ============
Pro forma net loss per
share:
Basic and diluted..... $ (3.27) $ (3.77)
============ ============
Weighted average
shares outstanding
(basic and diluted).. 2,550,619 2,596,604
============ ============
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
F-45
Financial Statements
<PAGE>
VERTICALNET, INC., BITC AND INFORMATRIX
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited pro forma condensed combined statements of operations for the
nine months ended September 30, 1998 and the year ended December 31, 1997 give
effect to the acquisition of BITC as if it had occurred on January 1, 1997 and
Informatrix as if has occurred on its inception of October 15, 1997. The
statement of operations for BITC for the nine months ended September 30, 1998
includes their operations for January 1, 1998 through September 1, 1998, the
date of acquisition by the Company.
The effects of the acquisitions have been presented using the purchase method
of accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based upon management's best preliminary
estimate of their fair value. The preliminary allocation of the purchase price
will be subject to further adjustments, which are not anticipated to be
material, as VerticalNet finalizes its allocation of its purchase price in
accordance with generally accepted accounting principles. The pro forma
adjustments related to the purchase price allocation of the acquisition
represent management's best estimate of the effects of the acquisition.
2. Pro forma statement of operations adjustments consist of:
The pro forma statement of operations adjustments for the year ended December
31, 1997 consist of:
(a) Product development expense has been adjusted to reflect the elimination
of the costs charged by VerticalNet to Informatrix to develop Informatrix's
vertical trade community.
(b) General and administrative expense has been adjusted to reflect the
amortization of goodwill associated with the acquisitions which has an
estimated useful life of 36 months.
(c) Interest expense has been adjusted to reflect the elimination of the
interest expense incurred by Informatrix on indebtedness to VerticalNet.
The pro forma statement of operations adjustments for the nine months ended
September 30, 1998 consist of:
(d) Cost of editorial and operational has been adjusted to reflect the
elimination of the costs charged by VerticalNet to Informatrix to maintain
Informatrix's vertical trade community.
(e) General and administrative expense has been adjusted to reflect the
amortization of goodwill associated with the the acquisitions which has an
estimated useful life of 36 months.
(f) Interest expense has been adjusted to reflect the elimination of the
interest expense incurred by Informatrix on indebtedness to VerticalNet.
(g) No income tax provision is required due to the Company's current tax loss
and the inability of the Company to currently use the benefits of the net
operating loss carryforward.
F-46
Financial Statements
<PAGE>
[LOGO OF VERTICALNET APPEARS HERE]
www.verticalnet.com
Business-to-Business
Communities of Commerce
<PAGE>
[LOGO OF VERTICALNET INC. APPEARS HERE]
3,500,000 Shares
Common Stock
-----------------
PROSPECTUS
, 1999
-----------------
Lehman Brothers
Hambrecht & Quist
Volpe Brown Whelan & Company
Wit Capital Corporation
as e-ManagerTM
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of common stock being registered, all of which will
be paid by the Company:
<TABLE>
<S> <C>
Registration fee............................................... $ 15,665
NASD filing fee................................................ 4,525
Transfer agent and registrar fees.............................. 10,000
Printing and engraving......................................... 300,000
Legal fees..................................................... 400,000
Blue sky fees and expenses..................................... 2,500
Nasdaq National Market listing fee............................. 5,000
Accounting fees................................................ 350,000
Miscellaneous.................................................. 212,310
----------
Total........................................................ $1,300,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The Company's Amended and Restated Articles of Incorporation provide that
pursuant to and to the extent permitted by Pennsylvania law, the Company's
directors shall not be personally liable for monetary damages for breach of any
duty owed to the Company and its shareholders. This provision does not
eliminate the duty of care, and, in appropriate circumstances, equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under Pennsylvania law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
knowing violations of law, or for actions resulting in improper personal
benefit to the director, the provision also does not affect a director's
responsibilities under any other law, such as federal securities laws or state
or federal environmental laws. The Company's Amended and Restated Bylaws
provide that the Company shall indemnify its officers and directors to the
fullest extent permitted by Pennsylvania law, including some instances in which
indemnification is otherwise discretionary under Pennsylvania law. Pennsylvania
law permits the Registrant to provide similar indemnification to employees and
agents who are not directors or officers. The determination of whether an
individual meets the applicable standard of conduct may be made by the
disinterested directors, independent legal counsel or the shareholders.
Pennsylvania law also permits indemnification in connection with a proceeding
brought by or in the right of the Registrant to procure a judgment in its
favor. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in that Act and is therefore unenforceable.
In general, any officer or director of the Company shall be indemnified by
the Company against expenses including attorneys' fees, judgments, fines and
settlements actually and reasonably incurred by that person in connection with
a legal proceeding as a result of such relationship, whether or not
II-1
<PAGE>
the indemnified liability arises from an action by or in the right of the
Company, if the officer or director acted in good faith, and in the manner
believed to be in or not opposed to the Company's best interest, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe the conduct was unlawful. Such indemnity is limited to the extent that
(i) such person is not otherwise indemnified and (ii) such indemnifications not
prohibited by Pennsylvania law or any other applicable law.
Any indemnification under the previous paragraph (unless ordered by a court)
shall be made by the Company only as authorized in the specific case upon the
determination that indemnification of the director or officer is proper in the
circumstances because that person has met the applicable standard of conduct
set forth above. Such determination shall be made (i) by the board of directors
by a majority vote of a quorum of disinterested directors who are not parties
to such action or (ii) if such quorum is not obtainable or, even if obtainable
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion. To the extent that a director or officer of the Company
shall be successful in prosecuting an indemnity claim, the reasonable expenses
of any such person and the fees and expenses of any special legal counsel
engaged to determine the possibility of indemnification shall be borne by the
Company.
Expenses incurred by a director or officer of the Company in defending a
civil or criminal action, suit or proceeding shall be paid by the Company in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that person is not entitled to
be indemnified by the Company as authorized by our Bylaws.
The indemnification and advancement of expenses provided by, or granted
pursuant to Article of our Bylaws is not deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled, both as to action in that person's official capacity and as to action
in another capacity while holding such office.
The Board of Directors has the power to authorize the Company to purchase and
maintain insurance on behalf of the Company and others to the extent that power
to do so has not been prohibited by the Pennsylvania law, create any fund to
secure any of its indemnification obligations and give other indemnification to
the extent permitted by law. The obligations of the Company to indemnify a
director or officer under our Bylaws is a contract between the Company and such
director or officer and no modification or repeal of our Bylaws shall
detrimentally affect such officer or director with regard to that person's acts
or omissions prior to such amendment or repeal.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
Item 15. Recent Sales of Unregistered Securities
Since its inception in July 1995, the Company has issued and sold
unregistered securities in the transactions described below. Share amounts have
been restated to give effect to all of the Company's stock splits.
II-2
<PAGE>
Shares of Common Stock
1. In September 1995, the Company issued 685,479 shares of Common Stock to
Mr. McNulty in an organizational subscription for an aggregate purchase price
of $255.
2. In September 1995, the Company issued 685,479 shares of Common Stock to
Mr. Hagan in an organizational subscription for an aggregate purchase price of
$255.
3. In October and November of 1995, the Company issued an aggregate of
591,341 shares of Common Stock to four investors for an aggregate purchase
price of $70,000.
4. In January 1996, the Company issued 53,763 shares of Common Stock to one
investor for an aggregate purchase price of $15,000.
5. In January and February 1996, the Company issued an aggregate of 672,038
shares of Common Stock to four investors, including Mr. Buckley, a director of
the Company, in connection with the issuance of $100,000 aggregate principal
amount of unsecured term notes.
6. In June 1998, the Company issued 56,980 shares of Common Stock to Lehman
Brothers Inc. in consideration for services rendered as private placement agent
in the Series D private placement.
Shares of Series A Preferred Stock
7. In September 1996, the Company issued, 512,821 shares of Series A
Preferred Stock to Internet Capital Group for an aggregate purchase price of
$1,000,000, which shares will be automatically converted into 512,821 shares of
Common Stock upon or immediately prior to the consummation of the Offering.
Shares of Series B Preferred Stock
8. In July 1997, the Company issued 2,579,580 shares of Series B Preferred
Stock to Internet Capital Group for an aggregate purchase price of $2,000,000,
which shares will be automatically converted into 2,579,580 shares of Common
Stock upon or immediately prior to the consummation of the Offering.
Shares of Series C Preferred Stock
9. In October 1997, the Company issued 154,861 shares of Series C Preferred
Stock to one accredited investor for an aggregate purchase price of $200,000,
which shares will be automatically converted into 154,861 shares of Common
Stock upon or immediately prior to the consummation of the Offering.
Shares of Series D Preferred Stock
10. From May 1998 to June 1998, the Company issued 4,558,405 shares of Series
D Preferred Stock to various accredited investors, including 854,701 shares to
Koch Ventures, Inc., 787,775
II-3
<PAGE>
shares to Wheatley Partners, L.P., and 1,139,602 shares to Internet Capital
Group, for an aggregate purchase price of $16,000,000, which shares will be
automatically converted into 4,558,405 shares of Common Stock upon or
immediately prior to the consummation of the Offering.
Convertible Notes
11. In November 1998, the Company issued Convertible Notes in the aggregate
principal amount of $5.0 million which will convert into 384,615 shares of
Common Stock (assuming an initial public offering price of $13.00) upon or
immediately prior to the consummation of the Offering.
Warrants to Purchase Common Stock
12. In November 1998, the Company granted Warrants to purchase an aggregate
of 82,051 shares of Common Stock for a purchase price equal to the initial
public offering price to Internet Capital Group and certain holders of the
Company's Series D Preferred Stock in connection with the issuance of the
Convertible Notes.
13. In November 1998, the Company granted Warrants to purchase an aggregate
of 20,513 shares of Common Stock for a purchase price equal to the initial
public offering price to Progress Capital in connection with the $2.0 million
loan from Progress Bank.
14. In May 1998, the Company granted Warrants to purchase an aggregate of
85,470 shares of Common Stock for a purchase price of $3.51 per share to
Internet Capital Group in connection with certain guarantees of the Company's
bank debt by Internet Capital Group.
15. In April 1997, the Company granted Warrants to purchase an aggregate of
19,347 shares of Common Stock for a purchase price of $0.76 per share to
Progress in connection with Progress' provision of a line of credit.
16. In December 1997, the Company granted Warrants to purchase an aggregate
of 28,490 shares of Common Stock for a purchase price of $3.51 per share to
Progress in connection with Progress' extension of additional credit.
Options to Purchase Common Stock
17. The Company from time to time has granted stock options to employees,
directors and consultants. The following table sets forth certain information
regarding such grants:
<TABLE>
<CAPTION>
No. of Range of
Shares Exercise Prices
--------- ---------------
<S> <C> <C>
1995............................................. None --
1996............................................. None --
1997............................................. 555,213 $.27 to $ .80
1998............................................. 1,404,412 $.80 to $2.63
</TABLE>
The Company believes that the issuance of shares and grants of options
described above did not involve a public offering and were exempt from
registration under Section 4(2) of the Securities Act because such issuances
and grants were made to a limited group of persons, each of whom was believed
to have been a sophisticated investor or had a pre-existing business or
personal relationship with the Company or its management and because each such
person was purchasing for investment without a view to further distribution.
Restrictive legends were placed on stock certificates and are contained in
stock option agreements evidencing the securities described above.
II-4
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this registration statement:
Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1 Form of Underwriting Agreement
3.1 * Form of Amended and Restated Articles of Incorporation
3.2 * Form of Amended and Restated Bylaws
5 * Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
shares of Common Stock being registered
10.1 Amended and Restated 1996 Equity Compensation Plan
10.2 * Employment Letter with Mark L. Walsh
10.3 * Employment Letter with Barry E. Wynkoop
10.4 Share Purchase Agreement dated September 1, 1998, between Boulder
Interactive Technology Services Co. and VerticalNet, Inc.
10.5 * Agreement and Plan of Merger dated September 30, 1998, among
VerticalNet, Inc., Informatrix Acquisition Corp., Informatrix
Worldwide, Inc., and the Stockholders of Informatrix Worldwide, Inc.
10.6 Sponsorship Agreement dated June 30, 1998, between Excite!, Inc. and
VerticalNet, Inc.+
10.7 * Internet Services Agreement dated as of January 19, 1999 by and
between Compaq Computer Corporation and VerticalNet, Inc.+
10.8 Asset Purchase Agreement dated January 13, 1999 by and among
VerticalNet, Inc., Coastal Video Communications Corp., Paul V.
Michels and Philip P. Price
10.9 Common Stock Purchase Warrant to purchase 40,000 or 60,000 shares of
Common Stock dated November 25, 1998 issued to Progress Capital,
Inc.
10.10 Form of Common Stock Purchase Warrant dated November 25, 1998 issued
in connection with the Convertible Note
10.11 Form of Convertible Note dated November 25, 1998
10.12 * Series A Preferred Stock Purchase Agreement dated as of September
12, 1996 between Internet Capital Group, L.L.C. and Water Online,
Inc.
10.13 * Series D Investor Rights Agreement dated as of May 8, 1998 by and
among VerticalNet, Inc. and the Investors
10.14 * Registration Rights Agreement dated as of November 25, 1998 between
the Company and the Convertible Note Holders
21 * Subsidiaries
23.1* Consent of KPMG LLP
23.1A* Consent of KPMG LLP
23.1B* Consent of KPMG LLP
23.2 Consent of Morgan, Lewis & Bockius LLP (included in its opinion
filed as Exhibit 5 hereto)
24.1 Power of Attorney (included on signature page to this Registration
Statement)
27 Financial Data Schedule
99 * Description of Wit Capital Corporation Web site.
</TABLE>
- --------
*Filed herewith
+ Portions of this Exhibit have been omitted and filed separately with the
Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 under the Act.
(b) Except as follows, financial statement schedules have been omitted
because they are inapplicable, are not required under applicable provisions of
Regulation S-X, or the information that would otherwise be included in such
schedules is contained in the registrant's financial statements or accompanying
notes.
II-5
<PAGE>
Item 16. Exhibits and Financial Statements Schedules.
(b) (continued)
VERTICALNET, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Period from July 28, 1995 (inception) to December 31, 1995
the Years Ended December 31, 1996 and 1997 and the
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Balance at the Charged to Balance at the
Beginning of the Costs and End of the
Description Period Expenses Write-Offs Year
- ----------- ---------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Period from July 28,
1995 (inception) to
December 31, 1995...... $ -- $ -- $ -- $ --
Year ended December 31,
1996................... $ -- $18,575 $ -- $18,575
Year ended December 31,
1997................... $18,575 $11,425 $ -- $30,000
Nine months ended
September 30, 1998..... $30,000 $42,621 $14,555 $58,066
Note receivable:
Year ended December 31,
1997................... $ -- $80,000 $ -- $80,000
Nine months ended
September 30, 1998..... $80,000 $ -- $(80,000)(a) $ --
</TABLE>
- --------
(a) Reserve of $80,000 was eliminated upon acquiring Informatrix.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such amount 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 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.
II-6
<PAGE>
(2)For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement, as amended, to be
signed on its behalf by the undersigned, thereunto duly authorized, in Horsham,
Pennsylvania on February 8, 1999.
VerticalNet, Inc.
/s / Gene S. Godick
By: _________________________________
Gene S. Godick
Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement, as amended, has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
* President and Chief February 8, 1999
______________________________________ Executive Officer
Mark L. Walsh (principal executive
officer)
* Senior Vice President and February 8, 1999
______________________________________ Director
Michael J. Hagan
* Vice President and Chief February 8, 1999
______________________________________ Financial Officer
Gene S. Godick (principal financial and
accounting officer)
* Director February 8, 1999
______________________________________
Douglas A. Alexander
* Director February 8, 1999
______________________________________
Jeffrey C. Ballowe
* Director February 8, 1999
______________________________________
Walter W. Buckley, III
* Director February 8, 1999
______________________________________
Matthew J. Warta
</TABLE>
/s/ Gene S. Godick
*By: ____________________________
Gene S. Godick
Attorney-in-Fact
II-8
<PAGE>
Exhibit 3.1
FORM OF AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
VERTICALNET, INC.
(A Pennsylvania Corporation)
The Articles of Incorporation of VerticalNet, Inc. are hereby amended and
restated in their entirety to read as follows:
FIRST: Corporate Name. The name of the corporation is VerticalNet,
--------------
Inc. (hereinafter referred to as the "Corporation").
-----------
SECOND: Registered Office. The location and post office address of the
-----------------
registered office of the Corporation in the Commonwealth of Pennsylvania is 2
Walnut Grove Drive, Suite 150 Horsham, Pennsylvania 19044
THIRD: Original Incorporation. The Corporation was incorporated under
----------------------
the provisions of the Business Corporation Law, Act of May 5, 1933, as amended.
The date of its incorporation is on July 28, 1995.
FOURTH: Method of Adoption. These Amended and Restated Articles of
------------------
Incorporation were duly adopted by vote of the shareholders in accordance with
Sections 1914 and 1915 of the Pennsylvania Business Corporation Law of 1988, as
amended (the "Pennsylvania BCL").
----------------
FIFTH: Corporate Purposes. The purpose for which the Corporation is
------------------
organized is to engage in any and all lawful acts and activity for which
corporations may be organized under the Pennsylvania BCL.
SIXTH: Corporate Existence. The term of existence of the Corporation
-------------------
is perpetual.
SEVENTH: Capital Stock. The aggregate number of shares which the
-------------
Corporation shall have authority to issue is 100,000,000 shares, par value of
one cent ($.01) per share, consisting of:
(a) 90,000,000 shares of Common Stock (the "Common Stock"); and
------------
(d) 10,000,000 shares of Preferred Stock.
EIGHTH: Preferred Stock. The Board of Directors may authorize the
---------------
issuance from time to time of Preferred Shares in one or more classes or series
and with designations, voting rights, preferences, and special rights, if any,
as the Board of Directors may fix by resolution.
NINTH: Rights of Common Stock. The designations, powers, preferences,
----------------------
rights, qualifications, limitations and restrictions of the Common Stock are as
follows:
<PAGE>
(a) General. Except as otherwise provided herein or as otherwise provided
-------
by applicable law, all shares of Common Stock shall have identical
rights and privileges in every respect and shall be treated identically
in all respects.
(b) Dividends. Subject to the prior rights and preferences, if any,
---------
applicable to shares of the Preferred Stock, the holders of the Common
Stock shall be entitled to participate in such dividends, whether in
cash, stock or otherwise, as may be declared by the Board of Directors
from time to time out of funds of the Corporation legally available
therefor.
(c) Voting. Each holder of record of Common Stock shall be entitled to one
------
vote for each share of Common Stock standing in his name on the books
of the Corporation. Except as otherwise required by law, or as
otherwise expressly provided in these Articles of Incorporation and any
Statement with Respect to Shares hereafter filed with respect to any
Preferred Stock: (i) the holders of Common Stock shall vote together as
a single class on all matters submitted to shareholders for a vote, and
(ii) the holders of the Common Stock shall elect the directors in the
manner prescribed by the Company's Bylaws.
(d) Liquidation. In the event of any voluntary or involuntary liquidation,
-----------
dissolution, or winding-up of the Corporation, after all creditors of
the Corporation shall have been paid in full and after payment of all
sums payable in respect of Preferred Stock, if any, the holders of the
Common Stock shall share ratably on a share-for-share basis in all
distributions of assets pursuant to such voluntary or involuntary
liquidation, dissolution, or winding-up of the Corporation. For the
purposes of this paragraph (d), neither the merger nor the
consolidation of the Corporation into or with another entity or the
merger or consolidation of any other entity into or with the
Corporation, or the sale, transfer, or other disposition of all or
substantially all the assets of the Corporation, shall be deemed to be
a voluntary or involuntary liquidation, dissolution, or winding-up of
the Corporation.
TENTH: General.
-------
(a) Issuance of Shares. Subject to the foregoing provisions of these
------------------
Amended and Restated Articles of Incorporation, the Corporation may
issue shares of its Common Stock or Preferred Stock from time to time
for such consideration (not less than the par value thereof) as may be
fixed by the Board of Directors, which is expressly authorized to fix
the same in its absolute and uncontrolled discretion subject to the
foregoing provisions. Shares so issued for which the consideration
shall have been paid or delivered to the Corporation shall be deemed
fully paid capital stock and shall not be liable to any further call or
assessment thereon, and the holders of such shares shall not be liable
for any further payments in respect of such shares.
(b) Rights and Options. The Corporation shall have authority to create and
------------------
issue rights and options entitling their holders to purchase shares of
the Corporation's capital stock of any class or series or other
securities of the Corporation, and such rights
2
<PAGE>
and options shall be evidenced by instrument(s) approved by the Board
of Directors or otherwise provided in a plan relating to the issuance
of such rights and options which has been approved by the Board of
Directors. The Board of Directors or a committee of the Board of
Directors shall be empowered to set the exercise price, duration, times
for exercise, and other terms of such options or rights; provided,
however, that the consideration to be received for any shares of
capital stock subject thereto shall not be less than the par value
thereof.
ELEVENTH: Board of Directors. The number, classification, and terms of
------------------
the Board of Directors of the Corporation and the procedures to elect directors,
to remove directors, and to fill vacancies in the Board of Directors shall be as
stated in the Corporation's By-Laws.
TWELFTH: No Cumulative Voting. The shareholders of the Corporation
--------------------
shall not have the right to cumulate their votes for the election of directors
of the Corporation.
THIRTEENTH: Indemnification. The Corporation shall indemnify any Person
---------------
who was, is, or is threatened to be made a party to a proceeding (as hereinafter
defined) by reason of the fact that he or she (i) is or was a director or
officer of the Corporation, or (ii) while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan, or other enterprise,
to the fullest extent permitted under the Pennsylvania BCL, as the same exists
or may hereafter be amended. Such right shall be a contract right and as such
shall run to the benefit of any director or officer who is elected and accepts
the position of director or officer of the Corporation or elects to continue to
serve as a director or officer of the Corporation while this Article THIRTEENTH
is in effect. Any repeal or amendment of this Article THIRTEENTH shall be
prospective only and shall not limit the rights of any such director or officer
or the obligations of the Corporation with respect to any claim arising from or
related to the services of such director or officer in any of the foregoing
capacities prior to any such repeal or amendment to this Article THIRTEENTH.
Such right shall include the right to be paid by the Corporation expenses
incurred in investigating or defending any such proceeding in advance of its
final disposition to the maximum extent permitted under the Pennsylvania BCL, as
the same exists or may hereafter be amended. If a claim for indemnification or
advancement of expenses hereunder is not paid in full by the Corporation within
sixty (60) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim, and if successful in whole or in part,
the claimant shall also be entitled to be paid the expenses of prosecuting such
claim. It shall be a defense to any such action that such indemnification or
advancement of costs of defense is not permitted under the Pennsylvania BCL, but
the burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors or any committee
thereof, independent legal counsel, or shareholders) to have made its
determination prior to the commencement of such action that indemnification of,
or advancement of costs of defense to, the claimant is permissible in the
circumstances nor an actual determination by the Corporation (including its
Board of Directors or any committee thereof, independent legal counsel, or
shareholders) that such indemnification or advancement is not permissible shall
be a defense to the action or create a presumption that such indemnification or
advancement is not permissible. In the event of the death of any Person having
a right of indemnification under the foregoing provisions, such right shall
inure to the benefit of his or her heirs,
3
<PAGE>
executors, administrators, and personal representatives. The rights conferred
above shall not be exclusive of any other right which any Person may have or
hereafter acquire under any statute, bylaw, resolution of shareholders or
directors, agreement, or otherwise.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
Without limiting the generality of the foregoing, to the extent permitted
by then applicable law, the grant of mandatory indemnification pursuant to this
Article THIRTEENTH shall extend to proceedings involving the negligence of such
Person.
As used herein, the term "proceeding" means any threatened, pending, or
----------
completed action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit, or proceeding.
FOURTEENTH: Personal Liability of Directors and Officers.
--------------------------------------------
(a) Directors. A director of the Corporation shall not be personally
---------
liable, as such, to the Corporation or its shareholders for monetary
damages (including, without limitation, any judgment, amount paid in
settlement, penalty, punitive damages or expense of any nature
(including, without limitation, attorneys' fees and disbursements))
for any action taken, or any failure to take any action, unless the
director has breached or failed to perform the duties of his or her
office under these Amended and Restated Articles of Incorporation, the
Amended and Restated Bylaws of the Corporation or applicable
provisions of law and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
(b) Officers. An officer of the Corporation shall not be personally
--------
liable, as such, to the Corporation or its shareholders for monetary
damages (including, without limitation, any judgment, amount paid in
settlement, penalty, punitive damages or expense of any nature
(including, without limitation, attorneys' fees and disbursements))
for any action taken, or any failure to take any action, unless the
officer has breached or failed to perform the duties of his or her
office under these Amended and Restated Articles of Incorporation, the
Amended and Restated Bylaws of the Corporation or applicable
provisions of law and the breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness.
FIFTEENTH: Powers of the Board of Directors. All of the power of the
--------------------------------
Corporation, insofar as it may be lawfully vested by these Amended and Restated
Articles of Incorporation in the Board of Directors, is hereby conferred upon
the Board of Directors of the Corporation.
SIXTEENTH: Special Meetings. Special meetings of the shareholders may
----------------
only be called by the Chairman or Chief Executive Officer of the Corporation or
by resolution of the Board of Directors.
4
<PAGE>
Exhibit 3.2
FORM OF AMENDED AND RESTATED BYLAWS
OF
VERTICALNET, INC.
ARTICLE I
Name and Seal
Section 1.01. Name. The name of the Corporation is VERTICALNET, INC.
Section 1.02. State of Incorporation. The Corporation is
incorporated under the laws of the Commonwealth of Pennsylvania.
Section 1.03. Seal. The corporate seal of the Corporation shall have
inscribed thereon the name of the Corporation, the year of its organization, the
words "Corporate Seal," and the name of the State of Incorporation. The seal
may be used by any person authorized by the Board of Directors of the
Corporation or by these Bylaws by causing the seal or a facsimile thereof to be
impressed or affixed, or in any manner reproduced.
ARTICLE II
Offices and Fiscal Year
Section 2.01. Registered Office. The registered office of the
Corporation in the Commonwealth of Pennsylvania shall be at 2 Walnut Grove
Drive, Suite 150, Horsham, Pennsylvania 19044 until otherwise established by an
amendment of the articles of incorporation (the "articles") or by the Board of
Directors of the Corporation (the "Board of Directors" or the "Board") and a
record of such change is filed with the Pennsylvania Department of State in the
manner provided by law.
Section 2.02. Other Offices. The Corporation may also have offices
at such other places within or without the Commonwealth of Pennsylvania as the
Board of Directors may from time to time appoint or the business of the
Corporation may require.
Section 2.03. Fiscal Year. The fiscal year of the Corporation shall
begin on the first day of January in each year.
ARTICLE III
Notice--Waivers--Meetings Generally
Section 3.01. Manner of Giving Notice.
(a) General Rule. Whenever written notice is required to be given to
any person under the provisions of the Business Corporation Law or by the
articles or these bylaws, it may be given to the person either personally or by
sending a copy thereof by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with answerback
received) or courier service, charges prepaid, or by facsimile transmission, to
the address (or to the telex, TWX, facsimile or telephone number) of the person
appearing on the books of the Corporation or, in the case of directors, supplied
by the director to the Corporation for the purpose of notice. If the notice is
sent by
<PAGE>
mail, telegraph or courier service, it shall be deemed to have been given to the
person entitled thereto when deposited in the United States mail or with a
telegraph office or courier service for delivery to that person or, in the case
of telex or TWX, when dispatched or, in the case of facsimile transmission, when
received. A notice of meeting shall specify the place, day and hour of the
meeting and any other information required by any other provision of the
Business Corporation Law, the articles or these bylaws.
(b) Bulk Mail. If the Corporation has more than 30 shareholders,
notice of any regular or special meeting of the shareholders, or any other
notice required by the Business Corporation Law or by the articles or these
bylaws to be given to all shareholders or to all holders of a class or series of
shares, may be given by any class of postpaid mail if the notice is deposited in
the United States mail at least 20 days prior to the day named for the meeting
or any corporate or shareholder action specified in the notice.
(c) Adjourned Shareholder Meetings. When a meeting of shareholders
is adjourned by the Chairman of the meeting or a vote of the shareholders, it
shall not be necessary to give any notice of the adjourned meeting or of the
business to be transacted at an adjourned meeting, other than by announcement at
the meeting at which the adjournment is taken, unless the Board fixes a new
record date for the adjourned meeting in which event notice shall be given in
accordance with Section 3.03.
Section 3.02. Notice of Meetings of Board of Directors. Notice of a
regular meeting of the Board of Directors need not be given, provided that the
dates for such meetings are fixed by the Board of Directors or the Chairman for
an ensuing period of at least twelve months, and such dates are set forth in the
minutes of the meeting at which such dates were fixed, which minutes were
distributed to each director. Notice of every special meeting of the Board of
Directors shall be given to each director by telephone or in writing at least 24
hours (in the case of notice by telephone, telex, TWX or facsimile transmission)
or 48 hours (in the case of notice by telegraph, courier service or express
mail) or five days (in the case of notice by first class mail) before the time
at which the meeting is to be held. Every such notice shall state the time and
place of the meeting. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Board need be specified in a notice of
the meeting.
Section 3.03. Notice of Meetings of Shareholders.
(a) General Rule. Except as otherwise provided in Section 3.01(b),
written notice of every meeting of the shareholders shall be given by, or at the
direction of, the Secretary or other authorized person to each shareholder of
record entitled to vote at the meeting at least (10) ten days prior to the day
named for a meeting (and, in case of a meeting called to consider a merger,
consolidation, share exchange or division, to each shareholder of record not
entitled to vote at the meeting) called to consider a fundamental change under
15 Pa.C.S. Chapter 19 or (2) five days prior to the day named for the meeting in
any other case. If the Secretary neglects or refuses to give notice of a
meeting, the person or persons calling the meeting may do so. In the case of a
special meeting of shareholders, the notice shall specify the general nature of
the business to be transacted.
(b) Notice of Action by Shareholders on Bylaws. In the case of a
meeting of share holders that has as one of its purposes action on the bylaws,
written notice shall be given to each shareholder that the purpose, or one of
the purposes, of the meeting is to consider the adoption,
2
<PAGE>
amendment or repeal of the bylaws. There shall be included in, or enclosed with,
the notice a copy of the proposed amendment or a summary of the changes to be
effected thereby.
(c) Notice of Action by Shareholders on Fundamental Change. In the
case of a meeting of the shareholders that has as one of its purposes action
with respect to any fundamental change under 15 Pa.C.S. Chapter 19, each
shareholder shall be given, together with written notice of the meeting, a copy
or summary of the amendment or plan to be considered at the meeting in
compliance with the provisions of Chapter 19.
(d) Notice of Action by Shareholders Giving Rise to Dissenters
Rights. In the case of a meeting of the shareholders that has as one of its
purposes action that would give rise to dissenters rights under the provisions
of 15 Pa.C.S. Subchapter 15D, each shareholder shall be given, together with
written notice of the meeting:
(1) statement that the shareholders have a right to dissent and
obtain payment of the fair value of their shares by complying with the
provisions of Subchapter 15D (relating to dissenters rights); and
(2) copy of Subchapter 15D.
Section 3.04. Waiver of Notice.
(a) Written Waiver. Whenever any written notice is required to be
given under the provisions of the Business Corporation Law, the articles or
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of the notice. Neither the business to be
transacted at, nor the purpose of, a meeting need be specified in the waiver of
notice of the meeting.
(b) Waiver by Attendance. Attendance of a person at any meeting
shall constitute a waiver of notice of the meeting except where a person attends
a meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting was not lawfully called
or convened.
Section 3.05. Modification of Proposal Contained in Notice. Whenever
the language of a proposed resolution is included in a written notice of a
meeting required to be given under the provisions of the Business Corporation
Law or the articles or these bylaws, the meeting considering the resolution may
without further notice adopt it with such clarifying or other amendments as do
not materially enlarge its original purpose.
Section 3.06. Exception to Requirement of Notice.
(a) General Rule. Whenever any notice or communication is required
to be given to any person under the provisions of the Business Corporation Law
or by the articles or these bylaws or by the terms of any agreement or other
instrument or as a condition precedent to taking any corporate action and
communication with that person is then unlawful, the giving of the notice or
communication to that person shall not be required.
3
<PAGE>
(b) Shareholders Without Forwarding Addresses. Notice or other
communications need not be sent to any shareholder with whom the Corporation has
been unable to communicate for more than 24 consecutive months because
communications to the shareholder are returned unclaimed or the shareholder has
otherwise failed to provide the Corporation with a current address. Whenever
the shareholder provides the Corporation with a current address, the Corporation
shall commence sending notices and other communications to the shareholder in
the same manner as to other shareholders.
Section 3.07. Use of Conference Telephone and Similar Equipment. Any
director may participate in any meeting of the Board of Directors, and the Board
of Directors may provide by resolution with respect to a specific meeting or
with respect to a class of meetings that one or more persons may participate in
a meeting of the shareholders of the Corporation, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in person at the meeting.
ARTICLE IV
Shareholders
Section 4.01. Place of Meeting. All meetings of the shareholders of
the Corporation shall be held at such place, within or without the Commonwealth
of Pennsylvania, as shall be determined by the Board of Directors from time to
time.
Section 4.02. Annual Meeting. The Board of Directors may fix and
designate the date and time of the annual meeting of the shareholders, but if no
such date and time is fixed and designated by the Board, the meeting for any
calendar year shall be called for and held on the third Tuesday in May in such
year, if not a legal holiday under the laws of Pennsylvania, and, if a legal
holiday, then on the next succeeding business day, not a Saturday, at 10 o'clock
A.M. and at said meeting the shareholders then entitled to vote shall elect
directors and shall transact such other business as may properly be brought
before the meeting. If the annual meeting shall not have been called and held
within six months after the designated time, any shareholder may call the
meeting at any time thereafter.
Section 4.03. Special Meetings. Special meetings of the shareholders
may only be called by the Chairman or CEO, or by resolution of the Board of
Directors, which may fix the date, time and place of the meeting. If the Board
does not fix the date, time or place of the meeting, it shall be the duty of the
Secretary to do so. A date fixed by the Secretary shall not be more than 60
days after the date of the adoption of the resolution of the Board calling the
special meeting.
Section 4.04. Quorum and Adjournment.
(a) General Rule. A meeting of shareholders of the Corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the Corporation owned,
directly or indirectly, by the Corporation which are controlled, directly or
indirectly, by the Board of Directors shall not be counted in determining the
total number of outstanding shares for quorum purposes at any given time.
4
<PAGE>
(b) Withdrawal of a Quorum. The shareholders present at a duly
organized meeting can continue to do business until conclusion of the meeting,
including any adjournment thereof, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
(c) Adjournments Generally. Any regular or special meeting of the
shareholders, including one at which directors are to be elected and one which
cannot be organized because a quorum has not attended, may be adjourned for such
period and to such place (i) as the shareholders present and entitled to vote
shall direct, or (ii) if no shareholder vote is taken, as the Chairman of the
meeting shall direct.
(d) Electing Directors at Adjourned Meeting. Those shareholders
entitled to vote who attend a meeting called for the election of directors that
has been previously adjourned for lack of a quorum, although less than a quorum
as fixed in this section, shall nevertheless constitute a quorum for the purpose
of electing directors.
(e) Other Action in Absence of Quorum. Those shareholders entitled
to vote who attend a meeting of shareholders that has been previously adjourned
for one or more periods aggregating at least 15 days because of an absence of a
quorum, although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if such notice states that in the event a quorum is not
present on the date set forth in such notice and the meeting is adjourned to a
later date at least 15 days after the initial date then those shareholders who
attend the adjourned meeting shall nevertheless constitute a quorum for the
purpose of acting upon the matter.
Section 4.05. Action by Shareholders. Except as otherwise provided
in the Business Corporation Law or the articles or these bylaws, whenever any
corporate action is to be taken by vote of the shareholders of the Corporation,
it shall be authorized upon receiving the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote thereon at a meeting duly called
and organized and, if any shareholders are entitled to vote thereon as a class,
upon receiving the affirmative vote of a majority of the votes cast by the
shareholders entitled to vote as a class.
Section 4.06. Organization. At every meeting of the shareholders,
the Chairman of the Board, if there be one, or, in the case of vacancy in office
or absence of the Chairman of the Board, one of the following persons present in
the order stated: the Vice Chairman of the Board, the CEO, the President, the
COO, the CFO, the Executive Vice President or a person chosen by vote of the
shareholders present, shall act as Chairman of the meeting. The Secretary or,
in the absence of the Secretary, an assistant Secretary, or, in the absence of
both the Secretary and assistant secretaries, a person appointed by the Chairman
of the meeting, shall act as Secretary of the meeting.
Section 4.07. Voting Rights of Shareholders. Except as otherwise
provided in the articles, every shareholder of the Corporation shall be entitled
to one vote for each full share having voting power standing in the name of the
shareholder on the books of the Corporation.
Section 4.08. Voting and Other Action by Proxy.
(a) General Rule.
5
<PAGE>
(1) every shareholder entitled to vote at a meeting of
shareholders may authorize another person to act for the shareholder
by proxy.
(2) The presence of, or vote or other action at a meeting of
shareholders by a proxy of a shareholder shall constitute the presence
of, or vote or action by the shareholder.
(3) Where two or more proxies of a shareholder are present, the
Corporation shall, unless otherwise expressly provided in the proxy,
accept as the vote of all shares represented thereby the vote cast by
a majority of them and, if a majority of the proxies cannot agree
whether the shares represented shall be voted or upon the manner of
voting the shares, the voting of the shares shall be divided equally
among those persons.
(b) Execution and Filing. Every proxy shall be executed in writing
by the shareholder or by the duly authorized attorney-in-fact of the shareholder
and filed with the Secretary of the Corporation. A telegram, telex, cablegram,
datagram or similar transmission from a shareholder or attorney-in-fact, or a
photographic, facsimile or similar reproduction of a writing executed by a
shareholder or attorney-in-fact:
(1) may be treated as properly executed for purposes of this
subsection; and
(2) shall be so treated if it sets forth a confidential and
unique identification number or other mark furnished by the
Corporation to the shareholder for the purposes of a particular
meeting or transaction.
(c) Revocation. A proxy, unless coupled with an interest, shall be
revocable at will, notwithstanding any other agreement or any provision in the
proxy to the contrary, but the revocation of a proxy shall not be effective
until written notice thereof has been given to the Secretary of the Corporation.
An unrevoked proxy shall not be valid after three years from the date of its
execution unless a longer time is expressly provided therein. A proxy shall not
be revoked by the death or incapacity of the maker unless, before the vote is
counted or the authority is exercised, written notice of the death or incapacity
is given to the Secretary of the Corporation.
(d) Expenses. The Corporation shall pay the reasonable expenses of
solicitation of votes, proxies or consents of shareholders by or on behalf of
the Board of Directors or its nominees for election to the Board, including
solicitation by professional proxy solicitors and otherwise.
Section 4.09. Voting by Fiduciaries and Pledgees. Shares of the
Corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
Section 4.10. Voting by Joint Holders of Shares.
6
<PAGE>
(a) General Rule. Where shares of the Corporation are held jointly
or as tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person or
by proxy, all of the shares standing in the names of such persons
shall be deemed to be represented for the purpose of determining a
quorum and the Corporation shall accept as the vote of all the shares
the vote cast by a joint owner or a majority of them; and
(2) if the persons are equally divided upon whether the shares
held by them shall be voted or upon the manner of voting the shares,
the voting of the shares shall be divided equally among the persons
without prejudice to the rights of the joint owners or the beneficial
owners thereof among themselves.
(b) Exception. If there has been filed with the Secretary of the
Corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
Section 4.11. Voting by Corporate Shareholders. Any corporation that
is a shareholder of this Corporation may vote at meetings of shareholders of
this Corporation by any of its officers or agents, or by proxy appointed by any
officer or agent, unless some other person, by resolution of the board of
directors of the other corporation or a provision of its articles or bylaws, a
copy of which resolution or provision certified to be correct by one of its
officers has been filed with the Secretary of this Corporation, is appointed its
general or special proxy in which case that person shall be entitled to vote the
shares.
Section 4.12. Determination of Shareholders of Record.
(a) Fixing Record Date. The Board of Directors may fix a time prior
to the date of any meeting of shareholders as a record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of shareholders. Only
shareholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Corporation after any record date
fixed as provided in this subsection. The Board of Directors may similarly fix
a record date for the determination of shareholders of record for any other
purpose. When a determination of shareholders of record has been made as
provided in this section for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the Board fixes a new record date for
the adjourned meeting.
(b) Determination When a Record Date is Not Fixed. If a record date
is not fixed:
(1) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the
close of business on the day that is ten days prior to the day on
which notice is given.
7
<PAGE>
(2) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(c) Certification by Nominee. The Board of Directors may adopt a
procedure whereby a shareholder of the Corporation may certify in writing to the
Corporation that all or a portion of the shares registered in the name of the
shareholder are held for the account of a specified person or persons. Upon
receipt by the Corporation of a certification complying with the procedure, the
persons specified in the certification shall be deemed, for the purposes set
forth in the certification, to be the holders of record of the number of shares
specified in place of the shareholder making the certification.
Section 4.13. Voting Lists.
(a) General Rule. The officer or agent having charge of the transfer
books for shares of the Corporation shall make a complete list of the
shareholders entitled to vote at any meeting of shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting for the purposes thereof except that, if the Corporation has
1,000 or more shareholders, in lieu of the making of the list the Corporation
may make the information therein available at the meeting by any other means.
(b) Effect of List. Failure to comply with the requirements of this
section shall not affect the validity of any action taken at a meeting prior to
a demand at the meeting by any shareholder entitled to vote thereat to examine
the list. The original share register or transfer book, or a duplicate thereof
kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to
who are the shareholders entitled to examine the list or share register or
transfer book or to vote at any meeting of shareholders.
Section 4.14. Judges of Election.
(a) Appointment. In advance of any meeting of shareholders of the
Corporation, the Board of Directors may appoint judges of election, who need not
be shareholders, to act at the meeting or any adjournment thereof. If judges of
election are not so appointed, the presiding officer of the meeting may, and on
the request of any shareholder shall, appoint judges of election at the meeting.
The number of judges shall be one or three. A person who is a candidate for an
office to be filled at the meeting shall not act as a judge.
(b) Vacancies. In case any person appointed as a judge fails to
appear or fails or refuses to act, the vacancy may be filled by appointment made
by the Board of Directors in advance of the convening of the meeting or at the
meeting by the presiding officer thereof.
(c) Duties. The judges of election shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity and effect of
proxies, receive votes or ballots, hear and determine all challenges and
questions in any way arising in connection with nominations by shareholders or
the right to vote, count and tabulate all votes, determine the result and do
such acts as may be proper to conduct the election or vote with fairness to all
shareholders. The judges of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three judges of
8
<PAGE>
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all.
(d) Report. On request of the presiding officer of the meeting or of
any shareholder, the judges shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
Section 4.15. Minors as Security Holders. The Corporation may treat
a minor who holds shares or obligations of the Corporation as having capacity to
receive and to empower others to receive dividends, interest, principal and
other payments or distributions, to vote or express consent or dissent and to
make elections and exercise rights relating to such shares or obligations
unless, in the case of payments or distributions on shares, the corporate
officer responsible for maintaining the list of shareholders or the transfer
agent of the Corporation or, in the case of payments or distributions on
obligations, the Treasurer or paying officer or agent has received written
notice that the holder is a minor.
Section 4.16. Advance Notice of Nomination of Directors.
(a) Nominations for election of directors may be made by any
shareholder entitled to vote for the election of directors only if written
notice (the "Notice") of such shareholder's intent to nominate a director at the
meeting is given by the shareholder and received by the Secretary of the
Corporation in the manner and within the time specified herein. The Notice
shall be delivered to the Secretary of the Corporation not less than (i) for an
election of directors to be held at an annual meeting of shareholders, sixty
(60) days prior to the anniversary date of the immediately preceding annual
meeting of shareholders, and (ii) for an election of directors to be held at a
special meeting of shareholders, not later than the close of business on the
seventh (7th) day following the day on which notice of the meeting was first
mailed to shareholders or public disclosure of the special meeting is made. In
lieu of delivery to the Secretary of the Corporation, the Notice may be mailed
to the Secretary of the Corporation by certified mail, return receipt requested,
but shall be deemed to have been given only upon actual receipt by the Secretary
of the Corporation.
(b) The Notice shall be in writing and shall contain or be
accompanied by;
(1) the name and residence of such shareholder;
(2) a representation that the shareholder is a holder of the
Corporation's voting stock and intends to appear in person or by proxy
at the meeting to nominate the person or persons specified in the
Notice;
(3) such information regarding each nominee as would have been
required to be included in a proxy statement filed pursuant to
Regulation 14A of the rules and regulations established by the
Securities and Exchange Commission under the Securities Exchange Act
of 1934 (or pursuant to any successor act or regulation) had proxies
been solicited with respect to such nominee by the management or Board
of Directors of the Corporation;
(4) a description of all arrangements or understandings among the
shareholder and each nominee and any other person or persons (naming
such person or
9
<PAGE>
persons) pursuant to which such nomination or nominations are to be
made by the shareholder; and
(5) the consent of each nominee to serve as director of the
Corporation if so elected.
(c) The Chairman of the meeting may, in good faith, determine and
declare to the meeting that any nomination made at the meeting was not made in
accordance with the foregoing procedures and, in such event, the nomination
shall be disregarded.
ARTICLE V
Board of Directors
Section 5.01. Powers; Personal Liability.
(a) General Rule. Unless otherwise provided by statute, all powers
vested by law in the Corporation shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed under the
direction of, the Board of Directors.
(b) Personal Liability of Directors.
(1) A director shall not be personally liable to the Corporation
or any of its shareholders, as such, for monetary damages (including,
without limitation, any judgment, amount paid in settlement, penalty,
punitive damages or expense of any nature (including, without
limitation, attorneys' fees and disbursements)) for any action taken,
or any failure to take any action, unless:
(i) the director has breached or failed to perform the
duties of his or her office under Subchapter 17B of the
Business Corporation Law or any successor provision; and
(ii) the breach or failure to perform constitutes self-
dealing, willful misconduct or recklessness.
(2) The provisions of paragraph (1) shall not apply to the
responsibility or liability of a director pursuant to any criminal
statute, or the liability of a director for the payment of taxes
pursuant to local, State or Federal law.
(c) Notation of Dissent. A director of the Corporation who is
present at a meeting of the Board of Directors, or of a committee of the Board,
at which action on any corporate matter is taken on which the director is
generally competent to act, shall be presumed to have assented to the action
taken unless his or her dissent is entered in the minutes of the meeting or
unless the director files his or her written dissent to the action with the
Secretary of the meeting before the adjournment thereof or transmits the dissent
in writing to the Secretary of the Corporation immediately after the adjournment
of the meeting. The right to dissent shall not apply to a director who voted in
favor of the action. Nothing in this section shall bar a director from asserting
that minutes of the meeting incorrectly omitted his or her dissent if, promptly
upon receipt of a copy of such minutes, the director notifies the Secretary, in
writing, of the asserted omission or inaccuracy.
10
<PAGE>
Section 5.02. Qualifications and Selection of Directors.
(a) Qualifications. Each director of the Corporation shall be a
natural person of full age who need not be a resident of the Commonwealth of
Pennsylvania or a shareholder of the Corporation.
(b) Election of Directors. In elections for directors, voting need
not be by ballot, unless required by vote of the shareholders before the voting
for the election of directors begins. The candidates receiving the highest
number of votes from each class or group of classes, if any, entitled to elect
directors separately up to the number of directors to be elected by the class or
group of classes shall be elected. If at any meeting of shareholders, directors
of more than one class are to be elected, each class of directors shall be
elected in a separate election.
Section 5.03. Number and Term of Office.
(a) Number. The Board of Directors shall consist of not less than
five (5) Directors nor more than eleven (11) directors, including such number of
directors as may be elected from time to time by the holders of any class or
series of Preferred Stock entitled to elect directors ("Preferred Stock
Directors"), such number to be determined from time to time by resolution of the
Board of Directors.
(b) Term of Office. Each director shall hold office until the
expiration of the term for which he or she was selected and each director shall
hold office for such term as shall be established by the Board of Directors
provided that no term shall exceed a period of more than three years and until a
successor has been selected and qualified or until his or her earlier death,
resignation or removal. A decrease in the number of directors shall not have
the effect of shortening the term of any incumbent director.
(c) Resignation. Any director may resign at any time upon written
notice to the Corporation. The resignation shall be effective upon receipt
thereof by the Corporation or at such sub sequent time as shall be specified in
the notice of resignation.
(d) Classified Board of Directors. The directors shall be divided
into three classes, Class I, Class II and Class III with respect to their terms
of office. All classes shall be as nearly equal in number as reasonably
possible. Subject to such limitations, when the number of Directors is changed,
any newly-created directorship or any decrease in directorships shall be
apportioned among the classes by action of the Board of Directors. The terms of
office of the Directors shall be as follows:
(1) Class I shall expire at the annual meeting of shareholders to
be held in 2000;
(2) Class II shall expire at the annual meeting of shareholders
to be held in 2001; and
(3) Class III shall expire at the annual meeting of shareholders
to be held in 2002;
11
<PAGE>
At each annual meeting of shareholders, commencing with the annual meeting to be
held in 2000, the successors of the class of Directors whose term expires at
such meeting shall be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year of their elections.
Section 5.04. Vacancies.
(a) General Rule. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of directors, may be filled
by a majority vote of the remaining members of the Board though less than a
quorum, or by a sole remaining director, and each person so selected shall be a
director to serve until the next selection of the class for which such director
has been chosen, and until a successor has been selected and qualified or until
his or her earlier death, resignation or removal.
(b) Action by Resigned Directors. When one or more directors resign
from the Board effective at a future date, the directors then in office,
including those who have so
resigned, shall have power by the applicable vote to fill the vacancies, the
vote thereon to take effect when the resignations become effective.
Section 5.05. Removal of Directors.
(a) Removal by the Shareholders. The entire Board of Directors, or
any class of the Board, or any individual director may be removed from office
only for cause by vote of a majority of the shareholders entitled to vote
thereon. In case the Board, or a class of the Board or any one or more
directors are so removed, new directors may be elected at the same meeting. The
repeal of a provision of the articles or bylaws prohibiting, or the addition of
a provision to the articles or bylaws permitting, the removal by the
shareholders of the Board, a class of the Board or any individual director
without assigning any cause shall not apply to any incumbent director during the
balance of the term for which the director was selected.
(b) Removal by the Board. The Board of Directors may declare vacant
the office of a director who has been judicially declared of unsound mind or who
has been convicted of an offense punishable by imprisonment for a term of more
than one year or if, within 60 days after notice of his or her selection, the
director does not accept the office either in writing or by attending a meeting
of the Board of Directors.
Section 5.06. Place of Meetings. Meetings of the Board of Directors
may be held at such place within or without the Commonwealth of Pennsylvania as
the Board of Directors may from time to time appoint or as may be designated in
the notice of the meeting.
Section 5.07. Organization of Meetings. At every meeting of the
Board of Directors, the Chairman of the Board, if there be one, or, in the case
of a vacancy in the office or absence of the Chairman of the Board, one of the
following officers present in the order stated: the Vice Chairman of the Board,
the CEO, the President, the COO, the CFO, or a person chosen by a majority of
the directors present, shall act as Chairman of the meeting. The Secretary or,
in the absence of the Secretary, an assistant Secretary, or, in the absence of
the Secretary and the assistant secretaries, any person appointed by the
Chairman of the meeting, shall act as Secretary of the meeting.
12
<PAGE>
Section 5.08. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such time and place as shall be designated from time
to time by resolution of the Board of Directors, or as called by the Chairman or
the Chief Executive Officer.
Section 5.09. Special Meetings. Special meetings of the Board of
Directors shall be held whenever called by the Chairman, the Chief Executive
Officer or by two or more of the directors.
Section 5.10. Quorum of and Action by Directors.
(a) General Rule. A majority of the directors in office of the
Corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the Board of
Directors.
(b) Action by Written Consent or Ratification. Any action required
or permitted to be taken at a meeting of the directors may be taken without a
meeting if, prior or subsequent to the action, a consent or consents thereto by
all of the directors in office is filed with the Secretary of the Corporation or
the action is ratified by the directors at the next regular or special meeting
thereof.
Section 5.11. Executive and Other Committees.
(a) Establishment and Powers. The Board of Directors may, by
resolution adopted by a majority of the directors in office, establish one or
more committees to consist of one or more directors of the Corporation. Any
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all of the powers and authority of the Board of
Directors except that a committee shall not have any power or authority as to
the following:
(1) The submission to shareholders of any action requiring
approval of shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the Board of
Directors.
(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the Board.
(5) Action on matters committed by a resolution of the Board of
Directors to another committee of the Board.
(b) Alternate Committee Members. The Board may designate one or more
directors as alternate members of any committee who may replace any absent or
disqualified member at any meeting of the committee or for the purposes of any
written action by the committee. In the absence or disqualification of a member
and alternate member or members of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not
constituting a quorum, may unanimously appoint another director to act at the
meeting in the place of the absent or disqualified member.
(c) Term. Each committee of the Board shall serve at the pleasure of
the Board.
13
<PAGE>
(d) Committee Procedures. Any provision of these bylaws relating to
the organization or procedures of or the manner of taking action by the Board of
Directors, shall be construed to apply and refer to the organization and
procedures of any executive or other committee of the Board.
Section 5.12. Compensation. The Board of Directors shall have the
authority to fix the compensation of directors for their services as directors
and a director may be a salaried officer of the Corporation.
ARTICLE VI
Officers
Section 6.01. Officers Generally.
(a) Number, Qualifications and Designation. The officers of the
Corporation shall be a Chief Executive Officer ("CEO"), a President, one or more
Senior Vice Presidents, a Chief Operating Officer ("COO"), a Chief Financial
Officer ("CFO"), a Secretary, a Treasurer, and such other officers as may be
elected in accordance with the provisions of Section 6.03. Officers may but
need not be directors or shareholders of the Corporation. All of the officers
shall be natural persons of full age, except that the Treasurer may be a
Corporation. The Board of Directors may elect from among the members of the
Board a Chairman of the Board and a Vice Chairman of the Board who may both be,
but need not be, officers of the Corporation. Any number of offices may be held
by the same person.
(b) Bonding. The Corporation may secure the fidelity of any or all
of its officers by bond or otherwise.
(c) Standard of Care. In lieu of the standards of conduct otherwise
provided by law, officers of the Corporation shall be subject to the same
standards of conduct, including standards of care and loyalty and rights of
justifiable reliance, as shall at the time be applicable to directors of the
Corporation. An officer of the Corporation shall not be personally liable, as
such, to the Corporation or its shareholders for monetary damages (including,
without limitation, any judgment, amount paid in settlement, penalty, punitive
damages or expense of any nature (including, without limitation, attorneys' fees
and disbursements)) for any action taken, or any failure to take any action,
unless the officer has breached or failed to perform the duties of his or her
office under the articles, these bylaws, or the applicable provisions of law and
the breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. The provisions of this subsection shall not apply to the
responsibility or liability of an officer pursuant to any criminal statute or
for the payment of taxes pursuant to local, state or federal law.
Section 6.02. Election, Term of Office and Resignations.
(a) Election and Term of Office. The officers of the Corporation,
except those appointed by delegated authority pursuant to Section 6.03, shall be
elected annually by the Board of Directors, and each such officer shall hold
office such term as may be provided by the Board and until a successor has been
elected and qualified or until his or her earlier death, resignation or removal.
14
<PAGE>
(b) Resignations. Any officer may resign at any time upon written
notice to the Corporation. The resignation shall be effective upon receipt
thereof by the Corporation or at such subsequent time as may be specified in the
notice of resignation.
Section 6.03. Subordinate Officers, Committees and Agents. The Board
of Directors may from time to time appoint such other officers and such
committees, employees or other agents as the business of the Corporation may
require, including one or more assistant secretaries, and one or more assistant
Treasurers, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws, or as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any officer or committee the power to appoint subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
Section 6.04. Removal of Officers and Agents. Any officer or agent
of the Corporation may be removed by the Board of Directors or by the CEO with
or without cause. The removal shall be without prejudice to the contract rights,
if any, of any person so removed. Election or appointment of an officer or
agent shall not of itself create contract rights.
Section 6.05. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, may be filled by the
Board of Directors or by the CEO or by the officer or committee to which the
power to fill such office has been delegated pursuant to Section 6.03, as the
case may be, and if the office is one for which these bylaws prescribe a term,
shall be filled for the unexpired portion of the term.
Section 6.06. Authority. All officers of the Corporation, as between
themselves and the Corporation, shall have such authority and perform such
duties in the management of the Corporation as may be provided by or pursuant to
resolutions or orders of the Board of Directors or, in the absence of
controlling provisions in the resolutions or orders of the Board of Directors,
as may be determined by or pursuant to these bylaws or in the absence of any
such controlling authority then as provided by the CEO.
Section 6.07. The Chairman and Vice Chairman of the Board. The
Chairman of the Board or in the absence of the Chairman, the Vice Chairman of
the Board, shall preside at all meetings of the shareholders and of the Board of
Directors, and shall perform such other duties as may from time to time be
requested by the Board of Directors.
Section 6.08. CEO. The CEO shall be the chief executive officer of
the Corporation. The CEO shall have general supervision over the business,
finances, operations and welfare of the Corporation, subject however, to the
control of the Board of Directors. The CEO shall sign, execute, and
acknowledge, in the name of the Corporation, deeds, mortgages, bonds, contracts
or other instruments, authorized by the Board of Directors, except in cases
where the signing and execution thereof shall be expressly delegated by the
Board of Directors, or by these bylaws or by the CEO, to some other officer or
agent of the Corporation; and, in general, shall have all powers and perform all
duties incident to the position of a chief executive officer and such other
powers and duties as from time to time may be assigned by the Board of
Directors. The CEO shall from time to time make such reports of the affairs of
the Corporation as the Board may require and shall present to the annual meeting
of the shareholders a report of the business of the Corporation for the
preceding fiscal year.
15
<PAGE>
Section 6.09. The President. The President shall perform the duties
of the CEO in the absence of the CEO and such other duties as may from time to
time be assigned to the President by the CEO.
Section 6.10. The Senior Vice Presidents. The Senior Vice Presidents
shall perform such duties as may from time to time be assigned to them by the
Board of Directors, the CEO or the President.
Section 6.11. The Secretary. The Secretary or an assistant Secretary
shall attend all meetings of the shareholders and of the Board of Directors and
all committees thereof and shall record all the votes of the shareholders and of
the directors and the minutes of the meetings of the shareholders and of the
Board of Directors and of committees of the Board in a book or books to be kept
for that purpose; shall see that notices are given and records and reports
properly kept and filed by the Corporation as required by law; shall be the
custodian of the seal of the Corporation and see that it is affixed to all
documents to be executed on behalf of the Corporation under its seal; and, in
general, shall perform all duties incident to the office of Secretary, and such
other duties as may from time to time be assigned by the Board of Directors or
the CEO.
Section 6.12. The COO. The COO shall be the chief operating officer
of the Corporation and shall have general management and supervision of the
operations of the Corporation under the direction and supervision of the CEO;
and, in general, shall discharge such other duties as may from time to time be
assigned by the Board of Directors or the CEO.
Section 6.13. The CFO. The CFO shall be the chief financial officer
of the Corporation and shall have general management and supervision of the
fiscal affairs of the Corporation under the direction and supervision of the
CEO. The CFO shall see that a full and accurate accounting of all financial
transactions is made; shall oversee the investment and reinvestment of the
capital funds of the Corporation; shall oversee the preparation of any financial
reports of the Corporation; shall cooperate in the conduct of the annual audit
of the Corporation's financial records by the Corporation's certified public
accountants; and, in general, shall discharge such other duties as may from time
to time be assigned by the Board of Directors or the CEO.
Section 6.14. The Treasurer. The Treasurer shall perform the duties
of the CFO in the absence of the CFO and shall have or provide for the custody
of the funds or other property of the Corporation; shall collect and receive or
provide for the collection and receipt of moneys earned by or in any manner due
to or received by the Corporation; shall deposit all funds in his or her custody
as Treasurer in such banks or other places of deposit as the Board of Directors
may from time to time designate; shall, whenever so required by the Board of
Directors, render an account showing all transactions as Treasurer, and the
financial condition of the Corporation; and, in general, shall discharge such
other duties as may from time to time be assigned by the Board of Directors, the
CEO, or the CFO.
Section 6.15. Salaries. The salaries of the officers elected by the
Board of Directors shall be fixed from time to time by the Board of Directors or
by such committee or officer as may be designated by resolution of the Board, or
in the absence of such designation by the CEO. The salaries or other
compensation of any other officers, employees and other agents shall be fixed
from time to time by the Board, or by the officer or committee to which the
power to appoint such officers or to retain or appoint such employees or other
agents has been delegated pursuant to Section 6.03, or in the absence of such
designation by the CEO or other officer designated by the CEO. No officer shall
be prevented from
16
<PAGE>
receiving such salary or other compensation by reason of the fact that the
officer is also a director of the Corporation.
ARTICLE VII
Certificates of Stock, Transfer, Etc.
Section 7.01. Share Certificates.
(a) Form of Certificates. Certificates for shares of the Corporation
shall be in such form as approved by the Board of Directors, and shall state
that the Corporation is incorporated under the laws of the Commonwealth of
Pennsylvania, the name of the person to whom issued, and the number and class of
shares and the designation of the series (if any) that the certificate
represents. If the Corporation is authorized to issue shares of more than one
class or series, certificates for shares of the Corporation shall set forth upon
the face or back of the certificate (or shall state on the face or back of the
certificate that the Corporation will furnish to any shareholder upon request
and without charge), a full or summary statement of the designations, voting
rights, preferences, limitations and special rights of the shares of each class
or series authorized to be issued so far as they have been fixed and determined
and the authority of the Board of Directors to fix and determine the
designations, voting rights, preferences, limitations and special rights of the
classes and series of shares of the Corporation.
(b) Share Register. The share register or transfer books and blank
share certificates shall be kept by the Secretary or by any transfer agent or
registrar designated by the Board of Directors for that purpose.
Section 7.02. Issuance. The share certificates of the Corporation
shall be numbered and registered in the share register or transfer books of the
Corporation as they are issued. They shall be executed in such manner as the
Board of Directors shall determine. In case any officer, transfer agent or
registrar who has signed or authenticated, or whose facsimile signature or
authentication has been placed upon, any share certificate shall have ceased to
be such officer, transfer agent or registrar because of death, resignation or
otherwise, before the certificate is issued, the certificate may be issued with
the same effect as if the officer, transfer agent or registrar had not ceased to
be such at the date of its issue. The provisions of this Section 7.02 shall be
subject to any inconsistent or contrary agreement in effect at the time between
the Corporation and any transfer agent or registrar.
Section 7.03. Transfer. Transfers of shares shall be made on the
share register or transfer books of the Corporation upon surrender of the
certificate therefor, endorsed by the person named in the certificate or by an
attorney lawfully constituted in writing. No transfer shall be made
inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.C.S.
(S)(S) 8101 et seq., and its amendments and supplements.
Section 7.04. Record Holder of Shares. The Corporation shall be
entitled to treat the person in whose name any share or shares of the
Corporation stand on the books of the Corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person except that the
Corporation may in its discretion recognize certain beneficial owners or
shareholders in accordance with the procedures set forth in Section 4.12(c).
17
<PAGE>
Section 7.05. Lost, Destroyed or Mutilated Certificates. The holder
of any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor, and the Board of
Directors may, in its discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the certificate, upon the
surrender of the mutilated certificate or, in case of loss or destruction of the
certificate, upon satisfactory proof of such loss or destruction and, if the
Board of Directors shall so determine, the deposit of a bond in such form and in
such sum, and with such surety or sureties, as it may direct.
Section 7.06. Agreements Restricting Transfer of Shares. The Board
of Directors may authorize the Corporation to become party to agreements with
shareholders and others relating to transfer, repurchase and issuance of shares
of stock of the Corporation; provided, however, that such agreements must be
filed with the Corporation and all share certificates affected thereby shall
have clearly imprinted thereon a legend containing such agreement or referring
thereto.
ARTICLE VIII
Indemnification of Directors, Officers and
Other Authorized Representatives
Section 8.01. Scope of Indemnification.
(a) General Rule. The Corporation shall indemnify an indemnified
representative against any liability incurred in connection with any proceeding
in which the indemnified representative may be involved as a party or otherwise
by reason of the fact that such person is or was serving in an indemnified
capacity, including, without limitation, liabilities resulting from any actual
or alleged breach or neglect of duty, error, misstatement or misleading
statement, negligence, gross negligence or act giving rise to strict or products
liability, except:
(1) where such indemnification is expressly prohibited by
applicable law;
(2) where the conduct of the indemnified representative has been
finally determined pursuant to Section 8.06 or otherwise:
(i) to constitute willful misconduct or recklessness
within the meaning of 15 Pa.C.S. (S) 1746(b) or any
superseding provision of law sufficient in the circumstances
to bar indemnification against liabilities arising from the
conduct; or
(ii) to be based upon or attributable to the receipt by
the indemnified representative from the Corporation of a
personal benefit to which the indemnified representative is
not legally entitled; or
(3) to the extent such indemnification has been finally
determined in a final adjudication pursuant to Section 8.06 to be
otherwise unlawful.
(b) Partial Payment. If an indemnified representative is entitled to
indemnification in respect of a portion, but not all, of any liabilities to
which such person may be subject, the Corporation shall indemnify such
indemnified representative to the maximum extent for such portion of the
liabilities.
18
<PAGE>
(c) Presumption. The termination of a proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that the indemnified representative is
not entitled to indemnification.
(d) Definitions. For purposes of this Article:
(1) "indemnified capacity" means any and all past, present and
future service by an indemnified representative in one or more
capacities as a director, officer, employee or agent of the
Corporation, or, at the request of the Corporation, as a director,
officer, employee, agent, fiduciary or trustee of another Corporation,
partnership, joint venture, trust, employee benefit plan or other
entity or enterprise;
(2) "indemnified representative" means any and all directors and
officers of the Corporation and any other person designated as an
indemnified representative by the Board of Directors of the
Corporation (which may, but need not, include any person serving at
the request of the Corporation, as a director, officer, employee,
agent, fiduciary or trustee of another Corporation, partnership, joint
venture, trust, employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgment, amount paid in
settlement, fine, penalty, punitive damages, excise tax assessed with
respect to an employee benefit plan, or cost or expense of any nature
(including, without limitation, attorneys' fees and disbursements);
and
(4) "proceeding" means any threatened, pending or completed
action, suit, appeal or other proceeding of any nature, whether civil,
criminal, administrative or investigative, whether formal or informal,
and whether brought by or in the right of the Corporation, a class of
its security holders or otherwise.
Section 8.02. Proceedings Initiated by Indemnified Representatives.
Notwithstanding any other provision of this Article, the Corporation shall not
indemnify under this Article an indemnified representative for any liability
incurred in a proceeding initiated (which shall not be deemed to include counter
claims or affirmative defenses) or participated in as an intervenor or amicus
curiae by the person seeking indemnification unless such initiation of or
participation in the proceeding is authorized, either before or after its
commencement, by the affirmative vote of a majority of the directors in office.
This section does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration under Section 8.06 or
otherwise successfully prosecuting or defending the rights of an indemnified
representative granted by or pursuant to this Article.
Section 8.03. Advancing Expenses. The Corporation shall pay the
expenses (including attorneys' fees and disbursements) incurred in good faith by
an indemnified representative in advance of the final disposition of a
proceeding described in Section 8.01 or the initiation of or participation in a
proceeding which has been authorized by a majority of the directors in office
pursuant to Section 8.02 upon receipt of an undertaking by or on behalf of the
indemnified representative to repay the amount if it is ultimately determined
pursuant to Section 8.06 that such person is not entitled to be indemnified by
the Corporation pursuant to this Article. The financial ability of an
indemnified representative to repay an advance shall not be a prerequisite to
the making of such advance.
19
<PAGE>
Section 8.04. Securing of Indemnification Obligations. To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the Corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust, escrow, cash collateral or other
fund or account, enter into indemnification agreements, pledge or grant a
security interest in any assets or properties of the Corporation, or use any
other mechanism or arrangement whatsoever in such amounts, at such costs, and
upon such other terms and conditions as the Board of Directors shall deem
appropriate. Absent fraud, the determination of the Board of Directors with
respect to such amounts, costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall not be subject to
voidability.
Section 8.05. Payment of Indemnification. An indemnified
representative who is entitled to indemnification under this Article VIII shall
be entitled to payment within 30 days after a written request for
indemnification has been delivered to the Secretary of the Corporation.
Section 8.06. Arbitration.
(a) General Rule. Any dispute related to the right to
indemnification, contribution or advancement of expenses as provided under this
Article, except with respect to indemnification for liabilities arising under
the Securities Act of 1933 that the Corporation has undertaken to submit to a
court for adjudication, shall be decided only by arbitration in the metropolitan
area in which the principal executive offices of the Corporation are located at
the time, in accordance with the commercial arbitration rules then in effect of
the American Arbitration Association, before a panel of three arbitrators, one
of whom shall be selected by the Corporation, the second of whom shall be
selected by the indemnified representative and the third of whom shall be
selected by the other two arbitrators. In the absence of the American
Arbitration Association, or if for any reason arbitration under the arbitration
rules of the American Arbitration Association cannot be initiated, and if one of
the parties fails or refuses to select an arbitrator or the arbitrators selected
by the Corporation and the indemnified representative cannot agree on the
selection of the third arbitrator within 30 days after such time as the
Corporation and the indemnified representative have each been notified of the
selection of the other's arbitrator, the necessary arbitrator or arbitrators
shall be selected by the presiding judge of the court of general jurisdiction in
the county in which the Corporation's executive office is located.
(b) Qualifications of Arbitrators. Each arbitrator selected as
provided herein is required to be or have been a director or executive officer
of a Corporation whose shares of common stock were listed during at least one
year of such service on the New York Stock Exchange or the American Stock
Exchange or quoted on the National Association of Securities Dealers Automated
Quotations System.
(c) Burden of Proof. The party or parties challenging the right of
an indemnified representative to the benefits of this Article shall have the
burden of proof.
(d) Expenses. The Corporation shall reimburse an indemnified
representative for the expenses (including attorneys' fees and disbursements)
incurred in successfully prosecuting or defending such arbitration.
(e) Effect. Any award entered by the arbitrators shall be final,
binding and nonappealable and judgment may be entered thereon by any party in
accordance with applicable law in any court of competent jurisdiction, except
that the Corporation shall be entitled to interpose as a defense in any such
judicial enforcement proceeding any prior final judicial determination adverse
to the
20
<PAGE>
indemnified representative under Section 8.01(a)(1) or Section 8.01(a)(2). This
arbitration provision shall be specifically enforceable.
Section 8.07. Contribution. If the indemnification provided for in
this Article or otherwise is unavailable for any reason in respect of any
liability or portion thereof, the Corporation shall contribute to the
liabilities to which the indemnified representative may be subject in such
proportion as is appropriate to reflect the intent of this Article or otherwise.
Section 8.08. Mandatory Indemnification of Directors, Officers, etc.
To the extent that an authorized representative of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1741 or 1742 of the Business Corporation Law
or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees and disbursements)
actually and reasonably incurred by such person in connection therewith.
Section 8.09. Contract Rights; Amendment or Repeal. All rights under
this Article shall be deemed a contract between the Corporation and the
indemnified representative pursuant to which the Corporation and each
indemnified representative intend to be legally bound. Any repeal, amendment or
modification hereof shall be prospective only and shall not affect any rights or
obligations then existing.
Section 8.10. Scope of Article. The rights granted by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification, contribution or advancement of expenses may be entitled under
any statute, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in an indemnified capacity and as to action in any
other capacity. The indemnification, contribution and advancement of expenses
provided by or granted pursuant to this Article shall continue as to a person
who has ceased to be an indemnified representative in respect of matters arising
prior to such time, and shall inure to the benefit of the heirs, executors,
administrators and personal representatives of such a person.
Section 8.11. Reliance on Provisions. Each person who shall act as
an indemnified representative of the Corporation shall be deemed to be doing so
in reliance upon the rights of indemnification, contribution and advancement of
expenses provided by this Article.
Section 8.12. Interpretation. The provisions of this Article are
intended to constitute bylaws authorized by 15 Pa.C.S. (S) 1746.
Section 8.13. Changes in Pennsylvania Law. References in this
Article VIII to Pennsylvania law or to any provision thereof shall be to such
law (including without limitation to the Directors' Liability Act) as it existed
on the date this Article VIII was adopted or as such law thereafter may be
changed; provided that (a) in the case of any change which expands the liability
of Directors (or expands the liability of officers) or limits the
indemnification rights or the rights to advancement of expenses which the
Corporation may provide, the rights to limited liability, to indemnification and
to the advancement of expenses provided in this Article shall continue as
theretofore to the extent permitted by law; and (b) if such change permits the
Corporation without the requirement of any further action by shareholders or
Directors to limit further the liability of Directors (or limit the liability of
Officers) or to provide broader indemnification rights or rights to the
advancement of expenses than the Corporation was permitted to provide prior to
such change, then liability thereupon shall be so limited and the rights to
indemnification and the advancement of expenses shall be so broadened to the
extent permitted by law.
21
<PAGE>
ARTICLE IX
Dividends and Other Distributions to Shareholders
Section 9.01. Dividends. Subject to applicable law of the
Commonwealth of Pennsylvania, and in accordance with the provisions thereof at
the pertinent applicable time, the Board of Directors of the Corporation may
from time to time declare, and the Corporation may pay, dividends on its
outstanding shares in cash or property other than its own shares, except when
the Corporation is insolvent, or when the payment thereof would render the
Corporation insolvent, or when the declaration or payment thereof would be
contrary to any restriction contained in the articles, but:
(1) Dividends may be declared and paid in cash or property only
out of unreserved and unrestricted earned surplus of the Corporation,
except as otherwise provided by statute; and
(2) No dividends shall be paid which would reduce the remaining
net assets of the Corporation below the aggregate preferential amount
payable in the event of voluntary liquidation to the holders of shares
having preferential rights to the assets of the Corporation in the
event of liquidation. The Board of Directors may also, from time to
time, distribute to the holders of the Corporation's outstanding
shares having a cumulative preferential right to receive dividends in
discharge of their cumulative dividend rights, dividends payable in
cash out of the unrestricted capital surplus of the Corporation, if at
the time the Corporation has no earned surplus and is not insolvent
and would not thereby be rendered insolvent. Each such distribution,
when made, shall be identified as a payment of cumulative dividends
out of capital surplus.
Section 9.02 Distributions of Shares of the Corporation. The Board
of Directors of the Corporation may, from time to time, distribute pro rata to
holders of any class or classes of its issued shares, treasury shares and
authorized but unissued shares, but
(1) If distribution is made, in the Corporation's authorized but
unissued shares having a par value, there shall be transferred to
stated capital at the time of such distribution an amount of surplus
at least equal to the aggregate par value of the shares so issued;
(2) If a distribution is made in the Corporation's authorized but
unissued shares without par value, the Board of Directors may fix a
stated value for the shares so issued, and there shall be transferred
to stated capital, at the time of such distribution, an amount of
surplus equal to the aggregate stated value, if any, so fixed;
(3) The amount per share so transferred to stated capital, or the
fact that there was no such transfer, shall be disclosed to the
shareholders receiving such distribution concurrently with the
distribution thereof;
(4) No distribution of shares of any class shall be made to
holders of shares of any other class unless the articles so provide or
such distribution is authorized by the affirmative vote or written
consent of the holders of a majority of the outstanding shares of the
class in which the distribution is to be made.
22
<PAGE>
In lieu of issuing fractional shares in any such distribution, the
Corporation may pay in cash the fair value thereof, as determined by the Board
of Directors, to shareholders entitled thereto.
Section 9.03. Reserves. There may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Directors, from
time to time, in their absolute discretion determine as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for the purchase of additional property, or
for such other purpose as the Board of Directors shall think conducive to the
interests of the Corporation. The Board of Directors may abolish or modify any
such reserve.
Section 9.04 Distributions in Partial Liquidation. The Board of
Directors of the Corporation may, from time to time, distribute to the common
shareholders in partial liquidation, out of unrestricted capital surplus of the
Corporation, a portion of its assets in cash or property, subject to the
following conditions:
(1) No such distribution shall be made at a time when the
Corporation is insolvent or when such distribution would render the
Corporation insolvent;
(2) No such distribution shall be made unless such distribution
shall have been authorized by the prior affirmative vote, obtained
within one (1) year of such distribution, of the holders of at least a
majority of the outstanding shares of each class of common stock,
whether or not entitled to vote thereon by the provisions of the
articles;
(3) No such distribution shall be made to the holders of any
class of shares unless all cumulative dividends accrued on all classes
of shares entitled to preferential dividends shall have been fully
paid prior to dividends on the shares to the holders of which such
distribution is to be made;
(4) No such distribution shall be made to the holders of any
class of shares which would reduce the remaining net assets of the
Corporation below the aggregate preferential amount payable in the
event of voluntary liquidation to the holders of shares having
preferential rights to the assets of the Corporation in the event of
liquidation;
(5) Each such distribution, when made, shall be identified as a
distribution in partial liquidation and the amount per share disclosed
to the shareholders receiving the same concurrently with the
distribution thereof.
ARTICLE X
Miscellaneous
Section 10.01. Checks. All checks, notes, bills of exchange or other
similar orders in writing shall be signed by such one or more officers or
employees of the Corporation as the Board of Directors may from time to time
designate.
23
<PAGE>
Section 10.02. Contracts.
(a) General Rule. Except as otherwise provided in the Business
Corporation Law in the case of transactions that require action by the
shareholders, the Board of Directors may authorize any officer or agent to enter
into any contract or to execute or deliver any instrument on behalf of the
Corporation, and such authority may be general or confined to specific
instances.
(b) Statutory Form of Execution of Instruments. Any note, mortgage,
evidence of indebtedness, contract or other document, or any assignment or
endorsement thereof, executed or entered into between the Corporation and any
other person, when signed by one or more officers or agents having actual or
apparent authority to sign it, or by the CEO, or Senior Vice Presidents, COO or
CFO and Secretary or assistant Secretary or Treasurer or assistant Treasurer of
the Corporation, shall be held to have been properly executed for and in behalf
of the Corporation, without prejudice to the rights of the Corporation against
any person who shall have executed the instrument in excess of his or her actual
authority.
Section 10.03. Interested Directors or Officers; Quorum.
(a) General Rule. A contract or transaction between the Corporation
and one or more of its directors or officers or between the Corporation and
another Corporation, partnership, joint venture, trust or other enterprise in
which one or more of its directors or officers are directors or officers or have
a financial or other interest, shall not be void or voidable solely for that
reason, or solely because the director or officer is present at or participates
in the meeting of the Board of Directors that authorizes the contract or
transaction, or solely because his, her or their votes are counted for that
purpose, if:
(1) the material facts as to the relationship or interest and as
to the contract or transaction are disclosed or are known to the Board
of Directors and the Board authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested directors
even though the disinterested directors are less than a quorum;
(2) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to
the shareholders entitled to vote thereon and the contract or
transaction is specifically approved in good faith by vote of those
shareholders; or
(3) the contract or transaction is fair as to the Corporation as
of the time it is authorized, approved or ratified by the Board of
Directors or the shareholders.
(b) Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board which authorizes
a contract or transaction specified in subsection (a).
Section 10.04. Deposits. All funds of the Corporation shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositaries as the Board of Directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees of the Corporation as the Board of Directors
shall from time to time designate.
Section 10.05. Corporate Records.
24
<PAGE>
(a) Required Records. The Corporation shall keep complete and
accurate books and records of account, minutes of the proceedings of the
incorporators, shareholders and directors and a share register giving the names
and addresses of all shareholders and the number and class of shares held by
each. The share register shall be kept at either the registered office of the
Corporation in the Commonwealth of Pennsylvania or at its principal place of
business wherever situated or at the office of its registrar or transfer agent.
Any books, minutes or other records may be in written form or any other form
capable of being converted into written form within a reasonable time.
(b) Right of Inspection. Every shareholder shall, upon written
verified demand stating the purpose thereof, have a right to examine, in person
or by agent or attorney, during the usual hours for business for any proper
purpose, the share register, books and records of account, and records of the
proceedings of the incorporators, shareholders and directors and to make copies
or extracts therefrom. A proper purpose shall mean a purpose reasonably related
to the interest of the person as a shareholder. In every instance where an
attorney or other agent is the person who seeks the right of inspection, the
demand shall be accompanied by a verified power of attorney or other writing
that authorizes the attorney or other agent to so act on behalf of the
shareholder. The demand shall be directed to the Corporation at its registered
office in the Commonwealth of Pennsylvania or at its principal place of business
wherever situated.
ARTICLE XI
Amendments
Section 11.01. Amendment of Bylaws. These bylaws may be amended or
repealed, or new bylaws may be adopted, either (i) by vote of the shareholders
at any duly organized annual or special meeting of shareholders, or (ii) with
respect to those matters that are not by statute committed expressly to the
shareholders and regardless of whether the shareholders have previously adopted
or approved the bylaw being amended or repealed, by vote of a majority of the
Board of Directors of the Corporation in office at any regular or special
meeting of directors. Any change in these bylaws shall take effect when adopted
unless otherwise provided in the resolution effecting the change.
Section 11.02. Recording Amendments and Alterations. The text of
all amendments and alterations to these bylaws shall be attached to the bylaws
with a notation of the date of each such amendment or alteration and a notation
of whether such amendment or alteration was adopted by the shareholders or the
Board of Directors.
ARTICLE XII
Adoption of Bylaws - Record of Amendment
Section 12.1. Adoption. These Amended and Restated Bylaws have been
adopted and filed with the undersigned on the ___ day of _______, 1999, and
shall be effective as of [the closing of the Corporation's initial public
offering].
Section 12.2. Amendments to Bylaws.
25
<PAGE>
Section Amended Date Amended Adopted by
--------------- ------------ ----------
------------------------------
Secretary
, 1999
------------- ---
26
<PAGE>
Exhibit 5
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, PA 19103
February 8, 1999
VerticalNet, Inc.
2 Walnut Grove Drive
Horsham, PA 19044
Re: VerticalNet, Inc. -- Registration Statement on Form S-1
-------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for VerticalNet, Inc., a Pennsylvania corporation (the
"Company"), in connection with the preparation of the registration statement
(the "Registration Statement") filed by the Company with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended (the
"Act"), relating to the public offering (the "Offering") of up to 4,025,000
shares (the "Company Shares") of the Company's Common Stock, $.01 par value (the
"Common Stock"), including 525,000 shares purchasable by the underwriters upon
exercise of their over-allotment option, are to be newly issued and sold by the
Company. This opinion is being furnished pursuant to Item 601(b)(5) of
Regulation S-K under the Act.
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Articles of Incorporation,
including the Articles of Amendment filed with Pennsylvania Secretary of State
on February 8, 1999; (c) the Company's Amended and Restated Bylaws; (d) certain
records of the Company's corporate proceedings as reflected in its minute books;
and (e) such statutes, records and other documents as we have deemed relevant.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and conformity with
the originals of all documents submitted to us as copies thereof. In addition,
we have made such other examinations of law and fact as we have deemed relevant
in order to form a basis for the opinion hereinafter expressed. Our opinion set
forth below is limited to the Pennsylvania Business Corporation Law of 1988.
Based upon the foregoing, we are of the opinion that the Company Shares, upon
issuance by the Company in the manner and for the consideration contemplated in
the Registration Statement, will be validly issued, fully paid and
nonassessable.
<PAGE>
We hereby consent to the use of this opinion as an Exhibit to the Registration
Statement and to the references to this Firm under the caption "Legal Matters"
in the Registration Statement. In giving such consent, we do not thereby admit
that we are acting within the category of persons whose consent is required
under Section 7 of the Act and the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
/s/Morgan, Lewis & Bockius LLP
<PAGE>
Exhibit 10.2
INTERNET CAPITAL GROUP
July 31, 1997
Mark L. Walsh
5212 Dorset Avenue
Chevy Chase, MD 20815
Dear Mark:
I enjoyed our conversation Monday. There certainly seemed to be a meeting
of the minds among all of us regarding VerticalNet and the opportunity before
us. I am not sure if the stars are aligned but the timing of our search and
your departure at AOL seem to be coinciding at an opportune time. VerticalNet
has the ability to build a truly unique brand on the Internet. I know all of us
including Mike and Mike feel that you have the ability to lead the company
forward, establishing the brand, developing strategy as well as articulating the
vision!
Below is an outline of our offer. It is contingent on finishing a couple
of key references, but I wanted you to have it before you left for vacation.
Please feel free to call me if you have any questions.
. Title: Your title will be President and Chief Executive Officer of
VerticalNet.
. Salary: VerticalNet will pay you a base of $200,000 and a bonus of $100,000
a year based on performance. Further, VerticalNet will guarantee your bonus
for 1997, pro rated for the actual number of months of your employment. For
example, if your employment begins on August 1, your bonus will be 5/12 of
$100,000 or $41,667.
. Stock Options: VerticalNet will grant you stock options for six percent
of the company. These stock options will be priced at $.39 a share and will
vest upon an IPO. Absent an IPO, the options should vest over 4 years (25%
a year) in accordance with the stock option plan in place at VerticalNet.
VerticalNet will provide anti-dilution protection through the next round
(the third) round of financing. Upon the third round of financing ($3 to
$6 million), we will issue additional options to you to keep you at the six
percent level. We expect this third round of financing will take us to the
IPO process, after this round the options would dilute pro rata with
everyone else.
. Relocation: We understand for the first nine to twelve months you will
commute to Horsham, PA from Washington, D.C. During that period, the
management team and the
<PAGE>
board will determine the best location for the business. If the board
determines it is best to keep the company in its current location or move
it somewhere other than Washington, D.C., we agree to pay your reasonable
and customary relocation expenses.
. Severance: We will guarantee you one year of severance (your base salary),
if your employment is terminated for other than cause.
. Benefits: You will receive the healthcare benefits that are currently
offered by VerticalNet. If your personal circumstances dictates additional
coverage, we will explore the various options together.
. Capital Commitment: On June 6, Internet Capital Group made a follow on
investment of $2 million in VerticalNet. Internet Capital Group will use
its best efforts to ensure that adequate capital resources (in a third
round of financing between $3 to $6 million) are available for the growth
and development of VerticalNet. It is anticipated Internet Capital Group
will provide a significant portion of this financing.
Mark, we believe that VerticalNet represents a tremendous opportunity to
build a truly unique brand and business on the Internet. The combination of
Internet Capital's partners and resources, the VerticalNet platform and your
talents and experiences creates a very strong team. I hope you have had success
contacting our references. Let's plan to talk sometime next week.
Have a great vacation.
Sincerely,
/s/ Walter Buckley /s/ Mark L. Walsh
- ----------------------- ------------------------
Walter Buckley Mark L. Walsh
President & CEO
EFFECTIVE STARTING DATE: AUGUST 25, 1997
<PAGE>
Exhibit 10.3
VerticalNet, Inc.
Mr. Barry Wynkoop
Potomac, MD
Dear Barry,
It is my pleasure to offer you the job of Senior Vice President of Sales and
Market Development and corporate officer at VerticalNet, Inc.
Your will have direct responsibility for the Corporate sales effort of the
company; selling storefronts, sponsorships, advertising and other promotional
products and services to companies worldwide that are targets of the vertical
industrial communities that VerticalNet operates on the Internet. Further, you
will be responsible for all marketing, industrial shows/expositions and other
corporate marketing activities to achieve your sales goals.
The particulars of the job offer are:
A. An annual salary of $175,000, paid semi-monthly.
B. A bonus of $100,000 annually, paid upon successful completion of your
annual sales targets (defined by GAAP revenue recognized from sales made by
people in your department) with a portion (30%) comprised of the company
achieving overall revenue and margin objectives.
If you exceed the sales targets set for your department, you will receive
1.25% (retroactive) of bonus goals for the first 25% over budget, and 1.5%
(retroactive) of bonus for all sales over 50% of budget, e.g., If you beat
sales goals by 60%, you would make 1.5 x 60%, or 90% of sales bonus, or
$63,000 (.9 x 70,000) on top of the base bonus of $70,000 for sales.
C. Stock option grant totaling 240,000 shares of common stock of the company.
These options will vest over 4 years, 25% per year upon the anniversary of
your grant. The strike price of the option will be set by the Board of
Directors upon the date of the grant.
D. A $400 per month car allowance.
E. Six months of your base salary paid as severance upon your termination for
reasons other than cause.
<PAGE>
The company's option grant dictates that all options fully vest upon change
of control of the company, unless dictated otherwise by the Board of
Directors.
The company also plans to add several other features to the employment
agreement, including:
1) Upon change of control, accelerated option vesting for select
employees if the new owner terminates an employee for reasons other
than cause or upon significant diminution of responsibilities.
2) Upon change of control, six months severance payments select employees
if the new owner terminates an employee for reasons other than cause
or upon significant diminution of responsibilities.
Barry, we are excited about your joining the company, and I personally am
convinced that you will have a long and successful career as part of the
executive team. I look forward to your acceptance of this offer, and hope I can
be helpful with any questions you may have on its particulars.
Sincerely,
/s/ Mark L. Walsh /s/ Barry Wynkoop
- ------------------------------------- ---------------------------------
Mark L. Walsh Accepted
President and Chief Executive Officer July 14, 1998
Start date: August 1, 1998
<PAGE>
Exhibit 10.5
AGREEMENT AND PLAN OF MERGER
among
VERTICALNET, INC.
(a Pennsylvania corporation),
INFORMATRIX ACQUISITION CORP.
(a Delaware corporation),
INFORMATRIX WORLDWIDE, INC.
(a Delaware corporation)
and
THE STOCKHOLDERS OF INFORMATRIX WORLDWIDE, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Definitions................................................................. 1
2. The Merger.................................................................. 7
3. Closing..................................................................... 10
4. Representations and Warranties of Seller Parties............................ 11
5. Representations and Warranties of Buyer..................................... 23
6. Covenants of Seller Parties................................................. 24
7. Covenants of Buyer.......................................................... 29
8. Mutual Covenants............................................................ 30
9. Conditions Precedent to Obligations of Seller Parties....................... 31
10. Conditions Precedent to Obligations of Buyer................................ 31
11. Indemnification............................................................. 32
12. Termination................................................................. 36
13. General Matters............................................................. 37
14. Notices..................................................................... 39
15. Governing Law............................................................... 40
</TABLE>
i
<PAGE>
Exhibits
- --------
A - Operating Plan
B - Escrow Agreement
C - Customers
Schedules
- ---------
4.3 Seller Required Consents
4.4 Stock Ownership
4.6 Encumbrances
4.8 Tangible Personal Property
4.9 Non-Real Estate Leases
4.12 Liabilities
4.13 Taxes
4.15 Litigation
4.16 Contracts
4.17 Insurance
4.18(a) Intellectual Property
4.18(b) Intellectual Property Contracts
4.18(c) Know-How
4.19 Directors and Officers of Seller
4.20 ERISA
4.22 Payments to Affiliates of Seller
4.23 Customers
4.36 Additional Information
ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of September 30, 1998 by and
among and VERTICALNET, INC., a Pennsylvania corporation ("Buyer"), INFORMATRIX
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Buyer
("Newco"), INFORMATRIX WORLDWIDE, INC., a Delaware corporation ("Seller") and
Brian Boltz, Page Lord, Dan McNulty, Howard Miller, Mechlin Moore, John Stewart,
Robert Stewart, Sr., David Willis, Murdo MacLeod and Robert Stewart, Jr.
(collectively, the "Stockholders"). Certain other terms are used herein as
defined below in Section 1 or elsewhere in this Agreement.
Background
----------
This Agreement sets forth the terms and conditions under which Newco will
merge with and into Seller (the "Merger") in accordance with this Agreement.
The parties intend that (a) upon completion of the Merger, Seller will be a
wholly-owned subsidiary of Buyer and (b) for federal income tax purposes, the
Merger will constitute a tax-free transaction under the Internal Revenue Code of
1986, as amended (the "Code").
Witnesseth
----------
NOW, THEREFORE, in consideration of the respective covenants contained
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
1. Definitions
-----------
For convenience, certain terms used in more than one part of this Agreement
are listed in alphabetical order and defined or referred to below (such terms as
well as any other terms defined elsewhere in this Agreement shall be equally
applicable to both the singular and plural forms of the terms defined).
"Accredited Investor" is defined in Section 4.30.
"Acquisition Proposal" is defined in Section 6.3.
"Action" is defined in Section 11.6.
"Affiliates" means, with respect to a particular party, persons or entities
controlling, controlled by or under common control with that party, as well as
any officers, directors and majority-owned entities of that party and of its
other Affiliates. For the purposes of the foregoing, ownership, directly or
indirectly, of 20% or more of the voting stock or other equity interest shall be
deemed to constitute control.
1
<PAGE>
"Agreement" means this Agreement and the Exhibits and Disclosure Schedules
hereto, as each may be amended, restated, supplemented or modified from time to
time.
"Assets" means all of the assets, properties, goodwill and rights of every
kind and description, real and personal, tangible and intangible, wherever
situated and whether or not reflected in the most recent Financial Statements,
that are owned or possessed by Seller.
"Balance Sheet" is defined in Section 4.5.
"Balance Sheet Date" is defined in Section 4.5.
"Benefit Plan" means: (i) as to employees employed in the United States,
any (y) "employee benefit plan" as defined in Section 3(3) of ERISA, and (z)
supplemental retirement, bonus, deferred compensation, severance, incentive
plan, program or arrangement or other employee fringe benefit plan, program or
arrangement; and (ii) as to employees employed outside the United States of
America, all employee benefit, health, welfare, supplemental unemployment
benefit, bonus, pension, profit sharing, deferred compensation, stock
compensation, stock purchase, retirement, hospitalization insurance, medical,
dental, legal, disability and similar plans or arrangements or practices.
"Business" means Seller's entire business, operations and facilities.
"Buyer Indemnified Party" is defined in Section 11.1.
"Buyer Required Consents" is defined in Section 5.3.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Claim Notice" is defined in Section 11.4.
"Claim Response" is defined in Section 11.4(a).
"Closing" is defined in Section 3.1.
"Closing Certificates" means the certificates to be delivered by various
Seller Parties under Section 10.3 and any other provisions hereof.
"Closing Date" is defined in Section 3.1.
"Code" is defined in the Background Section.
2
<PAGE>
"Confidential Information" means any confidential information or trade
secrets of Seller, including personnel information, know-how and other technical
information, customer lists, customer information and supplier information.
"Contingent Merger Consideration" is defined in Section 2.7.
"Contract" means any written or oral contract, agreement, lease,
instrument, or other commitment that is binding on any person or its property
under applicable law.
"Copyrights" means all copyrights in both published works and unpublished
works.
"Court Order" means any judgment, decree, injunction, order or ruling of
any federal, state, local or foreign court or governmental or regulatory body or
authority that is binding on any person or its property under applicable law.
"Damages" is defined in Section 11.1.
"Default" means (a) a breach, default or violation, (b) the occurrence of
an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (c) with respect to any
Contract, the occurrence of an event that with or without the passage of time or
the giving of notice, or both, would give rise to a right of termination,
renegotiation or acceleration or a right to receive damages or a payment of
penalties.
"DGCL" is defined in Section 2.1.
"Disclosure Schedule" means the any of the Schedules containing information
relating to Seller pursuant to Section 4 and other provisions hereof that has
been provided to Buyer on the date hereof.
"Effective Time" is defined in Section 2.2.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"Environmental Condition" is defined in Section 4.15(b).
"Environmental Law" means all Laws and Court Orders relating to pollution
or protection of public safety, safety or the environment as well as any
principles of common law under which a Party may be held liable for the release
or discharge of any materials into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
3
<PAGE>
"Escrow Fund" is defined in Section 11.7.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" is defined in Section 11.5.
"Financial Statements" is defined in Section 4.5.
"GAAP" means generally accepted accounting principles.
"Governmental Permits" means all governmental permits, licenses,
registrations, certificates of occupancy, approvals and other governmental
authorizations.
"Gross Revenues" means total value of invoices issued for the applicable
period.
"Hazardous Substances" means any toxic or hazardous gaseous, liquid or
solid material or waste that may or could pose a hazard to the environment or
human health or safety including (i) any "hazardous substances" as defined by
the federal Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. (S)(S) 9601 et seq., (ii) any "extremely hazardous substance,"
-- ----
"hazardous chemical," or "toxic chemical" as those terms are defined by the
federal Emergency Planning and Community Right-to-Know Act, 42 U.S.C. (S)(S)
11001 et seq., (iii) any "hazardous waste," as defined under the federal Solid
-- ----
Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42
U.S.C. (S)(S) 6901 et seq., (iv) any "pollutant," as defined under the federal
-- ----
Water Pollution Control Act, 33 U.S.C. (S)(S) 1251 et seq., as any of such laws
-- ----
in clauses (i) through (iv) as amended, and (v) any regulated substance or waste
under any Laws or Court Orders that have been enacted, promulgated or issued by
any federal, state or local governmental authorities concerning protection of
the environment.
"Immaterial Lease" is defined in Section 4.9.
"Indemnified Party" is defined in Section 11.4.
"Indemnitor" is defined in Section 11.4.
"Intellectual Property" means any Copyrights, Patents, Trademarks, service
marks, trade names, information, proprietary rights, processes, technology
rights and licenses, trade secrets, franchises, know-how, inventions and other
intellectual property.
"Inventory" means all inventory, including raw materials, supplies, work in
process and finished goods.
4
<PAGE>
"Law" means any statute, law, ordinance, regulation, order or rule of any
federal, state, local, foreign or other governmental agency or body or of any
other type of regulatory body, including those covering environmental, energy,
safety, health, transportation, bribery, recordkeeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, guaranty or endorsement of
or by any person, absolute or contingent, accrued or unaccrued, due or to become
due, liquidated or unliquidated.
"Liquidated Claim Notice" is defined in Section 11.4(a).
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
"Material Adverse Effect" means a material adverse effect on the Business,
including the Assets, financial condition, results of operations, liquidity,
products, competitive position, customers and customer relations thereof.
"Merger" is defined above in the Background section.
"Merger Consideration" is defined in Section 2.6.
"Minor Contract" means any Contract that is terminable by a party on not
more than 30 days' notice without any Liability and any Contract under which the
obligation of a party (fulfilled and to be fulfilled) involves an amount of less
than $5,000.
"Non-Competition Period" is defined in Section 6.6.
"Non-Real Estate Leases" is defined in Section 4.9.
"Operating Plan" means the operating plan of Seller dated as of January,
1998, as amended, which operating plan is attached hereto as Exhibit A.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Patents" means all patents, patent applications, and inventions and
discoveries that may be patentable.
"Person" means any natural person, corporation, partnership, limited
liability company, proprietorship, association, trust or other legal entity.
5
<PAGE>
"Prime Rate" means the prime lending rate as announced from time to time in
The Wall Street Journal.
- -----------------------
"Real Estate Leases" is defined in Section 4.7.
"Real Property" is defined in Section 4.7.
"Response Period" is defined in Section 11.4(a).
"Restricted Party" is defined in Section 6.6.
"Rule 144" is defined in Section 4.34.
"Securities" is defined in Section 4.29.
"Securities Act" means the Securities Act of 1933, as amended.
"Seller Contracts" is defined in Section 4.16(b).
"Seller's knowledge" or "knowledge of Seller" means the actual knowledge of
any of the Stockholders, directors or officers of the Seller.
"Seller Parties" means Seller and the Stockholders.
"Seller Representatives" means any investment advisors, accountants,
counsel, agents or other Persons who may act on behalf of Seller or any
Stockholders.
"Seller Required Consents" is defined in Section 4.3.
"Seller Share" means a share of the common stock, par value $.01, of
Seller.
"Taxes" means all taxes, duties, charges, fees, levies or other assessments
imposed by any taxing authority including, without limitation, income, gross
receipts, value-added, excise, withholding, personal property, real estate,
sale, use, ad valorem, license, lease, service, severance, stamp, transfer,
payroll, employment, customs, duties, alternative, add-on minimum, estimated and
franchise taxes (including any interest, penalties or additions attributable to
or imposed on or with respect to any such assessment).
"Tax Return@ means any return (including any information return), report,
statement, schedule, notice, form, estimate or declaration of estimated tax
relating to or required to be filed with any governmental authority in
connection with the determination, assessment, collection or payment of any Tax.
"Termination Date" is defined in Section 3.1.
6
<PAGE>
"Trade Secrets" means all know-how, trade secrets, confidential
information, customer lists, software, technical information, data, process
technology, plans, drawings, and blue prints, owned, used or licensed (as
licensor or licensee) by Seller, except for any such item that is generally
available to the public.
"Transaction Documents" means this Agreement and the documents contemplated
hereby.
"Transactions" means the Merger and the other transactions contemplated by
the Transaction Documents.
"Unliquidated Claim" is defined in Section 11.4(a).
"Welfare Plan" is defined in Section 4.20(g).
2. The Merger
----------
2.1 The Merger. Upon the terms and subject to the conditions hereof, and
----------
in accordance with the relevant provisions of the Delaware General Corporation
Law (the "DGCL"), Newco shall be merged with and into Seller on the effective
date of this Agreement (the "Effective Date"). Following the Merger, Seller
shall continue as the surviving corporation (the "Surviving Corporation") and
shall continue its existence under the laws of the State of Delaware, and the
separate corporate existence of Newco shall cease.
2.2 Effective Time. As soon as practicable, but in any event within five
--------------
business days after the satisfaction or waiver of all conditions to the Merger,
Seller and Newco shall file with the Secretary of State of the State of Delaware
articles of merger and such other appropriate documents executed in accordance
with the DGCL. The Merger shall become effective upon such filings or at such
later time as may be specified in such filings (the "Effective Time").
2.3 Effects of the Merger. The Merger shall have the effects set forth in
---------------------
the DGCL.
2.4 Articles of Incorporation and Bylaws. The Articles of Incorporation
------------------------------------
of Newco shall be the Articles of Incorporation of the Surviving Corporation
from and after the Effective Time until thereafter amended in accordance with
the provisions therein and as provided in the DGCL. The bylaws of Newco shall
be the bylaws of the Surviving Corporation from and after the Effective Time,
continuing until thereafter amended in accordance with their terms and the
Certificate of Incorporation of the Surviving Corporation and as provided by the
DGCL.
2.5 Directors and Officers. The initial directors and officers of the
----------------------
Surviving Corporation shall be the directors and officers of Newco immediately
prior to the Effective Time, until their successors are duly elected and
qualified. Such persons shall hold such positions as
7
<PAGE>
directors and offices until their successors are elected or appointed in
accordance with the Articles of Incorporation and the bylaws of the Surviving
Corporation.
2.6 Base Merger Consideration.
-------------------------
(a) Each of the shares of the Common Stock of Seller ("Seller Common
Stock") that, immediately prior to the Effective Time, is held by Seller as
treasury stock shall be canceled, and no consideration shall be delivered with
respect thereto.
(b) Each of the shares of Seller Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall be canceled and
extinguished and converted into the right to receive such number of shares of
the Buyer's Common Stock determined by dividing 90,000 by the total number of
shares of Seller Common Stock issued and outstanding immediately prior to the
Effective Time of the Merger.
The consideration to be received in respect of each share of Seller Common
Stock pursuant to this Section 2.6 is referred to as the "Merger Consideration."
2.7 Contingent Merger Consideration.
-------------------------------
(a) The following Contingent Merger Consideration shall be payable by
Buyer, on or before October 31, 1998:
(i) if Seller's actual Gross Revenues for the fiscal quarter
ended September 30, 1998 are greater than or equal to the Gross Revenues
projected in the Operating Plan for the fiscal quarter ended September 30, 1998,
each of the shares of Seller Common Stock issued and outstanding immediately
prior to the Effective Time of the Merger shall receive such number of shares of
the Buyer's Common Stock determined by dividing 11,250 by the total number of
shares of Seller Common Stock issued and outstanding immediately prior to the
Effective Time of the Merger; or
(ii) if Seller's actual Gross Revenues for the fiscal quarter
ended September 30, 1998 are less than the Gross Revenues projected in the
Operating Plan for the fiscal quarter ended September 30, 1998, each of the
shares of Seller Common Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall receive such number of shares of the Buyer's
Common Stock determined by dividing (A) the product of (i) 11,250 multiplied by
(ii) the ratio of Seller's actual Gross Revenues for the fiscal quarter ended
September 30, 1998 over the Gross Revenues projected in the Operating Plan for
the fiscal quarter ended September 30, 1998 by (B) the total number of shares of
Seller Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger.
(b) The following Contingent Merger Consideration shall be payable by
Buyer, on or before January 31, 1999:
8
<PAGE>
(i) if Seller's actual Gross Revenues for the fiscal quarter
ended December 31, 1998 are greater than or equal to the Gross Revenues
projected in the Operating Plan for the fiscal quarter ended December 31, 1998,
each of the shares of Seller Common Stock issued and outstanding immediately
prior to the Effective Time of the Merger shall receive such number of shares of
the Buyer's Common Stock determined by dividing 11,250 by the total number of
shares of Seller Common Stock issued and outstanding immediately prior to the
Effective Time of the Merger; or
(ii) if Seller's actual Gross Revenues for the fiscal quarter
ended December 31, 1998 are less than the Gross Revenues projected in the
Operating Plan for the fiscal quarter ended December 31, 1998, each of the
shares of Seller Common Stock issued and outstanding immediately prior to the
Effective Time of the Merger shall receive such number of shares of the Buyer's
Common Stock determined by dividing (A) the product of (i) 11,250 multiplied by
(ii) the ratio of Seller's actual Gross Revenues for the fiscal quarter ended
December 31, 1998 over the Gross Revenues projected in the Operating Plan for
the fiscal quarter ended December 31, 1998 by (B) the total number of shares of
Seller Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger.
The consideration to be received pursuant to this Section 2.7 is referred
to as the "Contingent Merger Consideration."
2.8 Escrow Fund. Each Stockholder hereby agrees to contribute the Merger
-----------
Consideration and the Contingent Merger Consideration into the Escrow Fund, to
be held and disbursed in accordance with the terms of the Escrow Agreement.
2.9 Newco Capital Stock Not Converted. Each share of capital stock of
---------------------------------
Newco issued and outstanding immediately prior to the Effective Time shall not
be converted or exchanged by virtue of the Merger, and each such share shall
remain outstanding as one share of capital stock of the Surviving Corporation.
2.1 Stockholder Consent Each of the Stockholders hereby votes all of his
-------------------
Seller Shares in favor of the Merger, this Agreement and the Transactions.
None of the Stockholders shall rescind, revoke or modify such vote prior to the
Effective Time.
3. Closing.
-------
3.1 Location, Date. The closing for the Transactions (the "Closing")
--------------
shall be held at the offices of Morgan, Lewis & Bockius LLP in Philadelphia, PA,
at 10:00 a.m. (local time) as promptly as practicable (and in any event within
three business days) after satisfaction or waiver of the conditions to the
consummation of the Transactions set forth in Sections 9 and 10 hereof, but in
any event not later than September __, 1998 (the "Termination Date"), unless the
parties hereto agree in writing to another date or place. The date on which the
Closing occurs is referred to herein as the "Closing Date."
9
<PAGE>
3.2 Deliveries. At the Closing, subject to the terms and conditions
----------
contained herein:
(a) Newco and Seller shall deliver to the Secretary of State of the
State of Delaware all such documents as required under Section 251 of the DGCL
and the parties shall take all such other and further actions as may be required
by the DGCL and any other applicable Law to make the Merger effective upon the
terms and subject to the conditions hereof;
(b) Buyer shall deliver the Merger Consideration to the Stockholders
with such Merger Consideration all registered in the names of the respective
Stockholders or their designees, and in due and proper form; and
(c) the parties shall also deliver to each other the respective
agreements, legal opinions and other documents and instruments specified with
respect to them in Sections 9 and 10.
4. Representations and Warranties of Seller Parties.
------------------------------------------------
Seller Parties, jointly and severally, hereby represent and warrant to
Buyer as follows:
4.1 Corporate Status. Seller is a corporation duly organized, validly
----------------
existing and in good standing under the Laws of the State of Delaware. The
Charter Documents and bylaws of Seller that have been delivered to Buyer as of
the date hereof are effective under applicable Laws and are current, correct and
complete.
4.2 Authorization. Seller has the requisite power and authority to own
-------------
the Assets and to carry on the Business. Seller has the requisite power and
authority to execute and deliver the Transaction Documents to which it is a
party and to perform the Transactions performed or to be performed by it. Such
execution, delivery and performance by Seller have been duly authorized by all
necessary corporate action, including approval by the Stockholders. Each
Transaction Document executed and delivered by Seller has been duly executed and
delivered by Seller and constitutes a valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms.
4.3 Consents and Approvals. Except for filings that may be required to
----------------------
effect the Merger under the Laws of Delaware and any consents specified in
Schedule 4.3 (collectively the "Seller Required Consents"), neither the
execution and delivery by any Seller Party of the Transaction Documents to which
it is a party, nor the performance of the Transactions performed or to be
performed by any Seller Party, require any filing, consent or approval,
constitute a Default or cause any payment obligation to arise under (a) any Law
or Court Order to which any Seller Party is subject, (b) the Charter Documents
or bylaws of Seller or (c) any Contract, Governmental Permit or other document
to which any Seller Party is a party or by which the properties or other assets
any Seller Party may be subject.
10
<PAGE>
4.4 Stock Ownership. The Stockholders are the sole record and beneficial
---------------
owners of all of the issued and outstanding shares of common stock of Seller,
and the respective shares owned by the Stockholders are specified on Schedule
4.4. There are no existing options, warrants, calls, commitments or other
rights of any character (including conversion or preemptive rights) relating to
the acquisition of any issued or unissued common stock or other securities of
Seller.
4.5 Financial Statements. Seller has delivered to Buyer prior to the date
--------------------
hereof the following financial statements of Seller (collectively, the
"Financial Statements"): the unaudited balance sheet as of June 30, 1998 and
the related statements of operations, shareholders' equity and cash flows for
the six months ended June 30, 1998 and for the period from inception to December
31, 1997. The Financial Statements have been prepared in accordance with GAAP
and present fairly, in all material respects, the financial position of Seller,
and the results of its operations and its cash flows for the period then ended.
The balance sheet of Seller as of June 30, 1998 that is included in the
Financial Statements is referred to herein as the "Balance Sheet," and the date
thereof is referred to as the "Balance Sheet Date."
4.6 Title to Assets and Related Matters. Seller has good title to and
-----------------------------------
valid leases and/or licenses to use, all of its Assets, free from any
Encumbrances except those specified in Schedule 4.6. The use of the Assets are
not subject to any Encumbrances (other than those specified in the preceding
sentence), and such use does not encroach on the property or rights of anyone
else. All tangible personal property (other than Inventory) included in the
Assets are suitable for the purposes for which they are used, in good working
condition, reasonable wear and tear excepted, and are free from any known
defects.
4.7 Real Property. Seller does not own, lease or occupy, and is not
-------------
otherwise in possession of, any real property, nor is Buyer purchasing any such
real property, expecting delivery of such real property and real property is no
part of this transaction.
4.8 Certain Personal Property. Schedule 4.8 describes all items of
-------------------------
tangible personal property that were included in the Balance Sheet at a carrying
value of at least $10,000. Except as specified in Schedule 4.8, since the
Balance Sheet Date, Seller has not acquired any items of tangible personal
property that have a carrying value in excess of $10,000. All of such personal
property included in Schedule 4.8 is, and any such personal property acquired
after the date hereof in accordance with Section 6.1 will be, usable in the
ordinary course of business, and all such personal property included in Schedule
4.8 conforms, and all of such personal property acquired after the date hereof
will conform, with any applicable Laws relating to its construction, use and
operation. Except for those items subject to the Non-Real Estate Leases, no
Person other than Seller owns any vehicles, equipment or other tangible assets
located on the Real Property that have been used in the Business or that are
necessary for the operation of the Business.
4.9 Non-Real Estate Leases. Schedule 4.9 lists all assets and property
----------------------
(other than
11
<PAGE>
Real Property) that are possessed by Seller under an existing lease, including
all trucks, automobiles, forklifts, machinery, equipment, furniture and
computers, except for any lease under which the aggregate annual payments are
less than $10,000 (each, an "Immaterial Lease"). Schedule 4.9 also lists the
leases under which such assets and property listed in Schedule 4.8 are
possessed. All of such leases (excluding Immaterial Leases) are referred to
herein as the "Non-Real Estate Leases."
4.10 Accounts Receivable. All accounts receivable of Seller (a) are valid
-------------------
and genuine, (b) arise out of bona fide sales and deliveries of goods,
performance of services or other business transactions, (c) are not subject to
valid defenses, set-offs or counterclaims other than normal returns and
allowances and (d) were generated only in the ordinary course of business.
Seller and Stockholders represent that, except for accounts receivable totaling
$25,000 in the aggregate for which Buyer shall bear the credit risk, (i)
accounts receivable totalling at least $25,000 will be collected in full within
120 days after the Closing Date, and (ii) at least fifty percent (50%) of all
other accounts receivable will be collected in full within 120 days after the
Closing Date.
4.11 Inventory and Equipment. All inventory and equipment of Seller
-----------------------
reflected on the Balance Sheet, and all inventory and equipment owned by Seller
was acquired and has been maintained in accordance with the regular business
practices of Seller, consists of items of a quality and quantity useable in the
ordinary course of their businesses consistent with past practice, and is valued
in conformity with generally accepted accounting principles applied on a
consistent basis; no significant amount of such inventory or equipment is
obsolete.
4.12 Liabilities. Seller does not have any Liabilities, other than (a)
-----------
Liabilities specified in Schedule 4.12, (b) Liabilities specified in the Balance
Sheet (except as heretofore paid or discharged), (c) Liabilities incurred in the
ordinary course since the Balance Sheet Date that, individually or in the
aggregate, are not material to the Business, or (d) Liabilities under any
Contracts included in the Assets that are specifically disclosed in Schedule
4.12 (or not required to be disclosed because of the term or amount involved)
that were not required under GAAP to have been specifically disclosed or
reserved for on the Balance Sheet.
4.13 Taxes. Except as set forth on Schedule 4.13,
-----
(a) Seller has timely filed all Tax Returns required to be filed on
or before the Closing Date and all such Tax Returns are true, correct and
complete in all respects. The Company and each Subsidiary has paid in full on a
timely basis all Taxes owed by it, whether or not shown on any Tax Return. No
claim has ever been made by any authority in any jurisdiction where the Seller
does not file Tax Returns that Seller may be subject to taxation in that
jurisdiction.
(b) The amount of Seller's liability for unpaid Taxes as of the
Balance Sheet Date did not exceed the amount of the current liability accruals
for Taxes (excluding reserves for deferred Taxes) shown on the Balance Sheet,
and the amount of the Seller's liability for unpaid
12
<PAGE>
Taxes for all periods or portions thereof ending on or before the Closing Date
will not exceed the amount of the current liability accruals for Taxes
(excluding reserves for deferred Taxes) as such accruals are reflected on the
books and records of the Seller on the Closing Date.
(c) There are no ongoing examinations or claims against either the
Seller for Taxes, and no notice of any audit, examination or claim for Taxes,
whether pending or threatened, has been received. Seller has not waived or
extended the statute of limitations with respect to the collection or assessment
of any Tax.
(d) The Seller has withheld and paid over to the proper governmental
authorities all Taxes required to have been withheld and paid over, and complied
with all information reporting and backup withholding requirements, including
maintenance of required records with respect thereto, in connection with amounts
paid to any employee, independent contractor, creditor or third party.
(e) Copies of (A) any Tax examinations, (B) extensions of statutory
limitations for the collection or assessment of Taxes and (C) the Tax Returns of
the Seller and each Subsidiary for the last five fiscal years, if any, have
been made available to Buyer
(f) There are (and as of immediately following the Closing there will
be) no Liens on the assets of the Seller relating to or attributable to Taxes,
except for liens for Taxes not yet due. To the Seller's knowledge, there is no
basis for the assertion of any claim relating to or attributable to Taxes which,
if adversely determined, would result in any Lien on the assets of the Seller or
otherwise have an adverse effect on the Seller or its business.
(g) There are no contracts, agreements, plans or arrangements,
including but not limited to the provisions of this Agreement, covering any
employee or former employee of the Seller that, individually or collectively,
could give rise to any payment (or portion thereof) that would not be deductible
pursuant to Sections 280G, 404 or 162 of the Code. Seller has not filed a
consent under Section 341(f) of the Code. Seller is not and has not been a
United States real property holding company within the meaning of Section 897(c)
during the period specified in Section 897(c)(1)(A)(ii).
(h) Neither the Seller nor any Subsidiary is or has been at any time,
a party to a tax sharing, tax indemnity or tax allocation agreement, and neither
the Seller nor any Subsidiary has assumed the tax liability of any other person
under contract.
(i) To the knowledge of the Seller, the Seller has not taken any
action or refrained from taking any action that would cause the Merger not to
qualify as a reorganization as defined under Code Section 368(a)(1)(A) and
Section 368(a)(2)(E).
4.14 Subsidiaries. Seller does not own, directly or indirectly, any
------------
interest or investment (whether equity or debt) in any corporation, partnership,
limited liability company,
13
<PAGE>
trust, joint venture or other legal entity.
4.15 Legal Proceedings and Compliance with Law.
-----------------------------------------
(a) Except as set forth in Schedule 4.15, there is no Litigation that
is pending or, to Seller's knowledge, threatened against Seller. There has been
no Default under any Laws applicable to Seller, including Laws relating to
pollution or protection of the environment, and Seller has not received any
notices from any governmental entity regarding any alleged Defaults under any
Laws. There has been no Default with respect to any Court Order applicable to
Seller.
(b) Without limiting the generality of Section 4.15(a), except as
described in Schedule 4.15, there is not and never has been any Environmental
Condition (i) at the premises at which the Business has been conducted by Seller
or any predecessor of Seller, (ii) (A) at any property owned, leased, occupied
or operated at any time by Seller or (B) at any property owned, leased, occupied
or operated at any time by any Person controlled by Seller or any predecessor of
any of them in connection with the Business, or (iii) at any property at which
wastes have been deposited or disposed by, from or at the behest or direction of
any of the foregoing, nor has Seller received written notice of any such
Environmental Condition. "Environmental Condition" means any condition or
circumstance, including the presence of Hazardous Substances, whether created by
Seller or any third party, at or relating to any such property or premises
specified in any of clauses (i) through (iii) above that did, does or may
reasonably be expected to (A) require abatement or correction under an
Environmental Law, (B) give rise to any civil or criminal liability on the part
of Seller under an Environmental Law, or (C) create a public or private
nuisance.
(c) Seller has obtained and is in full compliance with all
Governmental Permits, all of which are listed in Schedule 4.15 along with their
respective expiration dates, that are required for the complete operation of the
Business as currently operated or that relates to the Real Property, (ii) all of
such Governmental Permits are currently valid and in full force and (iii) Seller
has filed such timely and complete renewal applications as may be required with
respect to its Governmental Permits. To Seller's knowledge, no revocation,
cancellation or withdrawal thereof has been threatened.
4.16 Contracts.
---------
(a) Schedule 4.16 lists all Contracts of the following types to which
Seller is a party or by which it is bound, except for Minor Contracts:
(i) Contracts with any present or former stockholder, director,
officer, employee, partner or consultant of Seller or any Affiliate
thereof.
(ii) Contracts for the future purchase of, or payment for,
supplies or products, or for the lease of any real or personal
property from or the performance of services by a third party, in
excess of $1,000 in any
14
<PAGE>
individual case, or any Contracts for the sale of products that
involve an amount in excess of $5,000 with respect to any one supplier
or other party;
(iii) Contracts to sell or supply products or to perform
services that involve an amount in excess of $5,000 in any individual
case;
(iv) Contracts to lease to or to operate for any other party
any real or personal property that involve an amount in excess of
$5,000 in any individual case;
(v) Any notes, debentures, bonds, conditional sale agreements,
equipment trust agreements, letter of credit agreements, reimbursement
agreements, loan agreements or other Contracts for the borrowing or
lending of money (including loans to or from officers, directors,
partners, stockholders or Affiliates of Seller or any members of their
immediate families), agreements or arrangements for a line of credit
or for a guarantee of, or other undertaking in connection with, the
indebtedness of any other Person;
(vi) Any Contracts under which any Encumbrances exist; and
(vi) Any other Contracts (other than Minor Contracts and those
described in any of (i) through (vi) above) not made in the ordinary
course of business.
(b) The Contracts listed in Schedule 4.16 and the Minor Contracts
excluded from Schedule 4.16 based on the term or amount thereof are referred to
herein as the "Seller Contracts." Seller is not in Default under any Seller
Contracts (including any Real Estate Leases and Non-Real Estate Leases). Seller
has not received any communication from, or given any communication to, any
other party indicating that Seller or such other party, as the case may be, is
in Default under any Seller Contract. To the knowledge of Seller, (i) none of
the other parties in any such Seller Contract is in Default thereunder, and (ii)
each such Seller Contract is enforceable against any other parties thereto in
accordance with terms thereof.
4.17 Insurance. Schedule 4.17 lists all policies or binders of insurance
---------
held by or on behalf of Seller, specifying with respect to each policy the
insurer, the amount of the coverage, the type of insurance, the risks insured,
the expiration date, the policy number and any pending claims thereunder. To
Seller's knowledge, there is no Default with respect to any such policy or
binder, nor has there been any failure to give any notice or present any claim
under any such policy or binder in a timely fashion or in the manner or detail
required by the policy or binder. There is no notice of nonrenewal or
cancellation with respect to, or disallowance of any claim under, any such
policy or binder that has been received by Seller.
15
<PAGE>
4.18 Intellectual Property
---------------------
(a) Intellectual Property. Seller has good and valid title to and
---------------------
ownership of all Intellectual Property necessary for its Business and operations
(as now conducted and as proposed to be conducted). A list of all Intellectual
Property owned by Seller is set forth on Schedule 4.18(a). There are no
outstanding options, licenses or agreements of any kind to which Seller is a
party or by which it is bound relating to any Intellectual Property, whether
owned by Seller or another person, except as disclosed on Schedule 4.18(a). The
business of Seller as formerly and presently conducted did not and does not
utilize any Intellectual Property right, and, to the knowledge of Sellers and
Stockholders, did not and does not conflict with or infringe upon any
Intellectual Property right, owned or claimed by another.
(b) Contracts. Schedule 4.18(b) contains a complete and accurate list
---------
and summary description, including any royalties paid or received by Seller, of
all Contracts relating to the Intellectual Property to which Seller is a party
or by which Seller is bound, except for any license implied by the sale of a
product and perpetual, paid-up licenses for commonly available software programs
with a value of less than $1,000 under which Seller is the licensee. There are
no outstanding and, to Seller's Knowledge, no threatened disputes or
disagreements with respect to any such agreement.
(c) Know-How Necessary for the Business. The Intellectual Property
-----------------------------------
included in the Assets constitutes all of the Intellectual Property that is
necessary for the operation of the Business as it is currently conducted.
Except as described on Schedule 4.18(c), Seller is the owner of all right, title
and interest in and to each item of Intellectual Property, free and clear of any
Encumbrances, and has the right to use without payment to a third party all of
the Intellectual Property.
4.19 Employees.
---------
(a) Seller is not a party to any Contract or other employment
agreement with any of its employees. All employees of Seller are at-will
employees terminable, without any further obligations, immediately upon notice
thereof.
(b) Seller is not (i) a party to, involved in or, to Seller's
knowledge, threatened by, any labor dispute or unfair labor practice charge, or
(ii) currently negotiating any collective bargaining agreement. Seller has not
experienced during the last three years any work stoppage. Seller has delivered
to Buyer a complete and correct list of the names and salaries, bonus and other
cash compensation of all employees (including officers) of Seller. Schedule
4.19 lists the directors and officers of Seller.
4.20 ERISA.
-----
(a) Schedule 4.20 contains a complete list of all Benefit Plans
sponsored or
16
<PAGE>
maintained by Seller or under which Seller is obligated. Seller has delivered to
Buyer (i) accurate and complete copies of all such Benefit Plan documents and
all other material documents relating thereto, including (if applicable) all
summary plan descriptions, summary annual reports and insurance contracts, (ii)
accurate and complete detailed summaries of all unwritten Benefit Plans, (iii)
accurate and complete copies of the most recent financial statements and
actuarial reports with respect to all such Benefit Plans for which financial
statements or actuarial reports are required or have been prepared and (iv)
accurate and complete copies of all annual reports for all such Benefit Plans
(for which annual reports are required) prepared within the last three years.
Each such Benefit Plan providing benefits that are funded through a policy of
insurance is indicated by the word "insured" placed by the listing of the
Benefit Plan in the Schedule 4.20.
(b) All such Benefit Plans conform (and at all times have conformed)
in all material respects to, and are being administered and operated (and have
at all time been administered and operated) in material compliance with, the
requirements of ERISA, the Code and all other applicable Laws. All returns,
reports and disclosure statements required to be made under ERISA and the Code
with respect to all such Benefit Plans have been timely filed or delivered.
There have not been any "prohibited transactions," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA involving any of the Benefit
Plans, that could subject any Seller Company to any material penalty or tax
imposed under the Code or ERISA.
(c) Except as is set forth in Schedule 4.20, any such Benefit Plan
that is intended to be qualified under Section 401(a) of the Code and exempt
from tax under Section 501(a) of the Code has been determined by the Internal
Revenue Service to be so qualified or an application for such determination is
pending. Any such determination that has been obtained remains in effect and
has not been revoked, and with respect to any application that is pending,
Seller does not have any reason to suspect that such application for
determination will be denied. Nothing has occurred since the date of any such
determination that is reasonably likely to affect adversely such qualification
or exemption, or result in the imposition of excise taxes or income taxes on
unrelated business income under the Code or ERISA with respect to any such
Benefit Plan.
(d) Seller does not sponsor a defined benefit plan subject to Title IV
of ERISA, nor does it have a current or contingent obligation to contribute to
any multiemployer plan (as defined in Section 3(37) of ERISA). Seller does not
have any liability with respect to any employee benefit plan (as defined in
Section 3(3) of ERISA) other than with respect to such Benefit Plans.
(e) There are no pending or, to the knowledge of Seller, any
threatened claims by or on behalf of any such Benefit Plans, or by or on behalf
of any individual participants or beneficiaries of any such Benefit Plans,
alleging any breach of fiduciary duty on the part of Seller or any of its
officers, directors or employees under ERISA or any other applicable
regulations, or claiming benefit payments (other than those made in the ordinary
operation of such plans), nor is
17
<PAGE>
there, to the knowledge of Seller, any basis for such claim. The Benefit Plans
are not the subject of any pending (or to the knowledge of Seller, any
threatened) investigation or audit by the Internal Revenue Service or the
Department of Labor.
(f) Seller has timely made all required contributions under such
Benefit Plans.
(g) With respect to any such Benefit Plan that is an employee welfare
benefit plan (within the meaning of Section 3(1) of ERISA) (a "Welfare Plan")
and except as specified in Schedule 4.20, (i) each Welfare Plan for which
contributions are claimed by Seller as deductions under any provision of the
Code complies with all applicable requirements pertaining to such deduction,
(ii) with respect to any welfare benefit fund (within the meaning of Section 419
of the Code) related to a Welfare Plan, there is no disqualified benefit (within
the meaning of Section 4976(b) of the Code) that would result in the imposition
of a tax under Section 4976(a) of the Code, (iii) any Benefit Plan that is a
group health plan (within the meaning of Section 4980B(g)(2) of the Code)
complies, and in each and every case has complied, with all of the applicable
requirements of Section 4980B of the Code, ERISA, Title XXII of the Public
Health Service Act and the Social Security Act, and (iv) all Welfare Plans may
be amended or terminated at any time on or after the Closing Date. Except as
specified in Schedule 4.20, no Benefit Plan provides any health, life or other
welfare coverage to employees of Seller beyond termination of their employment
with Seller by reason of retirement or otherwise, other than coverage as may be
required under Section 4980B of the Code or Part 6 of ERISA, or under the
continuation of coverage provisions of the laws of any state or locality.
4.21 Corporate Records. The minute books of Seller contain complete,
-----------------
correct and current copies of its Charter Documents and bylaws and the records
of all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders set forth in such minute books are accurate. The
stock record books of Seller are complete, correct and current.
4.22 Absence of Certain Changes. Except as contemplated by this Agreement,
--------------------------
Seller has conducted the Business in the ordinary course since the Balance Sheet
Date, and there has not been with respect to the Business any of the items
specified below since the Balance Sheet Date:
(a) any change that has had or is reasonably likely to have a Material
Adverse Effect;
(b) any distribution or payment declared or made in respect of its
common stock by way of dividends, purchase or redemption of shares or
otherwise;
(c) any increase in the compensation payable or to become payable to
any director, officer, employee or agent, except for increases for non-
officer
18
<PAGE>
employees made in the ordinary course of business, nor any other change in
any employment or consulting arrangement;
(d) any sale, assignment or transfer of Assets, or any additions to or
transactions involving any Assets, other than those made in the ordinary
course of business;
(e) other than in the ordinary course of business, any waiver or
release of any claim or right or cancellation of any debt held;
(f) other than in the ordinary course of business, any incurrence of
indebtedness for borrowed money or issuance of any debt securities; or
(g) any payments to any Affiliate of Seller, except as specified in
Schedule 4.22.
4.23 Customers. Seller has used reasonable business efforts to maintain,
---------
and currently maintains, good working relationships with all of its customers.
Schedule 4.23 contains a list of the names of each of the 10 customers that, in
the aggregate, for the period from January 1, 1998 through July 31, 1998 were
the largest dollar volume customers of products or services, or both, sold by
Seller. Except as specified in Schedule 4.23, none of such customers has given
Seller written notice terminating, canceling or threatening to terminate or
cancel any Contract or relationship with Seller.
4.24 Previous Sales; Warranties. Seller has not breached any express or
--------------------------
implied warranties in connection with the sale or distribution of goods or the
performance of services, except for breaches that, individually and in the
aggregate, are not material and are consistent with the past practices of the
Business.
4.25 Finder's Fees. No Person retained by any Seller Party is or will be
-------------
entitled to any commission or finder's or similar fee in connection with the
Transactions.
4.26 Accuracy of Information. To Seller's knowledge, no representation or
-----------------------
warranty by any Seller Party in any Transaction Document, and no information
contained therein or otherwise delivered by or on behalf of any Seller Party to
Buyer in connection with the Transactions, including the Financial Statements,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which such statements were made.
4.27 Investigation and Evaluation. Seller and the Stockholders each
----------------------------
acknowledge that (a) the Stockholders are experienced in the operation of the
type of business conducted by Buyer, (b) the Stockholders, Seller and their
directors, officers, attorneys, accountants and advisors have been given the
opportunity to examine to the full extent deemed necessary and desirable by
19
<PAGE>
Seller and the Stockholders all books, records and other information with
respect to Buyer and its business, assets and liabilities, (c) Seller and the
Stockholders have taken full responsibility for determining the scope of their
investigations of Buyer and its business, assets and liabilities, and for the
manner in which such investigations have been conducted, and have examined Buyer
and its business, assets and liabilities to Seller and the Stockholders' full
satisfaction, (d) Seller and the Stockholders are fully capable of evaluating
the adequacy and accuracy of the information and material obtained by Seller and
the Stockholders in the course of such investigations and (e) Seller and the
Stockholders have not relied on Buyer or any of its directors, officers,
attorneys, accountants and advisors with respect to any matter in connection
with Seller and the Stockholders evaluation of Buyer and its business, assets
and liabilities and the transactions contemplated hereby, other than the
representations and warranties of Buyer specifically set forth in Article V.
4.28 Undisclosed Liabilities. Seller has no liabilities or obligations of
-----------------------
any nature (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), except for liabilities or
obligations reflected or reserved against in the Balance Sheet and current
liabilities incurred in the ordinary course of Business since the Balance Sheet
Date (none of which results from, arises out of, relates to, is in the nature
of, or was caused by any breach of Contract, breach of warranty, tort,
infringement or violation of Law).
4.29 Investment Purpose. As of the date hereof, each Stockholder is
------------------
purchasing the Seller Shares and the shares of Common Stock issuable upon
conversion of or otherwise pursuant to the Seller Shares (such shares of Common
Stock being referred to herein as the "Conversion Shares" and collectively with
the Seller Shares, the "Securities") for its own account and not with a present
view towards the public sale or distribution thereof, except pursuant to sales
registered or exempted from registration under the Securities Act; provided,
--------
however, that by making the representation herein, Stockholders do not agree to
- -------
hold any of the Securities for any minimum or other specific term and reserves
the right to dispose of the Securities at any time in accordance with or
pursuant to a registration statement or an exemption under the Securities Act.
4.30 Accredited Investor. Each Stockholder is an "accredited investor" as
-------------------
that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor").
4.31 Reliance on Exemptions. Stockholders each understand that the
----------------------
Securities are being offered and sold to them in reliance upon specific
exemptions from the registration requirements of United States federal and state
securities laws and that Buyer is relying upon the truth and accuracy of, and
Seller and Stockholders' compliance with, the representations, warranties,
agreements, acknowledgments and understandings of Seller and Stockholders set
forth herein in order to determine the availability of such exemptions and the
eligibility of Stockholders to acquire the Securities.
20
<PAGE>
4.32 Information. Stockholders and their advisors have been furnished with
-----------
all materials relating to the business, finances and operations of Buyer and
materials relating to the offer and sale of the Securities which have been
requested by Seller, Stockholders and their advisors. Seller, Stockholders and
their advisors have been afforded the opportunity to ask questions of Buyer.
Neither such inquiries nor any other due diligence investigation conducted by
Seller, Stockholders or any of their advisors or representatives shall modify,
amend or affect Seller or Stockholders' right to rely on Buyer's representations
and warranties contained in Section 5 below. Stockholders each understand that
their investment in the Securities involves a significant degree of risk.
4.33 Governmental Review. Stockholders each understand that no United
-------------------
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Securities.
4.34 Transfer or Re-sale. Each Stockholder understands that (i) the sale
-------------------
or re-sale of the Securities has not been and is not being registered under the
Securities Act or any applicable state securities laws, and the Securities may
not be transferred unless (a) such sale or re-sale is subsequently included in
an effective registration statement thereunder, (b) sold or transferred to an
"affiliate" (as defined in Rule 144 promulgated under the Securities Act (or a
successor rule) ("Rule 144")) of Stockholders who agrees to sell or otherwise
transfer the Securities only in accordance with this Section 4.34 and who is an
Accredited Investor or (c) the Securities are sold pursuant to Rule 144; (ii)
any sale of such Securities made in reliance on Rule 144 may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any re-sale of such Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder; and (iii) none
of the Stockholders nor any other person is under any obligation to register
such Securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
4.35 Legends. Each Stockholder understands that the Securities and, until
-------
such time as the Securities have been registered under the Securities Act or
otherwise may be sold pursuant to Rule 144 without any restriction as to the
number of securities as of a particular date that can then be immediately sold,
the Securities may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for such Securities):
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities may not be sold, transferred or assigned in the absence
of an effective registration
21
<PAGE>
statement for the securities under said Act, or an opinion of counsel,
in form, substance and scope customary for opinions of counsel in
comparable transactions, that registration is not required under said
Act or unless sold pursuant to Rule 144 under said Act."
The legend set forth above shall be removed and Buyer shall issue a
certificate without such legend to the holder of any Securities upon which it is
stamped, if, unless otherwise required by applicable state securities laws, (a)
such Securities are registered for sale under an effective registration
statement filed under the Securities Act, or (b) such holder provides Buyer with
reasonable assurances that such Securities can be sold pursuant to Rule 144
without any restriction as to the number of Securities acquired as of a
particular date that can then be immediately sold. Stockholders each agree to
sell all Securities, including those represented by a certificate(s) from which
the legend has been removed, in compliance with applicable prospectus delivery
requirements, if any.
4.36 Additional Information. Schedule 4.36 accurately lists the
----------------------
following:
(a) the names and addresses of every bank or other financial
institution in which Seller maintains an account (whether checking, saving
or otherwise), lock box or safe deposit box, and the account numbers and
names of Persons having signing authority or other access thereto; and
(b) all names under which Seller has conducted the Business or which
it has otherwise used at any time during the past five years.
5. Representations and Warranties of Buyer.
---------------------------------------
Buyer hereby represents and warrants to Seller Parties as follows:
5.1 Organizational Status. Buyer is a corporation duly organized, validly
---------------------
existing and in good standing under the Laws of the Commonwealth of Pennsylvania
and is qualified to do business in any jurisdiction where it is required to be
so qualified. The Charter Documents of Buyer that have been delivered to Seller
as of the date hereof are effective under applicable Laws and are current,
correct and complete.
5.2 Authorization. Buyer has the requisite power and authority to own its
-------------
assets and to carry on its business. Buyer has the requisite power and
authority to execute and deliver the Transaction Documents to which it is a
party and to perform the Transactions performed or to be performed by it. Such
execution, delivery and performance by Buyer have been duly authorized by all
necessary corporate action. Each Transaction Document executed and delivered by
Buyer has been duly executed and delivered by Buyer and constitutes a valid and
binding obligation of Buyer, enforceable against Buyer in accordance with its
terms.
22
<PAGE>
5.3 Consents and Approvals. Except for filings that may be required to
----------------------
effect the Merger under the Laws of the State of Delaware (the "Buyer Required
Consents"), neither the execution and delivery by Buyer of the Transaction
Documents to which it is a party, nor the performance of the Transactions
performed or to be performed by Buyer, require any filing, consent or approval,
constitute a Default or cause any payment obligation to arise under (a) any Law
or Court Order to which Buyer is subject, (b) the Charter Documents or bylaws of
Buyer or (c) any Contract, Governmental Permit or other document to which Buyer
is a party or by which the properties or other assets of Buyer may be subject.
5.4 Capitalization and Share Ownership. Upon consummation of the
----------------------------------
Transactions at the Closing, the authorized capital stock of Buyer consists of
40,000,000 shares of Common Stock of the Company, par value $.01, and 40,000,000
shares of Preferred Stock of the Company, par value $.01. Of the Preferred
Stock, 1,000,000 shares are designated as Series A Preferred Stock, 5,100,000
shares are designated Series B Preferred Stock, 400,000 shares are designated
Series C Preferred Stock and 9,000,000 shares are designated Series D Preferred
Stock. As of the date hereof, there are 5,128,497 shares of Common Stock,
1,000,000 shares of Series A Preferred Stock, 5,030,181 shares of Series B
Preferred Stock and 301,978 shares of Series C Preferred Stock and 8,888,889
shares of Series D Preferred Stock, outstanding. Additionally, the Company has
issued warrants for an aggregate number of 259,949 shares, has granted
3,011,536.6 options to purchase Common Stock, under the Company's 1996 Equity
Compensation Plan, as amended, of a total of 3,600,000 shares under such plan.
5.5 Finder's Fees. No Person retained by Buyer is or will be entitled to
-------------
any commission or finder's or similar fee in connection with the Transactions.
5.6 No Equity Interest. Buyer does not currently own any of the capital
------------------
stock of, or any other equity interest in, Seller.
5.7 Accuracy of Information. To Buyer's actual knowledge, no
-----------------------
representation or warranty by Buyer in any Transaction Document, and no
information contained therein or otherwise delivered by or on behalf of Buyer to
any other Party in connection with the Transactions contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading in light
of the circumstances under which such statements were made.
6. Covenants of Seller Parties.
---------------------------
6.1 Conduct of the Business. Except as contemplated or otherwise
-----------------------
consented to by Buyer in writing, Seller shall carry on the Business in the
ordinary course. In furtherance of and in addition to such restriction, (a)
Seller shall not: amend its Charter
23
<PAGE>
Documents or bylaws; merge or consolidate with, or purchase substantially all of
the assets of, or otherwise acquire any business of, any corporation,
partnership or other business organization or business division thereof; split,
combine or reclassify its outstanding capital stock; enter into any Contract or
otherwise incur any Liability outside the ordinary course of business; discharge
or satisfy any Encumbrance or pay or satisfy any material Liability except
pursuant to the terms thereof; compromise, settle or otherwise adjust any
material claim or litigation; make any capital expenditure involving in any
individual case more than $5,000; incur any indebtedness for borrowed money or
issue any debt securities; declare or pay any dividend or other distribution on
its capital stock; increase the salaries or other compensation payable to any
employee, or take any action, or fail to take any reasonable action within its
control, as a result of which any of the changes or events listed in Section
4.22 would be likely to occur, and (b) Seller shall maintain and service the
Assets consistent with past practice and preserve intact the current business
organization of Seller.
6.2 Access to Information. From the date of this Agreement to the Closing
---------------------
Date, Seller shall give to Buyer and its officers, employees, counsel,
accountants and other representatives access to and the right to inspect, during
normal business hours, all of the assets, records, contracts and other documents
relating to Seller as the other party may reasonably request. Buyer shall not
use such information for purposes other than in connection with the transactions
contemplated by this Agreement and shall otherwise hold such information in
confidence until such time as such information otherwise becomes publicly
available.
6.3 No Solicitation. From and after the date hereof, without the prior
---------------
written consent of Buyer, each Seller Party will not, and will not authorize or
permit any Seller Representative to, directly or indirectly, solicit, initiate
or encourage (including by way of furnishing information) or take any other
action to facilitate knowingly any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to an Acquisition Proposal
from any Person, or engage in any discussion or negotiations relating thereto or
accept any Acquisition Proposal. Any Seller Party that receives any such
inquiries, offers or proposals shall (a) notify Buyer orally and in writing of
any such inquiries, offers or proposals (including the terms and conditions of
any such proposal and the identity of the person making it), within 48 hours of
the receipt thereof, (b) keep Buyer informed of the status and details of any
such inquiry, offer or proposal, and (c) give Buyer five days' advance notice of
any agreement to be entered into with, or any information to be supplied to, any
Person making such inquiry, offer or proposal. As used herein, "Acquisition
Proposal" means a proposal or offer (other than pursuant to this Agreement) for
a tender or exchange offer, merger, consolidation or other business combination
involving any or any proposal to acquire in any manner a substantial equity
interest in, or all or substantially all of the Assets.
24
<PAGE>
6.4 Existing Employment Agreements and Other Liabilities. Each
----------------------------------------------------
Stockholder, effective as of the Closing, hereby consents to the cancellation of
any Contract that the Stockholder has with Seller, including any employment
agreement, and also releases and discharges Seller and any of its Affiliates
from any and all Liabilities other than those arising out of this Agreement or
any other Transaction Documents and those related to wages due to the
Stockholder in the ordinary course.
6.5 Expenses. The Stockholders shall pay all of the legal, accounting and
--------
other expenses incurred by Seller Parties in connection with the Transactions in
excess of $10,000. Buyer shall pay all of the legal, accounting and other
expenses incurred by Buyer in connection with the Transactions, plus $10,000 of
expenses incurred by the Seller Parties.
6.6 Non-Competition and Confidentiality.
-----------------------------------
(a) During the period beginning on the Closing Date and ending on the
second anniversary thereof (the "Non-Competition Period"), no Seller Party or
Affiliate of any Seller Party (each, a "Restricted Party") shall, directly or
indirectly, in any capacity, own, manage, operate, finance, join, control or
participate in the ownership, management, financing, operation or control of, or
be connected as an officer, employee, partner or otherwise, or render services,
engage or have a financial interest in, any business that shall both: (i) be
competitive with the Business, and (ii) provide services to, or otherwise have
as a customer, any Person listed on Exhibit C hereto. In addition, no
---------
Restricted Party shall solicit any employee of the Business for the purposes of
having any such employee terminate his or her employment with the Business. If
a court determines that the foregoing restrictions are too broad or otherwise
unreasonable under applicable law, including with respect to time or space, the
court is hereby requested and authorized by the parties hereto to revise the
foregoing restriction to include the maximum restrictions allowable under
applicable law. Each Restricted Party acknowledges, however, that this Section
6.6 has been negotiated by the Parties and that the geographical and time
limitations, as well as the limitation on activities, are reasonable in light of
the circumstances pertaining to the Business.
(b) Each Seller Party recognizes and acknowledges that by reason of
its or his involvement with or employment in the Business, it or he has had
access to Trade Secrets relating to the Business. Each Seller Party
acknowledges that such Trade Secrets are a valuable and unique asset and
covenants that it or he will not disclose any such Trade Secrets to any Person
for any reason whatsoever, unless such information (a) is in the public domain
through no wrongful act of such Seller Party, (b) has been rightfully received
from a third party without restriction and without breach of this Agreement or
(c) except as may be required by law.
25
<PAGE>
(c) The terms of this Section 6.6 shall apply to each Seller Party and
to any other Person controlled by any Seller Party and any of their respective
Affiliates that it or he controls to the same extent as if they were parties
hereto, and each such party shall take whatever actions may be necessary to
cause any such party or Affiliate to adhere to the terms of this Section 6.6.
(d) In the event of any breach or threatened breach by any Restricted
Party of any provision of Section 6.6, Buyer shall be entitled to injunctive or
other equitable relief, restraining such party from using or disclosing any
Trade Secrets in whole or in part, or from engaging in conduct that would
constitute a breach of the obligations of a Restricted Party under Section 6.6.
Such relief shall be in addition to and not in lieu of any other remedies that
may be available, including an action for the recovery of Damages, all of which
may be sought only in accordance with the arbitration provisions of this
Agreement.
6.7 Transfer of Assets and . Seller shall take such reasonable steps as
-----------------------
may be necessary or appropriate so that Buyer shall be placed in actual
possession and control of all of the Assets and the Business.
6.8 Relations. Seller shall use commercially reasonable efforts to
----------
maintain its relations and goodwill with its suppliers, customers, distributors
and any others having business relations with it. To the extent reasonably
requested by Buyer, Seller shall introduce Buyer to its customers and suppliers
and recommend that they continue doing business with Buyer after the Closing.
6.9 "Lock-Up" Agreement. Each Stockholder agrees, if so requested by
-------------------
Buyer and an underwriter of Common Stock or other securities of Buyer, not to
sell, transfer or dispose of any Common Stock or other securities of Buyer held
by it during a period of up to 180 days following the effective date of a
registration statement filed pursuant to the Initial Public Offering. For
purposes of this Agreement "Initial Public Offering" shall mean the first
underwritten public offering of Common Stock of Buyer for the account of Buyer
and offered on a "firm commitment" basis pursuant to an offering registered
under the Securities Act, with the Securities and Exchange Commission on Form S-
1, Form SB-1, Form SB-2 or their then equivalents. Such "lock-up" agreement
shall be in writing and in form and substance satisfactory to Buyer and the
underwriter.
6.10 Right of First Refusal and Stock Restriction and Buyback.
--------------------------------------------------------
(a) Except as expressly authorized herein or as the parties may
otherwise agree in writing from time to time hereafter, no Seller Party shall
sell, assign, transfer, pledge or otherwise in any manner dispose of or encumber
any of the Buyer Shares.
26
<PAGE>
(b) Until such time as Buyer shall have completed an initial public
offering of shares of its common stock, Buyer Shares may be sold, assigned,
transferred or otherwise disposed of (including transfers by operation of law),
provided that such Buyer Shares are first offered to Buyer or its assignee, as
follows:
(i) Such Seller Party shall deliver a notice ("Notice") to Buyer
stating (A) such Seller Party's bona fide intention to sell, assign,
transfer or otherwise dispose of such Buyer Shares, (B) the number of such
Buyer Shares to be sold, assigned, transferred or otherwise disposed of,
(C) the price, if any, for which such Seller Party proposes to sell,
assign, transfer or otherwise dispose of such Buyer Shares, and (D) the
name of the proposed purchaser or transferee.
(ii) Within thirty (30) days after receipt of the Notice, Buyer
or its assignee may elect to purchase any or all Buyer Shares to which the
Notice refers, at the price per share, if any, specified in the Notice.
(iii) If all of the Buyer Shares to which the Notice refers are
not elected to be purchased, such Seller Party may sell the remaining
shares to any person named in the Notice at the price specified in the
Notice or at a higher price, provided that such sale or transfer is
consummated within 60 days of the date of said Notice to Buyer, and
provided, further, that any such sale is in accordance with all the terms
and conditions hereof.
(c) If the consideration to be received by such Seller Party under the
terms of any such proposed sale, assignment, transfer or other disposition shall
be wholly or in part other than cash payable immediately or over a period of
time, the board of directors of Buyer shall make a good faith determination of
the cash equivalent of such non-cash consideration, which determination shall be
conclusive and binding on all parties. The price per share under any such Notice
shall be deemed to be the sum of the cash consideration, if any, under the terms
of the proposed sale, assignment, transfer or other disposition, and the cash
equivalent of the non-cash portion of the consideration thereunder as so
determined by the board of directors of Buyer.
(d) The provisions of this Section 6.11 shall not apply to a transfer
of any Buyer Shares by such Seller Party, either during Seller Party's lifetime
or on death by will or intestacy to Seller Party's other ancestors, descendants
or spouse, or any custodian or trustee for the account of Seller Party or Seller
Party's ancestors, descendants or spouse; provided, in each such case the
transferee specifically agrees (pursuant to a written agreement satisfactory to
Buyer in its sole discretion) to receive and hold such Buyer Shares subject to
all of the provisions of this Agreement and there shall be no further transfer
of such shares in accordance herewith except upon the death of such transferee.
27
<PAGE>
(e) In the event any Seller Party shall sell, assign, transfer, pledge
or otherwise in any manner dispose of or encumber any of the Buyer Shares
otherwise than pursuant to this Section 6.11, such action shall be void and of
no effect, and no dividends of any kind whatsoever nor any distribution pursuant
to liquidation or otherwise shall be paid by Buyer in respect of such Buyer
Shares (all such dividends and distributions being deemed waived by the
undersigned), and the voting rights of such Buyer Shares shall be suspended
during the period commencing with Seller's initial failure to comply with this
Section 6.11 and ending either (i) when such Seller Party complies with this
Section 6.11 or (ii) when Buyer agrees in writing to terminate such suspension
and to permit such sale, assignment, transfer, pledge, encumbrance or other
disposition.
(f) If, from time to time during the term of this Agreement:
(i) There is any stock dividend or liquidating dividend of cash
and/or property, stock split or other change in the character or amount of
any of the outstanding securities of Buyer; or
(ii) There is any consolidation, merger or sale of all, or
substantially all, of the assets of Buyer;
then, in such event, any and all new, substituted or additional securities or
other property to which Seller Parties are entitled by reason of Seller Parties'
ownership of Buyer Shares shall be immediately subject to this Agreement and be
included in the word "Buyer Shares" for all purposes with the same force and
effect as the Buyer Shares presently subject to this Agreement.
(g) Each Seller Party agrees to join at any time in any shareholders'
agreement to which the holders of a majority of Buyer Common Stock, regardless
of class, of Buyer are parties at any time in respect to the sale of Buyer
Common Stock of Buyer to any third party under which the undersigned will sell
his Buyer Shares to such third party on the same terms and conditions as those
terms and conditions under which such holders agree to sell their shares of
Buyer Common Stock. Each Seller Party acknowledges that this agreement pursuant
to this Section 6.11(g) is for the benefit of, and may be enforced by, the
holders of a majority of the shares of Buyer's Common Stock. Each Seller Party
also acknowledges that this Section 6.11 shall in no way limit, diminish or
modify the rights of Buyer to purchase his Buyer Shares under any other Section
of this Agreement.
7. Covenants of Buyer.
------------------
7.1 Fulfillment of Closing Conditions. At and prior to the Closing, Buyer
---------------------------------
shall use commercially reasonable efforts to fulfill the conditions specified in
Sections 9 and 10 to the extent that the fulfillment of such conditions is
within its control. In
28
<PAGE>
connection with the foregoing, each such party will (a) refrain from any actions
that would cause any of its representations and warranties to be inaccurate in
any material respect as of the Closing, (b) execute and deliver the applicable
agreements and other documents referred to in Sections 9 and 10, (c) comply in
all material respects with all applicable Laws in connection with its execution,
delivery and performance of this Agreement and the Transactions, (d) use
commercially reasonable efforts to obtain in a timely manner all necessary
waivers, consents and approvals required under any Laws, Contracts or otherwise,
including any Buyer Required Consents, and (e) use commercially reasonable
efforts to take, or cause to be taken, all other actions and to do, or cause to
be done, all other things reasonably necessary, proper or advisable to
consummate and make effective as promptly as practicable the Transactions.
7.2 Employees. Buyer shall have no obligation to continue the employment
---------
of any of Seller's employees.
8. Mutual Covenants.
----------------
8.1 Fulfillment of Closing Conditions. At and prior to the Closing, each
---------------------------------
party shall use commercially reasonable efforts to fulfill, and to cause each
other to fulfill, as soon as practicable after the conditions specified in
Sections 9 and 10 to the extent that the fulfillment of such conditions is
within its or his control. In connection with the foregoing, each party will
(a) refrain from any actions that would cause any of its representations and
warranties to be inaccurate as of the Closing, and take any reasonable actions
within its control that would be necessary to prevent its representations and
warranties from being inaccurate as of the Closing, (b) execute and deliver the
applicable agreements and other documents referred to in Sections 9 and 10, (c)
comply with all applicable Laws in connection with its execution, delivery and
performance of this Agreement and the Transactions, (d) use commercially
reasonable efforts to obtain in a timely manner all necessary waivers, consents
and approvals required under any Laws, Contracts or otherwise, including any
Seller Required Consents in the case of Seller Parties and any Buyer Required
Consents in the case of Buyer, (e) use commercially reasonable efforts to take,
or cause to be taken, all other actions and to do, or cause to be done, all
other things reasonably necessary, proper or advisable to consummate and make
effective as promptly as practicable the Transactions.
8.2 Disclosure of Certain Matters. Each Seller Party on the one hand, and
-----------------------------
Buyer, on the other hand, shall give Buyer and Seller Parties, respectively,
prompt notice of any event or development that occurs that (a) had it existed or
been known on the date hereof would have been required to be disclosed by such
party under this Agreement, (b) would cause any of the representations and
warranties of such party contained herein to be inaccurate or otherwise
misleading, except as contemplated by the terms hereof, or (c) gives any such
party any reason to believe that any of the conditions set forth in Section 9 or
10 will not be satisfied prior to the Termination Date (defined below).
29
<PAGE>
8.3 Public Announcements. Seller Parties and Buyer shall consult with
--------------------
each other before issuing any press release or making any public statement with
respect to this Agreement and the Transactions and, except as may be required by
applicable law, none of such Parties nor any other Parties shall issue any such
press release or make any such public statement without the consent of the other
parties hereto.
8.4 Confidentiality. If the Transactions are not consummated, each party
---------------
shall treat all information obtained in its investigation of another party or
any Affiliate thereof, and not otherwise known to them or already in the public
domain, as confidential and shall return to such other party or Affiliate all
copies made by it or its representatives of Confidential Information provided by
such other party or Affiliate.
9. Conditions Precedent to Obligations of Seller Parties.
-----------------------------------------------------
All obligations of Seller Parties to consummate the Transactions are
subject to the satisfaction (or waiver) prior thereto of each of the following
conditions:
9.1 Representations and Warranties. The representations and warranties of
------------------------------
Buyer contained in this Agreement shall be true and correct on the date hereof
and (except to the extent such representations and warranties speak as of an
earlier date) shall also be true and correct on and as of the Closing Date with
the same force and effect as if made on and as of the Closing Date.
9.2 Agreements, Conditions and Covenants. Buyer shall have performed or
------------------------------------
complied with all agreements, conditions and covenants required by this
Agreement to be performed or complied with by it on or before the Closing Date.
9.3 Certificates. Seller Parties shall have received a certificate of an
------------
executive officer of Buyer to the effect set forth in Sections 9.1 and 9.2 with
respect to Buyer.
9.4 Legality. No Law or Court Order shall have been enacted, entered,
--------
promulgated or enforced by any court or governmental authority that is in effect
and has the effect of making the purchase and sale of the Assets illegal or
otherwise prohibiting the consummation of such purchase and sale.
9.5 Buyer Required Consents. Buyer shall have obtained Buyer Required
-----------------------
Consents without any modification that Seller reasonably deems unacceptable.
10. Conditions Precedent to Obligations of Buyer.
--------------------------------------------
All obligations of Buyer to consummate the Transactions are subject to the
satisfaction (or waiver) prior thereto of each of the following conditions:
30
<PAGE>
10.1 Representations and Warranties. The representations and warranties of
------------------------------
Seller Parties contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak as of
an earlier date) shall also be true and correct on and as of the Closing Date,
except for changes contemplated by this Agreement, with the same force and
effect as if made on and as of the Closing Date.
10.2 Agreements, Conditions and Covenants. Seller Parties shall have
------------------------------------
performed or complied in all material respects with all agreements, conditions
and covenants required by this Agreement to be performed or complied with by
them on or before the Closing Date.
10.3 Certificates. Buyer shall have received a certificate of an executive
------------
officer of Seller and of each Stockholder to the effect set forth in Sections
10.1 and 10.2.
10.4 Legality. No Law or Court Order shall have been enacted, entered,
--------
promulgated or enforced by any court or governmental authority that is in effect
and (a) has the effect of making the purchase and sale of the Assets illegal or
otherwise prohibiting the consummation of such purchase and sale or (b) has a
reasonably likelihood of causing a Material Adverse Effect.
11. Indemnification.
---------------
11.1 By Seller Parties. From and after the Closing Date, the Stockholders
-----------------
severally, and not jointly, shall indemnify and hold harmless Buyer and its
successors and assigns, and their respective officers, directors, employees,
stockholders, agents, Affiliates and any Person who controls any of such Persons
within the meaning of the Securities Act or the Exchange Act (each, a "Buyer
Indemnified Party") from and against, and the Escrow Fund shall be available to
compensate and reimburse Buyer for, any liabilities, claims, demands, judgments,
losses, costs, damages or expenses whatsoever (including reasonable attorneys',
consultants' and other professional fees and disbursements of every kind, nature
and description incurred by such Buyer Indemnified Party in connection therewith
including consequential damages) (collectively, "Damages") that such Buyer
Indemnified Party may sustain, suffer or incur and that result from, arise out
of or relate to (a) any breach of any of the respective representations,
warranties, covenants or agreements of any Seller Parties contained in this
Agreement or in the Closing Certificates, (b) any Environmental Condition
existing on or before the Closing, and (c) any Liability of any Seller Party
involving Taxes due and payable by, or imposed with respect to any Seller Party
for any all taxable periods ending on or prior to the Closing Date (whether or
not such Taxes have been due and payable). Notwithstanding anything herein to
the contrary, the liability of all Stockholders shall be limited to the Escrow
Fund (as herein defined), and the Escrow Fund shall be available as the sole and
exclusive remedy to compensate Buyer for
31
<PAGE>
Damages which are the responsibility of Stockholders under this Section 11.
Furthermore, the liability of each Stockholder shall be limited to such
Stockholder's pro rata share of the Escrow Fund, and claims for indemnification
by Stockholder's shall be satisfied from each Stockholder on a pro rata basis.
11.2 By Buyer. From and after the Closing Date, Buyer shall indemnify and
--------
hold harmless Seller Parties and their respective successors and assigns, and
(if any) their respective officers, directors, employees, stockholders, agents,
Affiliates and any Person who controls any of such Persons within the meaning of
the Securities Act or the Exchange Act (each, a "Seller Indemnified Party") from
and against any Damages that such Seller Indemnified Party may sustain, suffer
or incur and that result from, arise out of or relate to any breach of any of
the respective representations, warranties, covenants or agreements of Buyer
contained in this Agreement. Buyer shall not be liable under this Agreement for
an aggregate amount in excess of the fair market value as of the Closing Date of
the Merger Consideration.
11.3 Holders' Representative.
-----------------------
(a) Mechlin D. Moore shall act as the Stockholders' representative
(the "Holders' Representative") for the purpose of settling on behalf of the
Stockholders any indemnification claims made by Buyer Indemnified Party
hereunder, and taking any other action that is specifically delegated to the
Holders' Representative hereunder. Buyer shall give notice under Section 11.4
of any claim for indemnification against the Stockholders to the Stockholders
and the Holders' Representative, and only the Holders' Representative shall be
empowered following such notice to respond to or take any other action on behalf
of the Stockholders with respect to the claim. The Stockholders shall be bound
by any and all actions taken by the Holders' Representative on their behalf in
accordance with this Agreement.
(b) Buyer shall be entitled to rely exclusively upon any
communications or writings given or executed by the Holders' Representative and
shall not be liable in any manner whatsoever for any action taken or not taken
in reliance upon the actions taken or not taken or communications or writings
given or executed by the Holders' Representative. Buyer shall be entitled to
disregard any notices or communications given or made by the Stockholders unless
given or made through the Holders' Representative.
(c) In the event of the death of the Holders' Representative or his
inability to perform his functions hereunder, the Stockholders who immediately
prior to the Closing owned a majority of Seller Shares shall choose another
Holders' Representative.
32
<PAGE>
(d The Holders' Representative shall not be liable to any Stockholder
or any other party for any action taken or omitted to be taken by him as
Holders' Representative except, in the case of willful misconduct or gross
negligence. The Stockholders shall jointly indemnify the Holders'
Representative and hold him harmless from and against any loss, liability or
expense of any nature incurred by the Holders' Representative arising out of or
in connection with the administration of his duties as Holders' Representative,
including reasonable legal fees and other costs and expenses of defending or
preparing to defend against any claim or liability in the premises, unless such
loss, liability or expense shall be caused by the Holders' Representative's
willful misconduct or gross negligence.
11.4 Procedure for Claims.
--------------------
(a Any Person that desires to seek indemnification under any part of
this Section 11 (each, an "Indemnified Party") shall give notice (a "Claim
Notice") to each party responsible or alleged to be responsible for
indemnification hereunder (an "Indemnitor") prior to any applicable Expiration
Date specified below. Such notice shall briefly explain the nature of the claim
and the parties known to be invoked, and shall specify the amount thereof. If
the matter to which a claim relates shall not have been resolved as of the date
of the Claim Notice, the Indemnified Party shall estimate the amount of the
claim in the Claim Notice, but also specify therein that the claim has not yet
been liquidated (an "Unliquidated Claim"). If an Indemnified Party gives a
Claim Notice for an Unliquidated Claim, the Indemnified Party shall also give a
second Claim Notice (the "Liquidated Claim Notice") within 60 days after the
matter giving rise to the claim becomes finally resolved, and the Second Claim
Notice shall specify the amount of the claim. Each Indemnitor to which a Claim
Notice is given shall respond to any Indemnified Party that has given a Claim
Notice (a "Claim Response") within 20 days (the "Response Period") after the
later of (i) the date that the Claim Notice is given or (ii) if a Claim Notice
is first given with respect to an Unliquidated Claim, the date on which the
Liquidated Claim Notice is given. Any Claim Notice or Claim Response shall be
given in accordance with the notice requirements hereunder, and any Claim
Response shall specify whether or not the Indemnitor giving the Claim Response
disputes the claim described in the Claim Notice. If any Indemnitor fails to
give a Claim Response within the Response Period, such Indemnitor shall be
deemed not to dispute the claim described in the related Claim Notice. If any
Indemnitor elects not to dispute a claim described in a Claim Notice, whether by
failing to give a timely Claim Response or otherwise, then the amount of such
claim shall be conclusively deemed to be an obligation of such Indemnitor. For
the purposes of the immediately preceding sentence, an Indemnitor's failure to
give a timely Claim Response shall not be deemed an election not to dispute a
Claim Notice unless the Indemnified Party shall have given a second Claim Notice
after expiration of the Response Period and another 20 days after the date on
which the Indemnified Party shall have given such second Claim Notice shall have
expired without the Indemnitor's having given a Response Notice within such
period.
33
<PAGE>
(b If any Indemnitor shall be obligated to indemnify an Indemnified
Party hereunder, such Indemnitor shall pay to such Indemnified Party within 30
days after the last day of the Claim Response Period the amount to which such
Indemnified Party shall be entitled. If there shall be a dispute as to the
amount or manner of indemnification under this Section 11, the Indemnified Party
may pursue whatever legal remedies may be available for recovery of the Damages
claimed from any Indemnitor in accordance with the arbitration provisions of
this Agreement. If any Indemnitor fails to pay all or part of any
indemnification obligation when due, then such Indemnitor shall also be
obligated to pay to the applicable Indemnified Party interest on the unpaid
amount for each day during which the obligation remains unpaid at an annual rate
equal to the Prime Rate, and the Prime Rate in effect on the first business day
of each calendar quarter shall apply to the amount of the unpaid obligation
during such calendar quarter.
(c Whenever there is an event, condition or a circumstance (a
"Possible Breach") the subject matter of which is covered by more than one of
the representations and warranties contained in Section 4 or Section 5 (the
"Applicable Representations") and one or more of such representations (the
"Specifically Applicable Representations") more specifically relate to the
subject matter of the Possible Breach, then if such Possible Breach would cause
a breach of any Specifically Applicable Representations, the fact that a breach
may not have occurred with respect to any of the more general Applicable
Representation shall not affect an Indemnified Party's ability to claim a breach
of the Specifically Applicable Representations. By way of illustration but not
by way of limitation, if, for example, an inaccuracy in the Financial Statements
exists with respect to Inventory that is unknown to Seller and, therefore, would
not constitute a breach of Section 4.26 by virtue of the knowledge limitation in
Section 4.26, a Buyer Indemnified Party would still be able to claim a breach of
the representations and warranties in Section 4.5 with respect to Financial
Statements and in Section 4.11 with respect to Inventory since Section 4.5 and
Section 4.11 more specifically relate to the Financial Statements and Inventory.
11.5 Claims Period. Any claim for indemnification under this Section 11
-------------
shall be made by giving a Claim Notice under Section 11.4 on or before six (6)
months following the Effective Time of the Merger (the "Expiration Date"). So
long as an Indemnified Party gives a Claim Notice for an Unliquidated Claim on
or before the Expiration Date, such Indemnified Party shall be entitled to
pursue its rights to indemnification regardless of the date on which such
Indemnified Party gives the related Liquidated Claim Notice.
11.6 Third Party Claims. An Indemnified Party that desires to seek
------------------
indemnification under any part of this Section 11 with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such
34
<PAGE>
Action. After such notice, any Indemnitor may, or if so requested by such
Indemnified Party, any Indemnitor shall, participate in such Action or assume
the defense thereof, with counsel satisfactory to such Indemnified Party;
provided, however, that such Indemnified Party shall have the right to
participate at its own expense in the defense of such Action; and provided,
further, that the Indemnitor shall not consent to the entry of any judgment or
enter into any settlement, except with the written consent of such Indemnified
Party (which consent shall not be unreasonably withheld). Any failure to give
prompt notice under this Section 11.6 shall not bar an Indemnified Party's right
to claim indemnification under this Section 11, except to the extent that an
Indemnitor shall have been harmed by such failure.
11.7 Escrow of Merger Consideration and Contingent Merger Consideration.
-------------------------------------------------------------------
Unitl the Expiration Date, the obligations of Stockholders under this Section 11
shall be secured in part by the deposit with the Escrow Agent of (a) the Merger
Consideration at the Closing and (b) the Contingent Merger Consideration (if
any) when paid in accordance with Section 2.7 (collectively, the "Escrow Fund"),
subject to the terms and conditions of the Escrow Agreement attached hereto as
Exhibit B. Subject to the terms of the Escrow Agreement, Buyer may offset
against the Escrow Fund any claims it has in good faith against the Stockholders
pursuant to this Section 11. Indemnification claims pursuant to this Section 11
shall be limited to the Escrow Fund.
12. Termination.
-----------
12.1 Grounds for Termination. This Agreement may be terminated at any time
-----------------------
before the Effective Time:
(a By mutual written consent of Seller and Buyer;
(b By Seller or Buyer if the Closing shall not have been consummated
on or before the Termination Date; provided, however, that the right to
terminate this Agreement under this Section 12.1(b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or before
the Termination Date;
(c By Seller or Buyer if a court of competent jurisdiction or govern
mental, regulatory or administrative agency or commission shall have issued a
Court Order (which Court Order the parties shall use commercially reasonable
efforts to lift) that permanently restrains, enjoins or otherwise prohibits the
Transactions, and such Court Order shall have become final and nonappealable;
(d By Buyer, if any Seller Party shall have breached, or failed to
comply with, any of its or his obligations under this Agreement or any
representation or
35
<PAGE>
warranty made by any Seller Party shall have been incorrect when made, and such
breach, failure or misrepresentation is not cured within 20 days after notice
thereof; and
(e By any Seller Party, if Buyer shall have breached, or failed to
comply with any of its obligations under this Agreement or any representation or
warranty made by it shall have been incorrect when made, and such breach,
failure or misrepresentation is not cured within 20 days after notice thereof,
and in either case, any such breaches, failures or misrepresentations,
individually or in the aggregate, results or would reasonably be expected to
affect materially and adversely the benefits to be received by the Stockholders
hereunder.
12.2 Effect of Termination. If this Agreement is terminated pursuant to
---------------------
Section 12.1, the agreements contained in Section 8.4 shall survive the
termination hereof and any party may pursue any legal or equitable remedies that
may be available if such termination is based on a breach of another party.
13. General Matters.
---------------
13.1 Arbitration.
-----------
(a) All disputes concerning this Agreement shall be decided by
arbitration in accordance with the commercial rules and regulations of the
American Arbitration Association (except to the extent such rules and
regulations are inconsistent with the provisions of this Section).
(b) If the parties agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. If the parties do not so agree, the parties shall
each select one independent, qualified arbitrator. For this purpose, all
parties whose interest in the matter being arbitrated are substantially
identical shall be treated as a single party entitled to select on arbitrator.
If an even number of arbitrators is selected, such arbitrators shall select an
additional arbitrator.
(c) Each party reserves the right to object to any individual
arbitrator who is employed by or affiliated with an organization that competes
with such party.
(d) The parties shall have the right to conduct discovery as specified
for up to three months. Such discovery shall include the right to take
depositions and subpoena witnesses.
(e) At the request of any party, arbitration proceedings shall be
conducted in the utmost secrecy. In such case, all documents, testimony, and
records shall be received, heard and maintained by the arbitrators in secrecy
under seal, available for the inspection only of the parties and their
respective attorneys and experts who have
36
<PAGE>
agreed in advance in writing to receive and maintain all such information in
confidence until such information becomes generally known.
(f) The arbitrators shall act by majority vote. The arbitrators shall
issue a written opinion of their findings of fact and their conclusions of law
at the request and at the expense of either party.
(g) The arbitrators shall be able to decree any and all relief of an
equitable nature, including without limitation such relief as a temporary
restraining order and a preliminary or permanent injunction, and shall also be
able to award damages, with or without an accounting, and costs, except that the
prevailing party shall be entitled to its reasonable attorneys fees. The decree
or judgment of an award rendered by the arbitrators shall be binding upon the
parties and may be entered in any court having jurisdiction thereof.
(h) All arbitrations shall be conducted by arbitrators located in
Philadelphia, Pennsylvania. Reasonable notice of the time and place of
arbitration shall be given to all persons as required by law. Such persons and
their authorized representatives shall have the right to attend or participate
in all the arbitration hearings in such manner as the law requires.
13.2 Contents of Agreement. This Agreement, together with the other
---------------------
Transaction Documents, sets forth the entire understanding of the parties with
respect to the Transactions and supersedes all prior agreements or
understandings among the parties regarding those matters.
13.3 Amendment, Parties in Interest, Assignment, Etc. This Agreement may
-----------------------------------------------
be amended, modified or supplemented only by a written instrument duly executed
by each of the parties hereto. If any provision of this Agreement shall for any
reason be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other provision
hereof, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the respective
heirs, legal representatives, successors and permitted assigns of the parties.
Nothing in this Agreement shall confer any rights upon any Person other than
Seller Parties and Buyer and their respective heirs, legal representatives,
successors and permitted assigns. No party hereto shall assign this Agreement
or any right, benefit or obligation hereunder. Any term or provision of this
Agreement may be waived at any time by the party entitled to the benefit thereof
by a written instrument duly executed by such party.
13.4 Further Assurances. At and after the Closing, Seller Parties and
------------------
Buyer shall execute and deliver any and all documents and take any and all other
actions that
37
<PAGE>
may be deemed reasonably necessary by their respective counsel to complete the
Transactions.
13.5 Interpretation. Unless the context of this Agreement clearly requires
--------------
otherwise, (a) references to the plural include the singular, the singular the
plural, the part the whole, (b) references to any gender include all genders,
(c) "or" has the inclusive meaning frequently identified with the phrase
"and/or," (d) "including" has the inclusive meaning frequently identified with
the phrase "but not limited to" and (e) references to "hereunder" or "herein"
relate to this Agreement. The section and other headings contained in this
Agreement are for reference purposes only and shall not control or affect the
construction of this Agreement or the interpretation thereof in any respect.
Section, subsection, Schedule and Exhibit references are to this Agreement
unless otherwise specified. Each accounting term used herein that is not
specifically defined herein shall have the meaning given to it under GAAP. Any
reference to a party's being satisfied with any particular item or to a party's
determination of a particular item presumes that such standard will not be
achieved unless such party shall be satisfied or shall have made such
determination in its sole or complete discretion.
13.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be binding as of the date first written above,
and all of which shall constitute one and the same instrument. Each such copy
shall be deemed an original, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such counterpart.
13.7 Schedules. Any items listed or described on Schedules shall be listed
---------
or described under a caption that identifies the Sections of this Agreement to
which the item relates.
14. Notices.
-------
All notices that are required or permitted hereunder shall be in writing
and shall be sufficient if personally delivered or sent by mail, facsimile
message or Federal Express or other delivery service. Any notices shall be
deemed given upon the earlier of the date when received at, or the third day
after the date when sent by registered or certified mail or the day after the
date when sent by Federal Express to, the address or fax number set forth below,
unless such address or fax number is changed by notice to the other Party
hereto:
38
<PAGE>
If to Seller or any Stockholder:
Informatrix Worldwide, Inc.
c/o Mechlin Moore
1723 Grand Isle Court
Naples, FL 34108
with a required copy to:
Lawrence B. Florio, Esquire
1211 Avenue of the Americas, 15th Floor
New York, New York
Fax: (212) 827-0351
If to Buyer:
VerticalNet, Inc.
2 Walnut Grove Drive, Suite 150
Horsham, PA 19044
Attn: Gene S. Godick
FAX: 215-443-3336
with a required copy to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Attn: Stephen M. Goodman
FAX: 215-963-5299
15. Governing Law.
-------------
This Agreement shall be construed and interpreted in accordance with the
laws of the Commonwealth of Pennsylvania without regard to its provisions
concerning conflict of laws.
39
<PAGE>
IN WITNESS WHEREOF, this Agreement and Plan of Merger has been executed by
the parties hereto as of the day and year first written above.
INFORMATRIX WORLDWIDE, INC. INFORMATRIX ACQUISITION
By: /s/ Mechlin Moore By: /s/ Mark Walsh
------------------------- -------------------------
Mechlin Moore, President Mark Walsh, President
/s/ Brian Boltz VERTICALNET, INC.
- -------------------------
Brian Boltz
By: /s/ Mark Walsh
-------------------------
Mark Walsh, President
/s/ Page Lord
- -------------------------
Page Lord
/s/ Dan McNulty
- -------------------------
Dan McNulty
/s/ Howard Miller
- -------------------------
Howard Miller
/s/ Mechlin Moore
- -------------------------
Mechlin Moore, individually and in his capacity as
Holders' Representative
/s/ John Stewart
- -------------------------
John Stewart
/s/ Robert Stewart, Sr.
- -------------------------
Robert Stewart, Sr.
/s/ David Willis
- -------------------------
David Willis
/s/ Murdo MacLeod
- -------------------------
Murdo MacLeod
/s/ Robert Stewart, Jr.
- -------------------------
Robert Stewart, Jr.
40
<PAGE>
[***]=Confidential Treatment Requested for Redacted Portions of Document.
Exhibit 10.7
INTERNET SERVICES AGREEMENT
BY AND BETWEEN
COMPAQ COMPUTER CORPORATION
AND
VERTICALNET, INC.
This agreement ("Agreement") is entered into as of the 19th day of January, 1999
("Effective Date"), by and between Compaq Computer Corporation ("Compaq"), a
Delaware Corporation, and VerticalNet, Inc., ("VerticalNet"), a Pennsylvania
corporation, located at 2 Walnut Grove Drive, Suite 150, Horsham, Pennsylvania
19044.
This Agreement sets forth the terms and conditions between the parties.
RECITALS
A. Compaq maintains a site on the Internet known as AltaVista Search Service
with the URL http://www.altavista.com which contains various search
------------------------
services.
B. VerticalNet is engaged in the business of creating and operating "vertical
trade communities" with multiple sites on the Internet. VerticalNet also
owns or has the right to distribute certain content of interest to
industrial community users.
C. The parties shall develop "Industrial Communities" within the AltaVista
Search Service. VerticalNet will provide content and Compaq will deliver a
minimum number of impressions, collectively to the thirty one Co-Branded
Home Pages during the term of this Agreement. VerticalNet will develop
content for a minimum of thirty-one (31) distinct Co-Branded Home pages
corresponding to, but not limited to, each then current and future
VerticalNet websites, listed in Exhibit A. Compaq will guarantee
---------
traffic levels as specified herein in consideration for the payments for
impressions and share in the ad revenue generated from the sale of
advertising on the Co-Branded pages.
1. DEFINITIONS
1.1 "Advertising Placement Fee" means the fee owned to the Advertising
Sales Company for the promotion and sale of advertising placed in
connection with the Co-Branded Property.
<PAGE>
1.2 "AltaVista Home Page" means the web page with the URL
http://www.altavista.com
------------------------
1.3 "AltaVista Navigation Bar" means the AltaVista header provided in
Exhibit D. This Navigation Bar will include a link back to the
---------
AltaVista Search Service.
1.4 "AltaVista Search Engine" means the software program(s) developed by
Compaq that (i) compares the text query of an End User to the text URL
sites indexed by AltaVista and (ii) compiles those qualifying URLs
into a response file.
1.5 "AltaVista Search Service" means (i) the full-text World Wide Web
search engine and the index of the entire World Wide Web which can
currently be accessed through http://www.altavista.com and which was
------------------------
developed and is operated by or on behalf of Compaq, and any pages
contained therein, or (ii) with the approval of VerticalNet (which
approval will not be unreasonably withheld) any successor full-text
World Wide Web search engine and index of the public World Wide Web
operated by Compaq or any subsidiary of Compaq.
1.6 "Co-Branded Community Pages" means all pages that an End User visits
on the Vertical Net site accessible through the Co-Branded Home Pages.
The Co-Branded Community Pages will carry AltaVista Navigation Bar.
1.7 "Co-Branded Home Pages" means website pages that correspond to the top
level community page on a VerticalNet website on which both
AltaVista's and VerticalNet's logos and tool bars appear. The URL of
the Co-Branded Home Pages will be of the form
http://altavista.wateronline.com. VerticalNet shall host all
--------------------------------
Co-Branded Home Pages. The design of the Co-Branded Home Pages shall
be consistent with Exhibit E.
---------
1.8 "Co-Branded Impression Pages" means the combination of Co-Branded Home
Pages and the Industrial Community Page. These pages are used to
calculate payments from VerticalNet to Compaq as outlined in Section
7.
1.9 "Content" means all items that appear on the Co-Branded Home Pages and
the Co-Branded Community Pages with the exception of the AltaVista
Navigation Bar and logo.
1.10 "Dictionaries" mean a set of Keywords when searched upon by the
AltaVista Search Service, will trigger a text link to the appropriate
Co-Branded Home Page.
1.11 "End User" means a person who accesses either the AltaVista Search
Service of the Co-Branded Home and Community Pages.
-2-
<PAGE>
1.12 "Industrial Community Link" means a specific link on the AltaVista
Home Page that would link to the Industrial Community Page.
1.13 "Industrial Community Page" means the page on the Compaq server which
contains links to all of the Co-Branded Home Pages, set forth in
Exhibit J.
---------
1.14 "Intellectual Property Rights" means trade secrets, patents,
copyrights, trademarks, trade dress, know-how and similar rights of
any type under the laws of any governmental authority including,
without limitation, all applications and registrations relating to any
of the foregoing.
1.15 "Keywords" mean those words and phrases set forth on Exhibit B which
---------
will make up the Dictionaries. The Keywords will have direct relevance
to the industrial community to which they are associated. Additional
Keywords may be added upon the mutual consent of VerticalNet and
Compaq, which consent shall not be unreasonably withheld.
1.16 "Net Revenue" means gross revenue invoiced for advertising sales and
sponsorships generated from the Co-Branded Home Pages and Industrial
Communities Page, plus direct referral fees, defined as compensation
for sales leads that VerticalNet advertisers pay Vertical Net when
those leads are generated on the Co-Branded Home Pages, less outside
agency fees (or internal equivalent AltaVista cost to generate gross
revenues), actual discounts or credits allowed, if any, and sales,
tariff duties and/or use taxes.
1.17 "Search Results Page" means the page shown after a user enters a query
into the AltaVista Search Services main search box. It consists of a
collection of links presented to a user who has entered a query,
including question/answer links, directory links and full text search
hits, resulting from a complete search of the World Wide Web. These
pages are currently in the form as shown in Exhibit C.
---------
1.18 "Search Result Text Link" means the text link served to a Co-Branded
Home Page on the Search Result Page.
1.19 "VerticalNet Competitors" means those entitles set forth in Exhibit I.
---------
1.20 "Website" means a repository of data and other information in
electronic form residing on one or more servers that can be accessed
via the WWW by an End User on an anonymous basis.
1.21 "World Wide Web" or "WWW" means the Internet-based distributed
information service that utilizes the hypertext transfer protocol
(http) or any purchased protocol.
-3-
<PAGE>
2. DESCRIPTION OF OPERATION OF CO-BRANDED PROPERTY
2.1 The Industrial Community Page shall be accessible to End Users through
its own URL and, at Compaq's discretion, through a link on the
AltaVista Home Page. This link will be identified as "Industrial
Communities" or some other name at Compaq's discretion, as approved in
writing by VerticalNet, which approval shall not be unreasonably
withheld.
2.2 When a user initiates a search within the AltaVista Search Engine,
they will be presented with a Search Results Page. On this Results
Page, the End User will be presented with the Search Result Text Link
to the specific related Co-Branded Home Page if there is such a
community assigned to the End User's search word(s). The placement and
appearance of such a link will be at Compaq's discretion.
2.3 VerticalNet will place an AltaVista Navigation Bar on Co-Branded Home
Pages and Co-Branded Community pages. The Co-Branded Home and
Community Pages will initially utilize the branding and navigation
depicted in
Exhibit D. VerticalNet will make commercially reasonable efforts to
---------
assure that all pages directly linked from a Co-Branded Home Page will
include the AltaVista Navigation Bar. If Compaq wishes to change the
appearance or placement, it must be with the mutual written consent of
VerticalNet, which consent will not be unreasonably withheld. If
properly approved, VerticalNet will make such changes to update the
appearance or placement within ten (10) business days of the written
request. Mechanisms will be established to keep the branding and
navigation consistent with both the main AltaVista site and with
VerticalNet's site.
2.4 Any existing or future agreement between AltaVista and or its
agencies, and VerticalNet shall not contribute to the impression
delivered to the Co-Branded Home Pages or Industrial Community Page
under this agreement.
3. COMPAQ RESPONSIBILITIES
3.1 Compaq will integrate the Keywords into the Dictionaries by the
Scheduled Launch Date, 1/18/99. Additional Keywords shall be added to
the Dictionaries within fifteen (15) days of their addition to Exhibit
-------
B. There will be one Dictionary of Keywords for each of the Co-Branded
--
Home Pages, provided they meet Compaq's approval, which approval shall
not be unreasonably withheld. When an End User searches on a Keyword
that appears in a Dictionary, Compaq will serve a Search Result Text
Link to the corresponding Co-Branded Home
-4-
<PAGE>
Page. Compaq shall have the right to determine which Co-Branded Home
Pages are linked to which Keywords, subject to VerticalNet's approval.
Compaq agrees that during the term of this Agreement, it will not
serve a similar, paid for or bartered text link from a search to a
website or web page owned or operated by a VerticalNet Competitor. All
search results, question answer results directory linkages and banner
ads are exempt from this competitive exclusion.
3.2 Compaq, at its discretion, will create the Industrial Community Link.
Compaq will determine the placement of the Industry Community Link on
the AltaVista Home Page and any other alternate location for its
Industrial Community Links. Compaq will not provide links from the
Industrial Community Page to any VerticalNet Competitors.
3.3 Compaq will use commercially reasonable efforts to implement the
functionality set forth in Sections 2.1, 2.2, 3.1 and 3.2 and to
display promotions and advertising banners as described herein on or
before the Scheduled Launch Date.
3.4 AltaVista will deliver a minimum total of [***] impressions to the
Co-Branded Impression Pages, as defined in Section 1.8 during the one
year Term of this Agreement. Of these, at least [***] shall consist
of impressions to the Co-Branded Home Pages.
3.5 Compaq has the right to sell the banner (standard dimensions of 468 x
60) which may appear at the top and or the bottom of the Industrial
Communities Page. Compaq has the right to retain a sales agent,
provided that the agent is not a VerticalNet Competitor. Compaq or its
agent may not sell advertising on the Industrial Communities Page to a
VerticalNet Competitor. VerticalNet shall share in the Net Revenue
from the sale of advertising on the page using the schedule listed in
Exhibit F.
---------
3.6 Ten (10) days prior to the Scheduled Launch Date, Compaq shall provide
VerticalNet all technical and other data needed for VerticalNet to
implement the AltaVista navigator bar on the Co-Branded Home and
Community Pages.
4. VERTICALNET RESPONSIBILITIES
4.1 VerticalNet will own and be responsible for the generation of all
advertising revenues, with the exception listed in Section 3.5 above,
on the Co-Branded Pages, unless otherwise agreed to by the parties in
writing.
-5-
[***]=Confidential Treatment Requested for Redacted Portions of Document
<PAGE>
4.2 VerticalNet will be responsible for the creation and maintenance of
the content for the Co-Branded Home and Community Pages. There shall
be no limit to the number or quantity of the Co-Branded Home and
Community Pages.
4.3 VerticalNet may suggest additions or deletions of Keywords on a
monthly basis, subject to prior advertising commitments and Section
1.15. There will be no cap to the amount of "Keywords."
4.4 VerticalNet will Maintain the Co-Branded Home and Community Pages on
VerticalNet's Servers per the performance criteria in Exhibit H.
---------
4.5 VerticalNet will use commercially reasonable efforts to implement the
Co-Branded Home Pages and Co-Branded Community Pages, assist Compaq in
the implementation of the Industrial Community Page and to display the
promotions and advertising banners as described herein on or before
the Scheduled Launch Date.
4.6 VerticalNet will be responsible for providing monthly Net Revenue
reports for the Co-Branded Home Pages, due on the fifth business day
of every month for the prior month. These reports should be sent to
[email protected].
---------------------
4.7 VerticalNet will create a Co-Branded Home Page for all new VerticalNet
websites and, with the prior written approval of Compaq whose approval
will not be unreasonably withheld, link it to the Industrial Community
Page prior to publicly launching the new site on the World Wide Web.
4.8 VerticalNet shall offer a search feature for content on its commercial
sites, and shall make such feature available on the Co-Branded Home
Pages. VerticalNet shall make commercially reasonable efforts to
provide a uniform user experience between the AltaVista Search Service
and the Co-Branded Home Pages.
4.9 VerticalNet will review and approve the design of the AltaVista
branded elements provided by Compaq for incorporation in the Co-
Branded Home and Community Pages which approval will not be
unreasonably withheld.
5. EXCLUSIVITY
5.1 During the first year of this Agreement, VerticalNet will not offer
Industry Community Pages or Co-Branded Home Pages hosted on the
VerticalNet servers to Excite, Lycos, Infoseek, Yahoo, Hotbot,
Netscape and any search engine service operated by Microsoft or its
subsidiaries (collectively "AltaVista Competitors"). The "Launch
Date" shall mean that time that: (i) Compaq has
-6-
<PAGE>
implemented the functionality as set forth in Sections 2.1, 2.2, 3.1
and 3.2; (ii) VerticalNet has implemented the functionality set forth
in Sections 2.3 and 4.4, (collectively, the "Launch Date"); and (iii)
the foregoing functionality is made available to End Users.
VerticalNet reserves the right to offer co-branded pages on other
parties servers to any third parties, including AltaVista Competitors,
as long as Compaq is offered similar rights for VerticalNet content
only.
5.2 During the of this Agreement, VerticalNet will not sell or barter
advertising on the Co-Branded Home Pages to AltaVista Competitors.
5.3 In the event that Compaq has not delivered 50% of the total
impressions due at the two month period of the contract or any
successive two month period (on a pro rata basis), then the
restrictions set forth in Sections 5.1 and shall not apply, regardless
of whether Compaq subsequently delivers the proper amount of
impressions.
6. BARTER ADVERTISING
The parties agree to display barter advertising for the other party on
their respective sites during the initial Term of the Agreement. The
maximum value of the barter advertising is $300,000 for each party. The
value of the Barter Advertising will be determined based on the then
current rate cards of each company. Such Barter Advertising is for the
sole purpose of promoting each other's web property and shall not include
promotion of a third party's web property. Any such serving of respective
barter advertising will be at the sole discretion of the other party. Such
Barter Advertising will not affect the advertising agreements currently in
place between VerticalNet and AltaVista's advertising sales agency.
7. PAYMENT AND SCHEDULE
7.1 General. In consideration for the placement of the Industrial
Community Link on the AltaVista Home Page and impressions delivered to
the Co-Branded Impression Pages, VerticalNet shall make the following
payments to Compaq:
7.1.1 A non-refundable payment of [***] for the placement of
Industrial Community Link on the AltaVista home page or the
initiation of the Barter Advertising as per Section 6 of this
Agreement. This fee shall be payable in three equal monthly
installments beginning 30 days after the Launch Date of this
Agreement.
-7-
[***]=Confidential Treatment Requested for Redacted Portions of Document
<PAGE>
7.1.2 After such time as Compaq has served [***] Co-Branded
Impression Pages of which [***] must be Co-Branded Home pages,
VerticalNet shall pay $83.33 per thousand Co-Branded Impression
pages served (CPM) to a maximum of [***]. For the purposes of
this section, no more than [***] of the Co-Branded Impression
pages billable at any point shall be Industrial Community Page.
7.1.3 Compaq and VerticalNet will share the Net Revenue from all of
the Co-Branded Home Pages in accordance with the schedule in
Exhibit F. VerticalNet makes no representation that any such
---------
sales will occur, but will attempt to sell advertising on a
best efforts basis.
7.2 Manner of payment. All payments shall be payable in U.S. dollars by
check or wire transfer to such U.S. bank account as directed in
writing. The Terms of payment are Net 45 days from the last day of the
fiscal quarter revenue is earned and/or received by VerticalNet or
Compaq.
7.3 If either party fails to pay any amounts when due and payable and such
amounts are not disputed in good faith, then said party shall pay the
other a late payment charge of one and a half percent (1.5%) per
month, but not in excess of the lawful maximum, on any past due
balance which is not subject to a good faith dispute.
8. PROPRIETARY RIGHTS
8.1 Compaq and AltaVista. As between Compaq and VerticalNet, Compaq shall
own all right, title and interest in and to the AltaVista Search
Service, the AltaVista Web Crawler, the AltaVista URL Index, including
without limitation all successor products thereof and any current or
future intellectual property rights embodied in the foregoing.
8.2 As between Compaq and VerticalNet, VerticalNet shall own all right,
title and interest in and to the Content for the Co-Branded Home and
Community Pages and any current or future intellectual property rights
embodied in the foregoing. The above does not apply to the AltaVista
logo or trademarks to be used on the Co-Branded Home and Community
Pages, nor the use of the AltaVista name on those pages or in the URL
of the Co-Branded Pages.
8.3 No Implied License. Except for the license rights granted herein,
neither party grants the other rights in or to each other's respective
intellectual property.
8.4 Trademarks: Each party grants the other a non exclusive, non
transferable, royalty free right to display the trademarks and logos
made available by such
-8-
[***]=Confidential Treatment Requested for Redacted Portions of Document
<PAGE>
party, subject to the terms of this Agreement and such party's
standard trademark usage guidelines (copies of which are attached as
Exhibit G). In the event either party determines that the others use
of the applicable trademarks or service marks is inconsistent with the
applicable Trademark or Service Mark holders quality standards, then
upon written request and within a reasonable time the applicalbe party
shall conform such trademark or service mark use to the appropriate
party standards. If either party fails to conform the applicable
trademark use or service mark usage, then the owner of the marks shall
have the right to suspend use under the terms of this Agreement.
9. CONFIDENTIALITY AND PUBLICITY
9.1 During the Term of this Agreement (including any renewal Terms) and
for a period of one year thereafter, each party shall retain in
confidence any information provided to it by the other party which is
marked, labeled or otherwise designated as confidential or
proprietary, unless the information sought to be disclosed (a) is
publicly known at the time of disclosure, (b) is lawfully received
from a third party not bound in a confidential relationship with the
other party, (c) is published or otherwise made known to the public by
the other party, (d) was generated independently without reference to
the other party's confidential information, or (e) is required to be
disclosed under a court order, (f) or as required by law. Each party
shall use at least the same standard of care with the others
confidential information as it does with its own. Upon either
termination of expiration of this Agreement the parties will return
all confidential data provided under the terms of this Agreement
within thirty (30) days of termination or expiration.
9.2 Neither party will issue any press releases or other public statements
regarding this Agreement without the other party's prior written
approval.
9.3 Upon termination or expiration of this Agreement either party is
permitted to issue a press release solely to the effect the Agreement
has either expired or was terminated. Neither party is permitted to
disclose any business terms of this Agreement with respect to such
press release.
10. WARRANTIES, INDEMNIFICATION AND LIMITATION OF LIABILITY
10.1 Compaq warrants and represents:
10.1.1 That it has the full corporate right, power and authority to
enter into this Agreement;
-9-
<PAGE>
10.1.2 That the execution of this Agreement and the performance of the
obligations and duties hereunder, do not and will not violate
any agreement to which Compaq is a party or which it is
otherwise bound; and;
10.1.3 VerticalNet acknowledges that Compaq makes no representations,
warranties or agreements related to the subject matter
expressly provided for in this Agreement.
10.2 VerticalNet warrants and represents:
10.2.1 That it has the full corporate right, power and authority to
enter into this agreement;
10.2.2 That the execution of this Agreement and the performance of the
obligations and duties hereunder, do not and will not violate
any agreement to which VerticalNet is a party or which it is
otherwise bound; and
10.2.3 Compaq acknowledges that VerticalNet makes no representations,
warranties or agreements related to the subject matter
expressly provided for in this Agreement.
10.3 EACH PARTY ACKNOWLEDGES AND AGREES THAT THE SERVICES PROVIDED
HEREUNDER ARE BEING PROVIDED "AS IS", "WITH ALL FAULTS," AND THAT
NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED AS TO THE USEFULNESS, ACCURACY, RELIABILITY OF EFFECTIVENESS
OF THE SERVICES OR THAT ANY OF THE SERVICES PROVIDED HEREUNDER WILL BE
ERROR FREE, OR THAT DEFECTS HAVE OR WILL BE CORRECTED, OR THAT THE
SERVICES WILL MEET THE NEEDS OF THE OTHER PARTY OR ANY THIRD PARTY.
WITHOUT LIMITING THE FOREGOING, EACH PARTY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL
EITHER PARTY BE LIABLE TO THE OTHER FOR ANY FAILURE, DISRUPTION,
DOWNTIME, INCORRECT LINKAGE OR OTHER NON PERFORMANCE OF EACH OTHER'S
SERVICE.
10.4 INDEMNIFICATIONS
-10-
<PAGE>
10.4.1 Each party (the "indemnifying party") will indemnify, defend
and hold harmless the other party and its corporate parent or
affiliates (collectively "the indemnified party") from and
against all claims, suits and proceedings, and any and all
related liabilities, losses, expenses, damages and costs
(including without limitation, reasonable attorney fees),
including, without limitation, any third party claims alleging
infringement of any copyright, trademark or other intellectual
property right or alleging libel, defamation or invasion of
privacy, arising from the use of any content, products,
services, software, trademarks, logos or other materials or
information (collectively "Materials") (a) provided by the
indemnifying party or (b) accessible on the indemnifying
party's Website or via a link from the indemnifying party's
Website, unless such Materials were originally provided by the
indemnified party.
10.4.2 The indemnified party will: promptly notify the indemnifying
party of any claim, suit, or proceeding for which indemnity is
claimed; cooperate reasonably with the indemnifying party at
the latter's expense; and allow the indemnifying party to
control the defense or settlement thereof. The indemnified
party will have the right to participate in any defense of a
claim and or to be represented by counsel of its own choosing
at its own expense. The indemnifying party's obligations under
this section shall not apply to any claims based upon the use
of Materials that have been altered by any third party other
than the indemnifying party, the combination of any Materials
with any items not provided by the indemnifying party, or the
display of any material in a manner not approved by the
indemnifying party, if and to the extent such claim would not
have arisen but for such alterations, combinations or display.
10.5 LIMITATION OF LIABILITY
10.5.1 Except for a breach of either parties intellectual property
rights and the indemnification in Section 10.4, THE LIABILITY
OF EITHER PARTY FRO DAMAGES OR ALLEGED DAMAGES HEREUNDER,
WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED
TO, AND WILL NOT EXCEED THE AMOUNTS PAID BY VERTICALNET TO
ALTAVISTA HEREUNDER. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING
WITHOUT LIMITATION, LOSS PROFITS, IN ANY WAY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, EVEN IN THE EVENT SUCH PARTY HAS
BEEN ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES.
-11-
<PAGE>
11. TERM AND TERMINATION
11.1 The Term of this Agreement shall be one year from the date of
execution ("Effective Date"), unless termination in accordance with
the provisions of this Section. Thereafter, this Agreement will
automatically renew on a year-to-year basis unless either party
notifies the other at least thirty (30) days prior to the applicable
renewal term.
11.2 Either party may terminate this Agreement or any renewal term thereof
at any time (a) in the event of a material breach by the other party
that has not been cured within thirty (30) days of written notice
thereof or (b) within thirty (30) days prior to a renewal period,
provided such notice is given in writing.
11.3 Subsequent to Termination by either party or expiration of this
Agreement, such Termination or expiration shall not act as a waiver of
either party's rights or payment obligations under this Agreement or
release either party from any liability for breach of such party's
obligations under this Agreement.
11.4 Any termination or expiration of this Agreement shall mean that each
party shall no longer use any trademarks or service marks licensed
under the terms of this Agreement or continue to provide the services
described herein.
12. INSPECTION OF RECORDS
12.1 Each party will keep accurate records which are sufficient for the
calculation of any amounts due hereunder and will make such records
available to an independent third party during normal business hours,
provided that such inspections (a) occur only on reasonable advance
notice, (b) do not occur more frequently than once annually during the
Term and or any renewal Terms of this Agreement, and for one year
thereafter and (c) are conducted at the expense of this inspecting
party unless such inspection shows a deviation in the amounts paid in
excess of 5%, then the inspected party shall be liable for the cost of
the inspection of records. It is understood and agreed that the
independent third party inspector will be required to sign a non-
disclosure agreement with the party to be inspected.
-12-
<PAGE>
13. GENERAL
13.1 No Joint Venture: The sole relationship between the parties is that of
independent contractors. Each party is an independent contractor and
neither is an agent of the other. Each party shall be solely
responsible for the actions of their respective employees, agents, and
representatives.
13.2 Governing Law: This Agreement shall be interpreted and construed in
accordance with the laws of the State of California, without regard to
the principles of conflicts of laws. The parties specifically exclude
the terms of the United Nations International Convention of Contracts.
13.3 Non Assignment: Neither party shall transfer or assign any rights or
delegate any of its obligations hereunder, whether in whole or in
part, voluntary or by operation of law without the prior written
consent of the other, whose consent shall not be unreasonably
withheld.
13.4 Notices: All notices, requests, demands, reports or other
communications under this Agreement shall be in writing and may be
sent by mail, facsimile, or authorized electronic address and offices
specified below. Notices hereunder shall be directed to:
13.5 Waiver: Any of the provisions of this Agreement may be waived by the
party entitled to benefit thereof. Neither party shall be deemed to
have waived any of its rights or remedies hereunder unless such waiver
is in writing and signed by the waiving party, and then only to the
extent specifically set forth in such writing.
13.6 No Third Party Beneficiaries: Nothing contained in this Agreement
implies or is intended to confer upon any person other than the
parties and respective successors or assigns of the parties, any
rights remedies, obligations or liabilities whatsoever.
13.7 Survival: The respective rights and obligations between the parties
under the provisions of Sections 1, 8, 9, 10 (10.4 only for one year
after the termination of the Agreement), 11 and 13 hereof shall
survive expiration or termination of this Agreement.
13.8 Entire Agreement: This Agreement (including the Exhibits, Attachments
and or Addenda, if any,) represents the entire agreement of the
parties with respect of the subject matter hereof and supersedes all
prior and or contemporaneous agreements or understandings, written or
oral between the parties with respect to the subject matter hereof.
-13-
<PAGE>
13.9 Counterparts/Facsimiles: This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be
deemed an original, and such counterparts together shall constitute
one and the same instrument. For the purposes hereof, a facsimile copy
of this Agreement including the signature pages hereto, shall be
deemed an original.
IN WITNESS WHEREOF, the parties to this Agreement by their duly authorized
representatives have executed this Agreement as of the date first written above.
COMPAQ COMPUTER CORPORATION VERTICALNET, INC.
By: /s/ Kurt Losert By: /s/ Mario Shaffer
--------------- ------------------
Name: Kurt Losert Name: Mario Shaffer
--------------- --------------
Title: Vice President Title: Vice President
--------------- --------------
-14-
<PAGE>
Exhibit 10.12
---------------------------------------------------------------
PREFERRED STOCK PURCHASE AGREEMENT
INTERNET CAPITAL GROUP, L.L.C.
and
WATER ONLINE, INC.
---------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I - PURCHASE, SALE AND TERMS OF SHARES.......................................................1
1.01. The Preferred Shares...........................................................................1
1.02. The Conversion Shares..........................................................................1
1.03. Purchase Price and Closing.....................................................................1
1.04. Use of Proceeds................................................................................2
1.05. Representations by the Purchaser...............................................................2
(a) Investment Representations..............................................................2
(b) Access to Information...................................................................3
(c) General Access..........................................................................3
(d) Sophistication and Knowledge............................................................3
(e) Transfer Restrictions Imposed by Securities Laws........................................3
(f) Lack of Liquidity.......................................................................3
(g) Suitability and Investment Objectives...................................................3
(h) Accredited Investor Status..............................................................4
(i) Restrictions on Future Investments......................................................4
1.06. Brokers or Finders.............................................................................4
ARTICLE II - CONDITIONS TO PURCHASER'S OBLIGATIONS...................................................4
2.01. Representations and Warranties.................................................................4
2.02. Documentation at Closing.......................................................................4
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........................................6
3.01. Organization and Standing of the Company.......................................................6
3.02. Corporate Action...............................................................................6
3.03. Governmental Approvals.........................................................................7
3.04. Litigation.....................................................................................7
3.05. Certain Agreements of Officers and Employees...................................................8
3.06. Compliance with Other Instruments..............................................................8
3.07. Title to Assets, Patents.......................................................................8
3.08. Financial Information..........................................................................10
3.09. Taxes..........................................................................................10
3.10. ERISA..........................................................................................10
3.11. Transactions with Affiliates...................................................................10
3.12. Assumptions or Guaranties of Indebtedness of Other Persons.....................................11
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
3.13. Investments in Other Persons...................................................................11
3.14. Securities Act of 1933.........................................................................11
3.15. Disclosure.....................................................................................11
3.16. Brokers or Finders.............................................................................11
3.17. Capitalization; Status of Capital Stock........................................................12
3.18. Registration Rights............................................................................12
3.19. Insurance......................................................................................12
3.20. Books and Records..............................................................................13
3.21. Material Agreements............................................................................13
3.22. Absence of Certain Developments................................................................13
3.23. Environmental and Safety Laws..................................................................13
3.24. U.S. Real Property Holding Corporation.........................................................13
3.25. Business Plan..................................................................................13
ARTICLE IV - COVENANTS OF THE COMPANY................................................................14
4.01. Affirmative Covenants of the Company Other Than Reporting Requirements.........................14
(a) Maintenance of Key Man Insurance........................................................14
(b) Inspection Rights.......................................................................14
(c) Budgets Approval........................................................................14
(d) Financing...............................................................................15
(e) New Developments........................................................................15
(f) Meetings of Directors, Committees and Observer Rights...................................15
(g) Agreements of Officers and Employees....................................................15
(h) By-laws; Meetings and Indemnification...................................................16
(i) Corporate Existence.....................................................................16
(j) Properties, Business, Insurance.........................................................16
(k) Expenses of Directors...................................................................16
(l) Compliance with Laws....................................................................16
(m) Keeping of Records and Books of Account.................................................16
(n) Size of Board...........................................................................17
(o) Rule 144A Information...................................................................17
4.02. Negative Covenants of the Company..............................................................17
(a) Dealings with Affiliates................................................................17
(b) Issuance of Equity Securities...........................................................17
(c) Compensation to Officers................................................................18
(d) Maintenance of Ownership of Subsidiaries................................................18
(e) Transfer of Technology..................................................................18
(f) Conduct of Business.....................................................................18
(g) Assumptions or Guaranties of Indebtedness of Other Persons..............................18
(h) Investments in Other Corporations or Entities...........................................19
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
(i) Amendments..............................................................................19
4.03. Reporting Requirements.........................................................................19
(a) Monthly Reports.........................................................................19
(b) Annual Reports..........................................................................20
(c) Budgets and Operating Plan..............................................................20
(d) Notice of Adverse Changes...............................................................20
(e) Reports and Other Information...........................................................20
ARTICLE V- REGISTRATION RIGHTS.......................................................................20
5.01. Piggy-Back Registrations.......................................................................21
5.02. Required Registration..........................................................................21
5.03. Registrations on Form S-3......................................................................22
5.04. Effectiveness..................................................................................22
5.05. Indemnification of Holder of Registrable Shares................................................22
5.06. Indemnification of Company.....................................................................24
5.07. Exchange Act Registration......................................................................26
5.08. Damages........................................................................................26
5.09. Further Obligations of the Company.............................................................26
5.10. Expenses.......................................................................................28
5.11. Approval of Underwriter........................................................................28
5.12. Transferability................................................................................28
5.13. "Lock-Up" Agreement............................................................................28
(a) Initial Public Offering.................................................................28
(b) Lock-Up after Initial Public Offering...................................................29
5.14. Mergers, Etc...................................................................................29
ARTICLE VI - RIGHT OF FIRST REFUSAL..................................................................30
6.01. Right of First Refusal.........................................................................30
6.02. Notice of Acceptance...........................................................................31
6.03. Conditions to Acceptances and Purchase.........................................................31
(a) Permitted Sales of Refused Securities...................................................31
(b) Reduction in Amount of Offered Securities...............................................31
(c) Closing.................................................................................31
6.04. Further Sale...................................................................................32
6.05. Termination and Waiver of Right of First Refusal...............................................32
6.06. Exception......................................................................................32
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VII - DEFINITIONS AND ACCOUNTING TERMS.......................................................33
7.01. Certain Defined Terms..........................................................................33
7.02. Accounting Terms...............................................................................36
ARTICLE VIII - DISPUTE RESOLUTION....................................................................36
8.01. Good-Faith Negotiations........................................................................36
ARTICLE IX - MISCELLANEOUS...........................................................................38
9.01. No Waiver; Cumulative Remedies.................................................................38
9.02. Amendments, Waivers and Consents...............................................................38
9.03. Addresses for Notices..........................................................................38
9.04. Costs, Expenses and Taxes......................................................................39
9.05. Binding Effect; Assignment.....................................................................39
9.06. Survival of Representations and Warranties.....................................................39
9.07. Prior Agreements...............................................................................39
9.08. Severability...................................................................................39
9.09. Confidentiality................................................................................40
9.10. Public Announcements...........................................................................40
9.11. Governing Law..................................................................................40
9.12. Headings.......................................................................................40
9.13. Counterparts...................................................................................40
9.14. Further Assurances.............................................................................41
</TABLE>
EXHIBIT 1.01
EXHIBIT 2.02(a)
EXHIBIT 2.02(b)
EXHIBIT 2.02(i)(A)
EXHIBIT 2.02(j)
5
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
WATER ONLINE, INC.
As of September 12, 1996
Internet Capital Group, L.L.C.
435 Devon Park Drive
Wayne, PA 19087
Re: Series A Preferred Stock
Gentlemen:
Water Online, Inc. (the "Company"), a Pennsylvania corporation, agrees with you
as follows:
ARTICLE I
PURCHASE, SALE AND TERMS OF SHARES
1.01. The Preferred Shares. The Company has authorized the issuance,
sale and exchange of 1,000,000 shares (the "Series A Shares") of its authorized
but unissued shares of Series A Preferred Stock, $.01 par value (the "Series A
Preferred Stock"), at a purchase price of $1.00 per share to Internet Capital
Group, L.L.C. (the "Series A Purchaser") and in the amount set forth in Exhibit
1.01 hereto. The Series A Preferred Stock is sometimes hereinafter referred to
as the "Preferred Stock"; the Series A Shares are sometimes hereinafter referred
to as the "Preferred Shares"; and the Series A Purchaser is sometimes
hereinafter referred to as the "Purchaser". The designation, rights, preferences
and other terms and provisions of the Preferred Stock are set forth in Exhibit
2.02(a) hereto.
1.02. The Conversion Shares. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of shareholders, a sufficient number of its
authorized but unissued shares of Common Stock to satisfy the rights of
conversion of the holders of the Preferred Shares. Any shares of Common Stock
issuable upon conversion of the Preferred Shares (and such shares when issued)
are herein referred to as the "Conversion Shares". The Preferred Shares and
Conversion Shares are sometimes collectively referred to as the "Shares".
1.03. Purchase Price and Closing. The Company agrees to issue, sell and
exchange to the Purchaser and, in consideration of and in express reliance upon
the representations, warranties, covenants, terms and conditions of this
Agreement, the Purchaser agrees to purchase, that number of the Preferred Shares
set forth in Exhibit 1.01. The aggregate purchase price of the Preferred Shares
being
<PAGE>
acquired by Purchaser is set forth in Exhibit 1.01. The closing of the
purchase, sale and exchange of the Preferred Shares to be acquired by the
Purchaser from the Company under this Agreement shall take place at the offices
of the Purchaser, 435 Devon Park Drive, Wayne, PA 19087 at 10:00 a.m. on
September __, 1996, or at such time and date thereafter as the Purchaser and the
Company may agree (the "Closing"). At the Closing, the Company will deliver to
the Purchaser certificates for the number and series of Preferred Shares set
forth under the heading "Number of Series A Shares", in Exhibit 1.01 registered
in the Purchaser's name, against delivery of a check or checks payable to the
order of the Company, or a transfer of funds to the account of the Company by
wire transfer, representing the net cash consideration set forth on Exhibit
1.01, and the cancellation of an aggregate of $60,000 of principal of, and
accrued interest on, indebtedness of the Company to the Purchaser as so set
forth on Exhibit 1.01, as payment in full of the purchase price of the Series A
Shares.
1.04. Use of Proceeds. The Company shall use the cash proceeds from the
sale of the Preferred Shares for working capital and general corporate purposes;
provided, however, that the proceeds shall not be used by the Company to reduce
any outstanding indebtedness other than accounts payable incurred in the normal
course of business, and provided further that the Company may use up to $60,000
to exercise its right to repurchase 6% of the currently existing shares of
Common Stock from certain minority shareholders.
1.05. Representations by the Purchaser.
(a) Investment Representations. Purchaser represents that it
is its present intention to acquire the Shares to be acquired by it for its own
account (and it will be the sole beneficial owner thereof) and that the Shares
are being and will be acquired by it for the purpose of investment and not with
a view to distribution or resale thereof except pursuant to registration under
the Securities Act or exemption therefrom. The acquisition by Purchaser of the
Preferred Shares acquired by it shall constitute a confirmation of this
representation by Purchaser. Purchaser further represents that it understands
and agrees that, until registered under the Securities Act or transferred
pursuant to the provisions of Rule 144 or Rule 144A as promulgated by the
Commission, all certificates evidencing any of the Shares, whether upon initial
issuance or upon any transfer thereof, shall bear a legend, prominently stamped
or printed thereon, reading substantially as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 or applicable state securities laws.
These securities have been acquired for investment and not with a view to
distribution or resale. These securities may not be offered for sale, sold,
delivered after sale, transferred, pledged or hypothecated in the absence of an
effective registration statement covering such shares under the Act and any
applicable state securities laws, or the availability, in the opinion of
counsel, of an exemption from registration thereunder."
(b) Access to Information. Purchaser or its representative
during the course of this transaction, and prior to the purchase of any
Preferred Shares, has had the opportunity to ask questions of and receive
answers from management of the Company concerning the terms and conditions of
the
2
<PAGE>
offering of the Preferred Shares and the additional information, documents,
records and books relative to its business, assets, financial condition, results
of operations and liabilities (contingent or otherwise) of the Company.
(c) General Access. Purchaser or its representative has
received and read or reviewed, and is familiar with, this Agreement and the
other agreements executed or delivered herewith, including the terms of the
Preferred Stock, and confirms that all documents, records and books pertaining
to Purchaser's investment in the Company and requested by Purchaser or its
representative have been made available or delivered to him.
(d) Sophistication and Knowledge. Purchaser or its
representative has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the purchase of
the Preferred Shares. Purchaser can bear the economic risks of this investment
and can afford a complete loss of its investment.
(e) Transfer Restrictions Imposed by Securities Laws.
Purchaser understands that: the Shares have not been registered under the
Securities Act and applicable state securities laws, and, therefore, cannot be
resold unless they are subsequently registered under the Securities Act and
applicable state securities laws or unless an exemption from such registration
is available; Purchaser is and must be purchasing the Preferred Shares for
investment for the account of Purchaser and not for the account or benefit of
others, and not with any present view toward resale or other distribution
thereof. Purchaser agrees not to resell or otherwise dispose of all or any part
of the Shares purchased by it, except as permitted by law, including, without
limitation, any regulations under the Securities Act and applicable state
securities laws; the Company does not have any present intention and is under no
obligation to register the Shares under the Securities Act and applicable state
securities laws, except as provided in Article V hereof; and Rule 144 or Rule
144A under the Securities Act may not be available as a basis for exemption from
registration of the Shares thereunder.
(f) Lack of Liquidity. Purchaser has no present need for
liquidity in connection with its purchase of the Preferred Shares.
(g) Suitability and Investment Objectives. The purchase of the
Preferred Shares by Purchaser is consistent with the general investment
objectives of the Purchaser. The Purchaser understands that the purchase of the
Preferred Shares involves a high degree of risk in view of the fact that, among
other things, the Company is a start-up enterprise, and there may be no
established market for the Company's capital stock.
(h) Accredited Investor Status. Purchaser is an "Accredited
Investor" as that term is defined in Rule 501 of Regulation D promulgated under
the Securities Act.
(i) Restrictions on Future Investments. Purchaser represents
that it is not subject to any provisions in the limited liability company
agreement or other governing instrument that may operate
3
<PAGE>
to restrict or limit its ability to make investments on or after the date hereof
in capital stock of the Company.
1.06. Brokers or Finders. Purchaser represents that no Person has or
will have, as a result of the transactions contemplated by this Agreement, any
right, interest or valid claim against or upon the Company for any commission,
fee or other compensation as a finder or broker because of any act or omission
by Purchaser or its respective agents.
ARTICLE II
CONDITIONS TO PURCHASER'S OBLIGATIONS
The obligation of Purchaser to purchase and pay for the Preferred
Shares to be purchased by it at the Closing is subject to the following
conditions (all of which shall be deemed satisfied or waived by the Purchaser at
or prior to the Closing in the event all of the transactions contemplated to be
effected at the Closing are consummated):
2.01. Representations and Warranties. Each of the representations and
warranties of the Company set forth in Article III hereof shall be true,
accurate and correct on the date of the Closing.
2.02. Documentation at Closing. The Purchaser shall have received prior
to or at the Closing all of the following materials, each in form and substance
satisfactory to the Purchaser and its special counsel, and each of the following
events shall have occurred, or each of the following documents shall have been
delivered, prior to or simultaneous with the Closing:
(a) A copy of the Articles of Incorporation of the Company, as
amended or restated to date, together with such evidence as may be available of
the filing thereof; a copy of the resolutions of the Board of Directors
providing for the approval of the Restated Articles of Incorporation of the
Company in the form attached as Exhibit 2.02(a), the approval of this Agreement,
the issuance of the Preferred Shares, such amendment of the By-laws of the
Company as may be reasonably requested by the Purchaser, and all other
agreements or matters contemplated hereby or executed in connection herewith; a
copy of a consent of stockholders of the Company approving the Restated Articles
of Incorporation of the Company; and a copy of the By-laws of the Company, all
of which have been certified by the Secretary of the Company to be true,
complete and correct in every particular; and certified copies of all documents
evidencing other necessary corporate or other action and governmental approvals,
if any, required to be obtained at or prior to the Closing with respect to this
Agreement and the issuance of the Preferred Shares.
(b) The favorable opinion of John J. Hagan, Esquire, counsel
for the Company, in the form set forth in Exhibit 2.02(b).
(c) A certificate of the Secretary or an Assistant Secretary
of the Company which shall certify the names of the officers of the Company
authorized to sign this Agreement, the certificates for
4
<PAGE>
the Preferred Shares and the other documents, instruments or certificates to be
delivered pursuant to this Agreement by the Company or any of its officers,
together with the true signatures of such officers.
(d) A certificate of the President and the Treasurer of the
Company stating that the representations and warranties of the Company contained
in Article III hereof and otherwise made by the Company in writing in connection
with the transactions contemplated hereby are true and correct as of the time of
the Closing and that all conditions required to be performed prior to or at the
Closing have been performed as of the Closing.
(e) The Company shall have obtained any consents or waivers
necessary to be obtained at or prior to the Closing to execute and deliver this
Agreement, the Preferred Shares and the other agreements and instruments
executed and delivered by the Company in connection herewith and to carry out
the transactions contemplated hereby and thereby, and such consents and waivers
shall be in full force and effect at the Closing. All corporate and other action
and governmental filings necessary to effectuate the terms of this Agreement,
the Preferred Shares and the other agreements and instruments executed and
delivered by the Company in connection herewith shall have been made or taken.
(f) The Articles of Incorporation of the Company shall have
been amended and restated in the form set forth in Exhibit 2.02(a) attached
hereto.
(g) A Certificate of the Secretary of State of the
Commonwealth of Pennsylvania as to the due incorporation and good standing of
the Company and a certificate of the Secretary of State of each jurisdiction in
which the Company is required to qualify to do business as a foreign corporation
shall have been provided to the Purchaser and its special counsel.
(h) Payment for the costs, attorneys' fees, consulting fees,
expenses, taxes and filing fees identified in Section 9.04.
(i) Each of the employees listed on Exhibit 2.02(i)A shall
have entered into Nondisclosure, Assignment of Developments and Non-Solicitation
Agreements in the form satisfactory to the Purchaser (collectively, the
"Nondisclosure Agreements") , and the Company and each of Michael J. Hagan
("Hagan") and Michael P. McNulty ("McNulty") shall have entered into
Nondisclosure, Assignment of Developments, Non-Solicitation, Noncompetition and
Severance Agreements in the form satisfactory to the Purchaser (collectively,
the " Noncompetition Agreements") and copies thereof shall have been delivered
to counsel for the Purchaser.
(j) The Purchaser, the Company, Hagan and McNulty shall have
entered into a Voting, Stock Restriction and Co-Sale Agreement in the form
attached as Exhibit 2.02(j) hereto (the "Voting and Stock Restriction
Agreement").
5
<PAGE>
(k) This Agreement shall have been executed by Purchaser and
Purchaser shall have delivered to the Company the full purchase price for such
Series A Preferred Stock., net the cancellation of the $60,000 indebtedness, per
Section 1.03 above.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as of the Closing as follows:
3.01. Organization and Standing of the Company. The Company is a duly
organized and validly existing corporation in good standing under the laws of
the Commonwealth of Pennsylvania and has all requisite corporate power and
authority for the ownership and operation of its properties and for the carrying
on of its business as now conducted and as now proposed to be conducted and to
execute and deliver this Agreement and the Voting and Stock Restriction
Agreement, to issue, sell and deliver the Preferred Shares and to issue and
deliver the Conversion Shares and to perform its other obligations pursuant
hereto and thereto. The Company is duly licensed or qualified and in good
standing as a foreign corporation authorized to do business in all jurisdictions
wherein the character of the property owned or leased or the nature of the
activities conducted by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
material adverse effect on the business, operations or financial condition of
the Company.
3.02. Corporate Action. This Agreement, the Voting and Stock
Restriction Agreement, the Noncompetition Agreements, and the other agreements
executed in connection herewith have been duly authorized, executed and
delivered by the Company and constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms. The Voting and Stock Restriction Agreement and the
Noncompetition Agreements have been duly authorized, executed and delivered by
the Shareholders (as defined therein) and constitutes the legal, valid and
binding obligations of the Shareholders, enforceable against the several
Shareholders in accordance with their respective terms. The Preferred Shares
have been duly authorized. The issuance, sale and delivery of the Preferred
Shares and the issuance and delivery of the Conversion Shares upon conversion of
the Preferred Shares have been duly authorized by all required corporate action;
the Preferred Shares have been validly issued, are fully paid and nonassessable
with no personal liability attaching to the ownership thereof and are free and
clear of all liens, charges, restrictions, claims and encumbrances imposed by or
through the Company except as set forth in this Agreement and the Voting and
Stock Restriction Agreement; and the Conversion Shares have, as of the Closing,
been duly reserved for issuance upon conversion of the Preferred Shares and,
when so issued, will be duly authorized, validly issued, fully paid and
nonassessable with no personal liability attaching to the ownership thereof and
will be free and clear of all liens, charges, restrictions, claims and
encumbrances imposed by or through the Company except as set forth in this
Agreement and the Voting and Stock Restriction Agreement.
3.03. Governmental Approvals. Except as set forth on Exhibit 3.03 and
except for the filing of any notice prior or subsequent to the Closing that may
be required under applicable state and/or Federal
6
<PAGE>
securities laws (which, if required, shall be filed on a timely basis), no
authorization, consent, approval, license, exemption of or filing or
registration with any court of governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution and delivery by the Company of this
Agreement, for the offer, issue, sale, execution or delivery of the Preferred
Shares, or for the performance by the Company of its obligations under this
Agreement, the Voting and Stock Restriction Agreement or the Shares.
3.04. Litigation. Except as disclosed in Exhibit 3.04, there is no
litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company, threatened against the Company affecting any of its
properties or assets, or against any officer, Key Employee (defined in Section
7.01 below) or the holder of more than ten percent (10%) of the capital stock of
the Company relating to the Company or its business, nor, to the best knowledge
of the Company, has there occurred any event or does there exist any condition
on the basis of which any litigation, proceeding or investigation might properly
be instituted. Neither the Company nor, to the best knowledge of the Company,
any officer, Key Employee or holder of more than ten percent (10%) of the
capital stock of the Company is in default with respect to any order, writ,
injunction, decree, ruling or decision of any court, commission, board or other
government agency, which such default might have a material adverse effect on
the business, assets, liabilities, operations, Intellectual Property Rights
(defined in Section 7.01 below), management or financial condition of the
Company. There are no actions or proceedings pending or, to the Company's
knowledge, threatened (or any basis therefor known to the Company) which might
result, either in any case or in the aggregate, in any material adverse change
in the business, operations, Intellectual Property Rights, affairs or financial
condition of the Company or in any of its properties or assets, or which might
call into question the validity of this Agreement, any of the Preferred Shares,
or any action taken or to be taken pursuant hereto or thereto. The foregoing
sentences include, without limiting their generality, actions pending or, to the
Company's knowledge, threatened (or any basis therefor known to the Company)
involving the prior employment or engagement of any of the Company's officers,
employees or consultants or their use in connection with the Company's business
of any information or techniques allegedly proprietary to any of their former
employers or to any other Person. Without limitation to the foregoing
representations, a brief summary of the Company's material litigation and the
disposition of such matters is set forth on Exhibit 3.04.
3.05. Certain Agreements of Officers and Employees.
(a) No officer, employee or consultant of the Company is, or
is now, to the Company's knowledge, expected to be, in violation of any term of
any employment contract, patent disclosure agreement, proprietary information
agreement, noncompetition agreement, nonsolicitation agreement, confidentiality
agreement, or any other similar contract or agreement or any restrictive
covenant, including those set forth on Exhibit 3.05, relating to the right of
any such officer, employee, or consultant to be employed or engaged by the
Company because of the nature of the business conducted or to be conducted by
the Company or relating to the use of trade secrets or proprietary information
of others, and to the Company's best knowledge and belief, the continued
employment or engagement of the Company's officers, employees or consultants
does not subject the Company or Purchaser to any liability
7
<PAGE>
with respect to any of the foregoing matters.
(b) No officer, consultant or Key Employee of the Company
whose termination, either individually or in the aggregate, could have an
adverse effect on the Company, has terminated since the date hereof, or to the
best knowledge of the Company, has any present intention of terminating, his
employment or engagement with the Company.
3.06. Compliance with Other Instruments. The Company is in compliance
in all respects with the terms and provisions of this Agreement and of its
Articles of Incorporation and By-laws, each as amended and/or restated to date,
and in all respects with the material terms and provisions of all mortgages,
indentures, leases, agreements and other instruments by which it is bound or to
which it or any of its properties or assets are subject. The Company is in
compliance in all material respects with all judgments, decrees, governmental
orders, laws, statutes, rules or regulations by which it is bound or to which it
or any of its properties or assets are subject. Neither the execution, issuance
and delivery of this Agreement, the Voting and Stock Restriction Agreement, the
Noncompetition Agreements or the Preferred Shares, nor the consummation of any
transaction contemplated hereby or thereby, has constituted or resulted in or
will constitute or result in a default or violation of any term or provision of
any of the foregoing documents, instruments, judgments, agreements, decrees,
orders, statutes, rules and regulations. A schedule of Indebtedness of the
Company as of September 1, 1996 (including lease obligations required to be
capitalized in accordance with applicable Statements of Financial Accounting
Standards) is attached as Exhibit 3.06.
3.07. Title to Assets, Patents. The Company has good and marketable
title in fee to such of its fixed assets as are real property, and good and
merchantable title to all of its other assets, now carried on its books, which
assets consist of those reflected in the most recent balance sheet of the
Company which forms Exhibit 3.08 attached hereto, or acquired since the date of
such balance sheet (except personal property disposed of since said date in the
ordinary course of business) free of any mortgages, pledges, charges, liens,
security interests or other encumbrances other than (a) any such created in
accordance with the terms of the leases, security agreements and other financing
documents listed in Exhibit 3.07, (b) liens for taxes not yet due and payable,
(c) liens imposed by law and incurred in the ordinary course of business for
obligations not yet due and payable to landlords, carriers, warehousemen,
materialmen and the like, and (d) unperfected purchase money security interests
existing in the ordinary course of business without the execution of a separate
security agreement. The Company enjoys peaceful and undisturbed possession under
all leases under which it is operating, and all said leases are valid and
subsisting and in full force and effect.
The Company owns or has a valid right to use the Intellectual Property
Rights being used to conduct its business as now operated and as now proposed to
be operated (a complete list of licenses and registrations of such Intellectual
Property Rights is attached hereto as Exhibit 3.07); and the conduct of its
business as now operated and as now proposed to be operated does not and will
not conflict with or infringe upon the intellectual property rights of others.
Except as set forth on Exhibit 3.07, no claim is pending or threatened against
the Company and/or its officers, employees and consultants to the effect
8
<PAGE>
that any such Intellectual Property Right owned or licensed by the Company, or
which the Company otherwise has the right to use, is invalid or unenforceable by
the Company. Except pursuant to the terms of any licenses specified on Exhibit
3.07, the Company has no obligation to compensate any Person for the use of any
such Intellectual Property Rights and the Company has not granted any Person any
license or other right to use any of the Intellectual Property Rights of the
Company, whether requiring payment of royalties or not.
The Company has taken all reasonable measures to protect and preserve
the security, confidentiality and value of its Intellectual Property Rights,
including its trade secrets and other confidential information. All employees
and consultants of the Company involved in the design, review, evaluation or
development of products or Intellectual Property Rights have executed
nondisclosure and assignment of inventions agreements sufficient to protect the
confidentiality and value of the Company's Intellectual Property Rights and to
vest in the Company exclusive ownership of such Intellectual Property Rights. To
the best knowledge of the Company, all trade secrets and other confidential
information of the Company are presently valid and protectible and are not part
of the public domain or knowledge, nor, to the best knowledge of the Company,
have they been used, divulged or appropriated for the benefit of any person
other than the Company or otherwise to the detriment of the Company. To the best
of the Company's knowledge, no employee or consultant of the Company has used
any trade secrets or other confidential information of any other person in the
course of their work for the Company. The Company is the exclusive owner of all
right, title and interest in its Intellectual Property Rights as purported to be
owned by the Company, and such Intellectual Property Rights are valid and in
full force and effect. Neither the Company, nor any of its employees or
consultants has received notice of, and, to the best of the Company's knowledge
after reasonable investigation, there are no claims that the Company's
Intellectual Property Rights or the use or ownership thereof by the Company
infringes, violates or conflicts with any such right of any third party. No
university, hospital, government agency (whether federal or state) or other
organization which sponsored research and development conducted by the Company
has any claim of right to or ownership of or other encumbrance upon the
Intellectual Property Rights of the Company.
3.08. Financial Information. The financial statements of the Company,
including (i) the Company's Compiled Financial Statements from the date of its
incorporation, (September 1, 1995) through December 31, 1995, and the internally
prepared financial statements for the six months ended June 30, 1996, attached
hereto as Exhibit 3.08, present fairly the financial position of the Company as
at the date or dates thereof (the "Financial Statements"). The Company does not
have, and has no reasonable grounds to know of, any liability, contingent or
otherwise, not adequately reflected in or reserved against in the Financial
Statements. Except as set forth in Exhibit 3.08, since December 31, 1995, (i)
there has been no material adverse change in the business, assets, operations,
affairs, prospects or financial condition of the Company; (ii) neither the
business, financial condition, operations, prospects or affairs of the Company
nor any of its properties or assets, including without limitation, its
Intellectual Property Rights, have been materially adversely affected as the
result of any legislative or regulatory change, any revocation or change in any
franchise, permit, license or right to do business, or any other event or
occurrence, whether or not insured against; and (iii) the Company has not
entered into any
9
<PAGE>
material transaction other than in the ordinary course of business, made any
distribution on its capital stock, or redeemed or repurchased any of its capital
stock, except as set forth on Exhibit 3.08.
3.09. Taxes. The Company has accurately prepared and timely filed all
federal, state and other tax returns required by law to be filed by it, has paid
or made provision for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been made and are reflected
in the Company's financial statements for all current taxes and other charges to
which the Company is subject and which are not currently due and payable. None
of the federal income tax returns of the Company have been audited by the
Internal Revenue Service. The Company knows of no additional assessments,
adjustments or contingent tax liability (whether federal or state) pending or
threatened for any period, nor of any basis for any such assessment, adjustment
or contingency. Neither the Company nor, to the best of the Company's knowledge,
any of its stockholders, has ever filed a consent pertaining to the Company
pursuant to Section 341(f) of the Code relating to collapsible corporations.
3.10. ERISA. The Company makes no contributions to any employee pension
benefit plans for its employees which are subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
3.11. Transactions with Affiliates. Except as set forth in Exhibit
3.11, there are no loans, leases, royalty agreements or other continuing
transactions between (a) the Company or any of its customers or suppliers, and
(b) any officer, employee, consultant or director of the Company or any Person
owning five percent (5%) or more of the capital stock of the Company or any
member of the immediate family of such officer, employee, consultant, director
or stockholder or any corporation or other entity controlled by such officer,
employee, consultant, director or stockholder, or a member of the immediate
family of such officer, employee, consultant, director or stockholder.
3.12. Assumptions or Guaranties of Indebtedness of Other Persons. The
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable on (including, without limitation, liability by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss) any Indebtedness of any other Person except as set forth
in Exhibit 3.12.
3.13. Investments in Other Persons. Except as set forth in Exhibit
3.13, the Company has not made any loans or advances to any Person which is
outstanding on the date of this Agreement in excess of $5,000 in the aggregate,
nor is it committed or obligated to make any such loan or advance, nor does the
Company own any capital stock, assets comprising the business of, obligations
of, or any interest in, any Person. The Company does not have, and has not since
its incorporation had, any Subsidiaries.
3.14. Securities Act of 1933. The Company has complied and will comply
with all applicable federal and state securities laws in connection with the
offer, issuance and sale of the Preferred Shares hereunder. Neither the Company
nor anyone acting on its behalf has or will sell, offer to sell or solicit
10
<PAGE>
offers to buy the Preferred Shares or similar securities to, or solicit offers
with respect thereto from, or enter into any preliminary conversations or
negotiations relating thereto with, any Person, so as to bring the issuance and
sale of the Preferred Shares under the registration provisions of the Securities
Act and applicable state securities laws.
3.15. Disclosure. Neither this Agreement, the Financial Statements, nor
any other agreement, document, certificate, statement, whether oral or written,
furnished to the Purchaser or its special counsel by or on behalf of the Company
in connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained herein or therein, in light of the
circumstances in which made, not misleading. Projections made in the Business
Plan are not considered to be facts for the purpose of this Section. Such
projections were prepared in good faith on the basis of reasonable assumptions,
and all such assumptions which are material to such projections have been
disclosed in the Business Plan. There is no fact within the knowledge of the
Company or any of its executive officers which has not been disclosed herein or
in writing by them to the Purchaser and which materially adversely affects, or
in the future in their opinion may, insofar as they can now foresee, materially
adversely affect the business, operations, properties, Intellectual Property
Rights, assets or condition, financial or other, of the Company. Without
limiting the foregoing, the Company has no knowledge that there exists, or there
is pending or planned, any patent, invention, device, application or principle
or any statute, rule, law, regulation, standard or code which would materially
adversely affect the business, operations, Intellectual Property Rights, affairs
or financial condition of the Company.
3.16. Brokers or Finders. No Person has or will have, as a result of
the transactions contemplated by this Agreement, any right, interest or valid
claim against or upon the Company for any commission, fee or other compensation
as a finder or broker because of any act or omission by the Company or its
respective agents.
3.17. Capitalization; Status of Capital Stock. As of the Closing, the
Company will have a total authorized capitalization consisting of (i) 4,000,000
shares of Common Stock, $.01 par value, and (ii) 2,000,000 shares of Preferred
Stock, $.01 par value, of which 1,000,000 shares will be designated as Series A
Preferred Stock. As of the Closing, 1,100,800 shares of Common Stock will be
issued and outstanding, and, without giving effect to the transactions
contemplated hereby, no shares of Series A Preferred Stock will be issued or
outstanding. A complete list of the capital stock of the Company which has been
previously issued and the names in which such capital stock is registered on the
stock transfer book of the Company is set forth in Exhibit 3.17 hereto. All the
outstanding shares of capital stock of the Company have been duly authorized,
and are validly issued, fully paid and non-assessable. The Series A Shares when
issued and delivered in accordance with the terms hereof, and the Conversion
Shares, when issued and delivered upon conversion of the Series A Shares, will
be duly authorized, validly issued, fully-paid and non-assessable. Except for
210,080shares of Common Stock that will be reserved for issuance upon exercise
of stock options as further set forth in Exhibit 3.17, no options, warrants,
subscriptions or purchase rights of any nature to acquire from the Company, or
commitments of the Company to issue, shares of capital stock or other securities
are authorized, issued or outstanding, nor is the Company
11
<PAGE>
obligated in any other manner to issue shares or rights to acquire any of its
capital stock or other securities except as contemplated by this Agreement. None
of the Company's outstanding securities or authorized capital stock or the
Preferred Stock are subject to any rights of redemption, repurchase, rights of
first refusal, preemptive rights or other similar rights, whether contractual,
statutory or otherwise, for the benefit of the Company, any stockholder, or any
other Person, except pursuant hereto or the Voting and Stock Restriction
Agreement. Except as set forth in Exhibit 3.17, there are no restrictions on the
transfer of shares of capital stock of the Company other than those imposed by
relevant federal and state securities laws and as otherwise contemplated by this
Agreement. Except as set forth in Exhibit 3.17, there are no agreements,
understandings, trusts or other collaborative arrangements or understandings
concerning the voting or transfer of the capital stock of the Company. The offer
and sale of all capital stock and other securities of the Company issued before
the Closing complied with or were exempt from all applicable federal and state
securities laws and no stockholder has a right of rescission or damages with
respect thereto.
3.18. Registration Rights. Except as set forth on Exhibit 3.18, and
except for the rights granted hereunder, no Person has demand or other rights to
cause the Company to file any registration statement under the Securities Act
relating to any securities of the Company or any right to participate in any
such registration statement.
3.19. Insurance. The Company carries insurance covering its properties
and business adequate and customary for the type and scope of the properties,
assets and business, and similar to companies of comparable size and condition
similarly situated in the same industry in which the Company operates, but in
any event in amounts sufficient to prevent the Company from becoming a co-
insurer or self-insurer, with provision for reasonable deductibles.
3.20. Books and Records. The books of account, ledgers, order books,
records and documents of the Company accurately and completely reflect all
material information relating to the business of the Company, the location and
collection of its assets, and the nature of all transactions giving rise to the
obligations or accounts receivable of the Company.
3.21. Material Agreements. Except as set forth in Exhibit 3.21, the
Company is not a party to any written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement, a copy of which would be required
to be filed with the Commission as an exhibit to a registration statement on
Form S-1 or Form S-18 if the Company were registering securities under the
Securities Act, or any other agreement which could adversely affect the
business, assets, liabilities, Intellectual Property Rights, financial condition
or operations of the Company. The Company, and to the best of the Company's
knowledge, each other party thereto have in all material respects performed all
the obligations required to be performed by them to date, have received no
notice of default and are not in default under any lease, agreement or contract
now in effect to which the Company is a party or by which it or its property may
be bound, the result of which could cause a material adverse change in the
business, assets, liabilities, Intellectual Property Rights, operations or
financial condition of the Company. Except as set forth in Exhibit 3.21, each of
the contracts or agreements listed in Exhibit 3.21 is in full force and effect
with no
12
<PAGE>
default, anticipated or threatened default or failure of performance or
observance of any obligations or conditions contained therein, and none of the
foregoing parties nor the Company has provided any notice of default or of its
intention to terminate these agreements.
3.22. Absence of Certain Developments. Except as provided in Exhibit
3.22 attached hereto, since June 30, 1996 the Company has not engaged in any
activities except in the normal course of business, none of which are material.
3.23. Environmental and Safety Laws. To the best of the Company's
knowledge after due investigation, it is not in violation of any applicable
statute, law or regulation relating to the environment or occupational safety
and health, and to the best of its knowledge after due investigation, no
material expenditures will be required in order to comply with any such statute,
law or regulation.
3.24. U.S. Real Property Holding Corporation. The Company is not now
and has never been a "United States Real Property Holding Corporation" as
defined in Section 897(c)(2) of the Code and Section 1.897-2(b) of the
Regulations promulgated by the Internal Revenue Service.
3.25. Business Plan. All factual information contained in the Business
Plan was when given and is at the date of this Agreement true, complete and
accurate in all material respects and not misleading and, without prejudice to
the generality of the foregoing, the financial forecasts contained in the
Business Plan have been diligently prepared and such assumptions upon which they
are based as to the prospects of the Company have been carefully considered and
are honestly believed to be reasonable, having regard to the information
available and to the market conditions prevailing at the time of their
preparation and that the Company has made due and careful inquiry so as to
ascertain (as far as possible) all such information and conditions which are
relevant to the preparation of the Business Plan.
ARTICLE IV
COVENANTS OF THE COMPANY
4.01. Affirmative Covenants of the Company Other Than Reporting
Requirements. Without limiting any other covenants and provisions hereof, and
except to the extent the following covenants and provisions of this Section 4.01
are waived in any instance by all of the Investor Directors, the Company
covenants and agrees that until the consummation of a Qualified Public Offering,
it will perform and observe the following covenants and provisions, and will
cause each Subsidiary, if and when such Subsidiary exists, to perform and
observe such of the following covenants and provisions as are applicable to such
Subsidiary:
(a) Maintenance of Key Man Insurance. Within 90 days from the
date hereof, maintain term life insurance on the lives of Michael J. Hagan and
Michael P. McNulty, each in the amount of $250,000, in each case for so long as
such person remains an officer or employee of the Company, the proceeds of which
are payable to the Company. The Company will add Purchaser as a notice party to
13
<PAGE>
such policy and will request that the issuer of such policy provide the
Purchaser with at least twenty (20) days' notice before such policy is
terminated (for failure to pay premium or otherwise) or assigned, or before any
change is made in the designation of the beneficiary thereof.
(b) Inspection Rights. Permit during normal business hours,
upon reasonable request and notice, the Purchaser or any of its employees,
agents or representatives, to examine and make copies of and extracts from the
records and books of account of, and visit and inspect the properties, assets,
operations and business of the Company and any Subsidiary, and to discuss the
affairs, finances and accounts of the Company and any Subsidiary with any of its
officers, consultants, directors, Key Employees, attorneys or independent
accountants; provided, however, that Purchaser, and its employees, agents or
representatives, as the case may be, agrees to hold all information confidential
on the terms set forth in Section 9.09 hereof.
(c) Budgets Approval. At least thirty (30) days prior to the
commencement of each fiscal year, prepare and submit to, and obtain in respect
thereof the approval of two-thirds of the members of the Board of Directors, a
business plan and monthly operating budget in detail for each fiscal year,
monthly operating expenses and profit and loss projections, quarterly cash flow
projections and a capital expenditure budget for the fiscal year.
(d) Financing. Promptly, fully and in detail, inform the
Directors of any discussions, offers or contracts relating to possible financing
of any material nature for the Company, whether initiated by the Company or any
other Person.
(e) New Developments. Cause all technological developments,
patentable or unpatentable inventions, discoveries or improvements by the
Company's or any Subsidiary's employees or consultants to be documented in
accordance with industry practice and, where possible and appropriate, to file
and prosecute United States and foreign patent, copyright, trademark, mask work
or other Intellectual Property Right applications relating to and protecting the
Company's inventions, discoveries or developments on behalf of the Company or
any Subsidiary.
(f) Meetings of Directors, Committees and Observer Rights.
Hold meetings of the Company's Board of Directors not less than on a quarterly
basis; hold meetings of the Company's Executive Committee of the Board of
Directors not less than four times a year; permit Purchaser or its designee who
is not affiliated with the Investor Directors to have one representative attend
each meeting of the Board of Directors of the Company; permit Purchaser or its
designee to attend each meeting of any committee thereof and to participate in
all discussions during each such meeting; send to Purchaser and each Executive
Shareholder (as defined in the Voting and Stock Restriction Agreement) the
notice of the time and place of such meeting in the same manner and at the same
time as it shall send such notice to its directors or committee members, as the
case may be; and provide to Purchaser and each Executive Shareholder copies of
all notices, reports, minutes and consents at the time and in the manner as they
are provided to the Board of Directors or any committee thereof.
14
<PAGE>
(g) Agreements of Officers and Employees. Cause each employee
of the Company or any Subsidiary now or hereafter employed to execute and
deliver a Nondisclosure and Assignment of Developments Agreement in form and
substance satisfactory to the Purchaser (or as otherwise approved by the Board
of Directors of the Company, including a majority of the Investor Directors) and
cause each Key Employee of the Company or any Subsidiary hereafter employed to
execute and deliver a Non-competition Agreement in form and substance
satisfactory to the Purchaser (or as otherwise approved by the Board of
Directors of the Company, including a majority of the Investor Directors), and
use its best efforts to cause all consultants of the Company involved in the
design, review, evaluation or development of products or Intellectual Property
Rights to execute and deliver a Nondisclosure and Assignment of Developments
Agreement in form and substance satisfactory to the Purchaser (or as otherwise
approved by the Board of Directors, including a majority of the Investor
Directors), and, if requested by Purchaser, to cause all employees of the
Company or any Subsidiary, now or hereafter employed, who owns or acquires any
capital stock of the Company, to execute and deliver a Stock Restriction
Agreement in form and substance satisfactory to the Purchaser (or as otherwise
approved by the Board of Directors of the Company, including a majority of the
Investor Directors), except those employees who are Shareholders under the
Voting and Stock Restriction Agreement; and the Company shall not amend or waive
any of the provisions of such Nondisclosure and Assignment of Developments
Agreements, Non-competition Agreements or Stock Restriction Agreements.
(h) By-laws; Meetings and Indemnification. The Company shall
use its best efforts to at all times cause its By-laws to provide that, (A)
unless otherwise required by the laws of the state of its incorporation, (i) any
two directors or (ii) any holder or holders of at least 25% of the outstanding
shares of Preferred Stock, voting as a separate class, shall have the right to
call a meeting of the Board of Directors or stockholders, respectively and (B) a
quorum for a meeting of the Board of Directors or any Committee hereof of which
an Investor Director is a member shall require the attendance of at least one
Investor Director (as defined in the Voting and Stock Restriction Agreement),
except as otherwise provided in the Company's By-laws. The Company shall at all
times maintain provisions in its By-laws or Articles of Incorporation
indemnifying all directors against liability to the maximum extent permitted
under the laws of the state of its incorporation.
(i) Corporate Existence. Maintain and cause each of its
Subsidiaries to maintain their respective corporate existence, Intellectual
Property Rights, other rights and franchises in full force and effect to the
extent appropriate in accordance with good business practice.
(j) Properties, Business, Insurance. Maintain and cause each
of its Subsidiaries to maintain as to their respective properties and business,
with financially sound and reputable insurers, insurance against such casualties
and contingencies and of such types and in such amounts as is customary for
companies of a similar size and financial condition similarly situated within
the same industry.
(k) Expenses of Directors. Promptly reimburse in full each
director of the Company for all of his reasonable out-of-pocket expenses
incurred in attending each meeting of the Board of
15
<PAGE>
Directors of the Company or any Committee thereof.
(l) Compliance with Laws. Comply, and cause each Subsidiary to
comply, with all applicable laws, rules, regulations and orders, noncompliance
with which could materially adversely affect its business, assets, Intellectual
Property Rights, operations or condition, financial or otherwise.
(m) Keeping of Records and Books of Account. Keep, and cause
each Subsidiary to keep, adequate records and books of account, in which
complete entries will be made in accordance with generally accepted accounting
principles consistently applied, reflecting all financial transactions of the
Company and such Subsidiary, and in which, for each fiscal year, all proper
reserves for depreciation, depletion, obsolescence, amortization, taxes, bad
debts and other purposes in connection with its business shall be made.
(n) Size of Board. Fix and maintain the number of Directors on
the Board of Directors of the Company at seven members, including four directors
nominated by the Purchaser, one of which shall be the Chairman of the Board.
(o) Rule 144A Information. At all times during which the
Company is neither subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under
the Exchange Act, it will provide as promptly as practicable (in any event not
later than twenty (20) days after initial request) in written form, upon the
written request of the Purchaser or a prospective buyer of Shares from any
Purchaser, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company further covenants, upon written request, as promptly
as practicable (in any event not later than twenty (20) days after initial
request) to cooperate with and assist the Purchaser or any member of the
National Association of Securities Dealers, Inc. system for Private Offerings
Resales and Trading through Automated Linkage ("PORTAL") in applying to
designate and thereafter maintain the eligibility of the Shares for trading
through PORTAL. The Company's obligations under this Section 4.01(o) shall at
all times be contingent upon the Purchaser obtaining from a prospective
purchaser an agreement to take all reasonable precautions to safeguard the Rule
144A Information from disclosure to anyone other than a person who will assist
such purchaser in evaluating the purchase of the Shares.
4.02. Negative Covenants of the Company. The Company covenants and
agrees that until the consummation of a Qualified Public Offering, it will
comply with and observe the following negative covenants and provisions, and
will cause each Subsidiary to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, if and when such
Subsidiary exists, and will not without the written consent or written waiver of
all of the Investor Directors:
(a) Dealings with Affiliates. Enter into any transaction,
including, without limitation, any loans or extensions of credit or royalty
agreements with any employee, consultant, officer or director of the Company or
any Subsidiary or holder of five percent (5%) of any class of capital stock of
the
16
<PAGE>
Company or any Subsidiary, or any member of their respective immediate families
or any corporation or other entity directly or indirectly controlled by one or
more of such employees, consultants, officers, directors or 5% stockholders or
members of their immediate families, (i) on terms less favorable to the Company
or any Subsidiary than it would obtain in a transaction between unrelated
parties or (ii) except in the case of any transaction or series of transactions
entered into in the ordinary course of business and involving less than $5,000
in the aggregate, without the approval of two-thirds of the Board of Directors
(including a majority of the Investor Directors).
(b) Issuance of Equity Securities. Authorize or issue, or
obligate itself to issue, any additional shares or capital stock of the Company
of any class, provided, however, that the provisions of this Section 4.02(b)
shall not apply to the issuance of: (i) the Conversion Shares; or (ii) up to
210,080 shares of Common Stock or options or warrants exercisable therefor,
issued on or after the date hereof to directors, officers, employees or
consultants of the Company and any Subsidiary pursuant to any qualified or non-
qualified stock option plan or agreement, employee stock ownership plan,
employee benefit plan, stock purchase agreement, stock plan, stock restriction
agreement, or consulting agreement or such other options, arrangements,
agreements or plans approved by two-thirds of the members of the Compensation
Committee (including any Investor Director on such Committee), or if no such
committee, by two-thirds of the members of the Board of Directors of the Company
(including a majority of the Investor Directors).
(c) Compensation to Officers. Except in any instance in which
approval has been obtained by all of the Investor Directors or otherwise
pursuant to Section 4.01(c) hereof, during any calendar year pay to any officer
or senior manager compensation (including salary and bonus) which exceeds the
compensation customarily paid to management in companies of similar size, of
similar maturity, and in similar businesses.
(d) Maintenance of Ownership of Subsidiaries. Sell or
otherwise dispose of any shares of capital stock of any Subsidiary, except to
another Subsidiary, or permit any Subsidiary to issue, sell or otherwise dispose
of any shares or rights to acquire any of its capital stock or the capital stock
of any Subsidiary, except to the Company or another Subsidiary; provided,
however, that the Company may liquidate, merge or consolidate any Subsidiary or
Subsidiaries into or with itself, provided that the Company is the surviving
entity, or into or with another Subsidiary or Subsidiaries, or the Company may
sell all or a portion of any Subsidiary to the Company or any other subsidiary,
provided that after giving effect to the transaction, the Subsidiary continues
to remain a member of the Company's "consolidated group" for tax and accounting
purposes.
(e) Transfer of Technology. Transfer, sell, dispose of,
assign, lease, license or donate any ownership or interest in, or material
rights relating to, and of its technology, or other Intellectual Property Rights
to any person or entity which is not a member of the "consolidated group" of the
Company and its Subsidiaries; provided, however, that this Section shall not
apply to transfers or licenses of technology or Intellectual Property Rights
accomplished in the ordinary course of business as presently conducted or
proposed to be conducted.
17
<PAGE>
(f) Conduct of Business. The Company covenants that it will
not, and will not permit any of its Subsidiaries to engage in any business other
than the business engaged in by each of them on the date hereof and any
businesses or activities substantially similar or related thereto other than as
contemplated by the Business Plan.
(g) Assumptions or Guaranties of Indebtedness of Other
Persons. Assume, guarantee, endorse or otherwise become directly or contingently
liable on, or permit any Subsidiary to assume, guarantee, endorse or otherwise
become directly or contingently liable on (including, without limitation,
liability by way of agreement, contingent or otherwise, to purchase, to provide
funds for payment, to supply funds to or otherwise invest in the debtor or
otherwise to assure the creditor against loss) any Indebtedness of any other
Person, except for guaranties by endorsement of negotiable instruments for
deposit or endorsement of negotiable instruments for deposit or collection in
the ordinary course of business, and except for the guaranties of the permitted
obligations of any wholly-owned Subsidiary except as provided for in Exhibit
3.12.
(h) Investments in Other Corporations or Entities. Make, or
permit any Subsidiary to make, any loan or advance to any Person, or purchase,
otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire,
the capital stock, assets comprising the business of, obligations of, or any
interest in, any other corporation or entity which will not be operated as a
wholly-owned Subsidiary, except:
(i) investments by the Company or a Subsidiary in
evidences of indebtedness issued or fully guaranteed by the United States of
America and having a maturity of not more than one year from the date of
acquisition;
(ii) investments by the Company or a Subsidiary in
certificates of deposit, notes, acceptances and repurchase agreements having a
maturity of not more than one year from the date of acquisition issued by a bank
organized in the United States having capital, surplus and undivided profits of
at least $50,000,000;
(iii) investments by the Company or a Subsidiary in
the highest-rated commercial paper having a maturity of not more than one year
from the date of acquisition;
(iv) investments by the Company or a Subsidiary in
"Money Market" fund shares, or in money market accounts fully insured by the
Federal Deposit Insurance Corporation and sponsored by banks and other financial
institutions, provided that the investments consist principally of the types of
investments described in clauses (i), (ii) or (iii) of this subsection 4.02(h);
or
(v) loans or advances from a Subsidiary to the
Company or from the Company to a Subsidiary.
(i) Amendments. Amend the Articles of Incorporation or By-laws
of the Company.
18
<PAGE>
4.03. Reporting Requirements. Until the consummation of the Initial
Public Offering, the Company will furnish the following to each Person who holds
any of the shares issued pursuant to this Agreement:
(a) Monthly Reports. As soon as available and in any event
within 15 days after the end of each calendar month, consolidated and
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such month and consolidated and consolidating statements of income and
retained earnings and a summary statement of monthly cash flow of the Company
and its Subsidiaries for such month and for the period commencing at the end of
the previous fiscal year and ending with the end of such month, setting forth in
each case in comparative form the corresponding figures for the corresponding
period of the preceding fiscal year, and including comparisons to the monthly
budget or business plan and an analysis of the variances from the budget or
plan, prepared in accordance with generally accepted accounting principles
consistently applied; and, as soon as available and in any event within 15 days
after the end of each fiscal quarter, a consolidated and consolidating statement
of changes in financial position of the Company and its Subsidiaries for such
quarter and for the corresponding period of the prior fiscal year, prepared in
accordance with generally accepted accounting principles consistently applied;
(b) Annual Reports. As soon as available and in any event
within 45 days after the end of each fiscal year of the Company, a copy of the
annual audit report for such year for the Company and its Subsidiaries,
including therein consolidated and consolidating balance sheets of the Company
and its Subsidiaries as of the end of such fiscal year and consolidated and
consolidating statements of income and retained earnings and of changes in
financial position of the Company and its Subsidiaries for such fiscal year,
setting forth in each case in comparative form the corresponding figures for the
preceding fiscal year, all such consolidated statements to be duly certified by
the chief financial officer of the Company and an independent public accountant
of recognized national standing approved by a majority of the Board of
Directors;
(c) Budgets and Operating Plan. As soon as available and in
any event at least 60 days before the beginning of each fiscal year of the
Company, a business plan and monthly and quarterly operating budgets for the
forthcoming fiscal year, and as soon as available and in any event within 15
days after the end of each calendar month, monthly comparisons against the
business plan and monthly operating budgets;
(d) Notice of Adverse Changes. Promptly after the occurrence
thereof and in any event within five (5) business days after each occurrence,
notice of any material adverse change in the business, assets, Intellectual
Property Rights, management, operations or financial condition of the Company;
and
(e) Reports and Other Information. Promptly upon receipt,
publication, commencement or occurrence provide to each Purchaser copies of all
consulting reports, notices of all material actions, suits or proceedings,
copies of all accountant's reviews, and reports to management, and
19
<PAGE>
such other information as the Company shall make available to its directors or
stockholders or the Purchasers shall reasonably request.
ARTICLE V
REGISTRATION RIGHTS
5.01. Piggy-Back Registrations. If at any time the Company shall
determine to register for its own account or the account of others under the
Securities Act (including pursuant to the Qualified Public Offering, the Initial
Public Offering or a demand for registration of any shareholder of the Company
other than the Purchaser exercising registration rights with respect to the
Preferred Stock) any of its equity securities, other than on Form S-8 or Form S-
4 or their then equivalents relating to shares of Common Stock to be issued
solely in connection with any acquisition of any entity or business or shares of
Common Stock issuable in connection with stock option or other employee benefit
plans, it shall send to each holder of Registrable Shares, including each holder
who has the right to acquire Registrable Shares, written notice of such
determination and, if within fifteen (15) days after receipt of such notice,
such holder shall so request in writing, the Company shall use its best efforts
to include in such registration statement all or any part of the Registrable
Shares such holder requests to be registered, except that if, in connection with
any offering involving an underwriting of Common Stock to be issued by the
Company, the managing underwriter shall impose a limitation on the number of
shares of such Common Stock which may be included in the registration statement
because, in its judgment, such limitation is necessary to effect an orderly
public distribution, then the Company shall be obligated to include in such
registration statement only such limited portion of the Registrable Shares with
respect to which such holder has requested inclusion hereunder; provided,
however, that the Company shall not so exclude any Registrable Shares held by
the Series A Purchaser unless it has first excluded any securities to be offered
and sold by directors, officers or other employees of the Company or by holders
who do not have contractual, incidental rights to include such securities
(collectively, "Excludable Shares"); provided, further, that as between the
Company and holders of Registrable Shares, in no event shall the Registrable
Shares included in such offering be limited to less than twenty-five percent
(25%) of the aggregated shares offered. Any exclusion of Series A Preferred
Stock or capital stock issued or issuable on conversion thereof, shall be made
pro rata among the Series A Purchasers (or their assigns) seeking to include
such shares, in proportion to the number of such shares sought to be included by
such Purchasers (or their assigns). No incidental right under this Section 5.01
shall be construed to limit any registration required under Section 5.02. The
obligations of the Company under this Section 5.01 may be waived at any time
upon the written consent of holders of sixty percent (60%) in interest of the
Series A Shares and shall expire on the tenth anniversary following the
consummation of an Initial Public Offering.
5.02. Required Registration. If on any occasion one or more holders of
at least sixty percent (60%) of the Series A Shares shall notify the Company in
writing that it or they intend to offer or cause to be offered for public sale
at least thirty percent (30%) of the Registrable Shares, the Company will so
notify all holders of Registrable Shares, including all holders who have a right
to acquire Registrable Shares. Upon written request of any holder given within
fifteen (15) days after the receipt by such holder
20
<PAGE>
from the Company of such notification, the Company will use its best efforts to
cause such of the Registrable Shares as may be requested by any holder thereof
(including the holder or holders giving the initial notice of intent to offer)
to be registered under the Securities Act as expeditiously as possible. The
Company shall not be required to effect more than one registration during any
twelve (12) month period pursuant to this Section 5.02 and two such
registrations in the aggregate. If the Company determines to include shares to
be sold by it or by other selling shareholders in any registration request
pursuant to this Section 5.02, such registration shall be deemed to have been a
"piggy back" registration under Section 5.01, and not a "demand" registration
under this Section 5.02 if the holders of Registrable Shares are unable to
include in any such registration statement eighty-five percent (85%) of the
Registrable Shares initially requested for inclusion in such registration
statement. The Company shall not be required to effect a registration pursuant
to this Section 5.02 unless the minimum market value of any offering and
registration of Registrable Shares made pursuant thereto is at least $1,000,000,
before calculation of underwriting discounts and commissions. The holders of
Registrable Shares may not exercise their rights under this Section 5.02 until
the earlier to occur of (i) 30months following the date of the Closing or (ii)
90 days after the effectiveness of any registration statement covering the
Initial Public Offering.
5.03. Registrations on Form S-3. In addition to the rights provided the
holder of Registrable Shares in Sections 5.01 and 5.02 above, if the
registration of Registrable Shares under the Securities Act can be effected on
Form S-3 (or any similar form promulgated by the Commission), then upon the
written request of one or more holders of at least sixty percent (60%) of the
Series A Shares, the Company will so notify each holder of Registrable Shares,
including each holder who has a right to acquire Registrable Shares, and then
will, as expeditiously as possible, use its best efforts to effect qualification
and registration under the Securities Act on Form S-3 of all or such portion of
the Registrable Shares as the holder or holders shall specify; provided,
however, the Company shall not be required to effect a registration pursuant to
this Section 5.03 unless the market value of the Registrable Shares to be sold
in any such registration shall be estimated to be at least $500,000 at the time
of filing such registration statement, and further provided that the Company
shall not be required to effect more than one (1) registration during any twelve
(12) month period pursuant to this Section 5.03.
5.04. Effectiveness. The Company will use its best efforts to maintain
the effectiveness for up to 90 days (or such shorter period of time as the
underwriters need to complete the distribution of the registered offering, or
one year in the case of a "shelf" registration statement on Form S-3) of any
registration statement pursuant to which any of the Registrable Shares are being
offered, and from time to time will amend or supplement such registration
statement and the prospectus contained therein to the extent necessary to comply
with the Securities Act and any applicable state securities statute or
regulation. The Company will also provide each holder of Registrable Shares with
as many copies of the prospectus contained in any such registration statement as
it may reasonably request.
5.05. Indemnification of Holder of Registrable Shares. In the event
that the Company registers any of the Registrable Shares under the Securities
Act, the Company will indemnify and hold harmless each holder and each
underwriter of the Registrable Shares (including their officers, directors,
affiliates and partners) so registered (including any broker or dealer through
whom such shares may be sold) and
21
<PAGE>
each Person, if any, who controls such holder or any such underwriter within the
meaning of Section 15 of the Securities Act from and against any and all losses,
claims, damages, expenses or liabilities, joint or several, to which they or any
of them become subject under the Securities Act, applicable state securities
laws or under any other statute or at common law or otherwise, as incurred, and,
except as hereinafter provided, will reimburse each such holder, each such
underwriter and each such controlling Person, if any, for any legal or other
expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, as incurred, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement, in any preliminary or amended preliminary prospectus or in the final
prospectus (or the registration statement or prospectus as from time to time
amended or supplemented by the Company) or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, or any violation by the Company of any rule or regulation
promulgated under the Securities Act or any state securities laws applicable to
the Company and relating to action or inaction required of the Company in
connection with such registration, unless (i) such untrue statement or alleged
untrue statement or omission or alleged omission was made in such registration
statement, preliminary or amended preliminary prospectus or final prospectus in
reliance upon and in conformity with information furnished in writing to the
Company in connection therewith by any such holder of Registrable Shares (in the
case of indemnification of such holder), any such underwriter (in the case of
indemnification of such underwriter) or any such controlling Person (in the case
of indemnification of such controlling person) expressly for use therein, or
unless (ii) in the case of a sale directly by such holder of Registrable Shares
(including a sale of such Registrable Shares through any underwriter retained by
such holder of Registrable Shares to engage in a distribution solely on behalf
of such holder of Registrable Shares), such untrue statement or alleged untrue
statement or omission or alleged omission was contained in a preliminary
prospectus and corrected in a final or amended prospectus copies of which were
delivered to such holder of Registrable Shares or such underwriter on a timely
basis, and such holder of Registrable Shares failed to deliver a copy of the
final or amended prospectus at or prior to the confirmation for the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
Promptly after receipt by any holder of Registrable Shares, any
underwriter or any controlling Person of notice of the commencement of any
action in respect of which indemnity may be sought against the Company, such
holder of Registrable Shares, or such underwriter or such controlling Person, as
the case may be, will notify the Company in writing of the commencement thereof
(provided, that failure to so notify the Company shall not relieve the Company
from any liability it may have hereunder) and, subject to the provisions
hereinafter stated, the Company shall be entitled to assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to such holder of Registrable Shares, such underwriter or such
controlling Person, as the case may be), and the payment of expenses insofar as
such action shall relate to any alleged liability in respect of which indemnity
may be sought against the Company.
Such holder of Registrable Shares, any such underwriter or any such
controlling Person shall have
22
<PAGE>
the right to employ separate counsel in any such action and to participate in
the defense thereof but the fees and expenses of such counsel subsequent to any
assumption of the defense by the Company shall not be at the expense of the
Company unless the employment of such counsel has been specifically authorized
in writing by the Company. The Company shall not be liable to indemnify any
Person for any settlement of any such action effected without the Company's
written consent. The Company shall not, except with the approval of each party
being indemnified under this Section 5.05, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to the parties being so
indemnified of a release from all liability in respect to such claim or
litigation.
In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which any holder of
Registrable Shares exercising rights under this Article V, or any controlling
Person of any such holder, makes a claim for indemnification pursuant to this
Section 5.05 but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that this Section 5.05
provides for indemnification in such case, then, the Company and such holder
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and of
the holder of Registrable Shares on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the holder of Registrable Shares on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or by the holder of Registrable Shares on the other, and each party's
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, however, that, in any such case,
(A) no such holder will be required to contribute any amount in excess of the
public offering price of all such Registrable Shares offered by it pursuant to
such registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
5.06. Indemnification of Company. In the event that the Company
registers any of the Registrable Shares under the Securities Act, each holder of
the Registrable Shares so registered will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed or
otherwise participated in the preparation of the registration statement, each
underwriter of the Registrable Shares so registered (including any broker or
dealer through whom such of the shares may be sold) and each Person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several, to which they or any of them may become subject under the Securities
Act, applicable state securities laws or under any other statute or at common
law or otherwise, and, except as hereinafter provided, will reimburse the
Company and each such director, officer, underwriter or controlling Person for
any legal or other
23
<PAGE>
expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement, in any
preliminary or amended preliminary prospectus or in the final prospectus (or in
the registration statement or prospectus as from time to time amended or
supplemented) or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, but only insofar as any
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company in connection therewith by such
holder of Registrable Shares expressly for use therein; provided, however, that
such holder's obligations hereunder shall be limited to an amount equal to the
proceeds received by such holder of Registrable Shares sold in such
registration.
Promptly after receipt of notice of the commencement of any action in
respect of which indemnity may be sought against such holder of Registrable
Shares, the Company will notify such holder of Registrable Shares in writing of
the commencement thereof (provided, that failure to so notify such holder shall
not relieve such holder from any liability it may have hereunder), and such
holder of Registrable Shares shall, subject to the provisions hereinafter
stated, be entitled to assume the defense of such action (including the
employment of counsel, who shall be counsel reasonably satisfactory to the
Company) and the payment of expenses insofar as such action shall relate to the
alleged liability in respect of which indemnity may be sought against such
holder of Registrable Shares. The Company and each such director, officer,
underwriter or controlling Person shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel subsequent to any assumption of the defense by
such holder of Registrable Shares shall not be at the expense of such holder of
Registrable Shares unless employment of such counsel has been specifically
authorized in writing by such holder of Registrable Shares. Such holder of
Registrable Shares shall not be liable to indemnify any Person for any
settlement of any such action effected without such holder's written consent.
In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which the Company exercising
its rights under this Article V, makes a claim for indemnification pursuant to
this Section 5.06, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding that this
Section 5.06 provides for indemnification, in such case, then, the Company and
such holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the holder of Registrable Shares on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of the
holder of Registrable Shares on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
24
<PAGE>
fact or omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the holder of
Registrable Shares on the other, and each party's relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission; provided, however, that, in any such case, (A) no such holder will be
required to contribute any amount in excess of the public offering price of all
such Registrable Shares offered by it pursuant to such registration statement;
and (B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
5.07. Exchange Act Registration. If the Company at any time shall list
any class of equity securities of the type which may be issued upon the
conversion of the Preferred Stock on any national securities exchange and shall
register such class of equity securities under the Exchange Act, the Company
will, at its expense, simultaneously list on such exchange and maintain such
listing of, the Common Stock. If the Company becomes subject to the reporting
requirements of either Section 13 or Section 15(d) of the Exchange Act, the
Company will use its best efforts to timely file with the Commission such
information as the Commission may require under either of said Sections; and in
such event, the Company shall use its best efforts to take all action as may be
required as a condition to the availability of Rule 144 or Rule 144A under the
Securities Act (or any successor exemptive rule hereinafter in effect) with
respect to such Common Stock. The Company shall furnish to any holder of
Registrable Shares forthwith upon request (i) a written statement by the Company
as to its compliance with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of the Company as filed with the
Commission, and (iii) such other reports and documents as a holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing a holder to sell any such Registrable Shares without
registration. After the occurrence of the Initial Public Offering, the Company
agrees to use its best efforts to facilitate and expedite transfers of the
Shares pursuant to Rule 144 under the Securities Act, which efforts shall
include timely notice to its transfer agent to expedite such transfers of
Shares.
5.08. Damages. The Company recognizes and agrees that the holder of
Registrable Shares will not have an adequate remedy if the Company fails to
comply with this Article V and that damages may not be readily ascertainable,
and the Company expressly agrees that, in the event of such failure, it shall
not oppose an application by the holder of Registrable Shares or any other
Person entitled to the benefits of this Article V requiring specific performance
of any and all provisions hereof or enjoining the Company from continuing to
commit any such breach of this Article V.
5.09. Further Obligations of the Company. Whenever under the preceding
Sections of this Article V, the Company is required hereunder to register
Registrable Shares, it agrees that it shall also do the following:
(a) Furnish to each selling holder such copies of each
preliminary and final prospectus and such other documents as said holder may
reasonably request to facilitate the public offering of its Registrable Shares;
25
<PAGE>
(b) Use its best efforts to register or qualify the
Registrable Shares covered by said registration statement under the applicable
securities or "blue sky" laws of such jurisdictions as any selling holder may
reasonably request; provided, however, that the Company shall not be obligated
to qualify to do business in any jurisdictions where it is not then so qualified
or to take any action which would subject it to the service of process in suits
other than those arising out of the offer or sale of the securities covered by
the registration statement in any jurisdiction where it is not then so subject;
(c) Furnish to each selling holder a signed counterpart,
addressed to the selling holders, of
(i) an opinion of counsel for the Company, dated the
effective date of the registration statement, and
(ii) "comfort" letters signed by the Company's
independent public accountants who have examined and reported on the Company's
financial statements included in the registration statement, to the extent
permitted by the standards of the American Institute of Certified Public
Accountants, covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in the case of
the accountants' "comfort" letters) with respect to events subsequent to the
date of the financial statements, as are customarily covered in opinions of
issuer's counsel and in accountants' "comfort" letters delivered to the
underwriters in underwritten public offerings of securities, to the extent that
the Company is required to deliver or cause the delivery of such opinion or
"comfort" letters to the underwriters in an underwritten public offering of
securities;
(d) Permit each selling holder of Registrable Shares or his
counsel or other representatives to inspect and copy such corporate documents
and records as may reasonably be requested by them;
(e) Furnish to each selling holder of Registrable Shares a
copy of all documents filed with and all correspondence from or to the
Commission in connection with any such offering of securities;
(f) Use its best efforts to insure the obtaining of all
necessary approvals from the National Association of Securities Dealers, Inc.;
and
(g) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earning statement
covering the period of at least twelve months, but not more than eighteen
months, beginning with the first month after the effective date of the
registration statement covering the Initial Public Offering, which earning
statement shall satisfy the provisions of Section 11(a) of the Securities Act
and Rule 158 thereunder.
Whenever under the preceding Sections of this Article V the holders of
Registrable Shares are
26
<PAGE>
registering such shares pursuant to any registration statement, each such holder
agrees to (i) timely provide to the Company, at its request, such information
and materials as it may reasonably request in order to effect the registration
of such Registrable Shares and (ii) convert all shares of Preferred Stock
included in any registration statement to shares of Common Stock, such
conversion to be effective at the closing of such offering pursuant to such
registration statement.
5.10. Expenses. In the case of each registration effected under Section
5.01, 5.02 or 5.03, the Company shall bear all reasonable costs and expenses of
each such registration on behalf of the selling holders of Registrable Shares,
including, but not limited to, the Company's printing, legal and accounting fees
and expenses, Commission and NASD filing fees and "Blue Sky" fees and expenses
and the reasonable fees and disbursements (such fees not to exceed $25,000) of
one counsel for the selling holders of Registrable Shares in connection with the
registration of their Registrable Shares; provided, however, that the Company
shall have no obligation to pay or otherwise bear any portion of the
underwriters' commissions or discounts attributable to the Registrable Shares
being offered and sold by the holders of the Registrable Shares, or the fees and
expenses of more than one counsel for the selling holders of Registrable Shares
in connection with the registration of the Registrable Shares. The Company shall
pay all expenses of the holders of the Registrable Shares in connection with any
registration initiated pursuant to this Article V which is withdrawn, delayed or
abandoned at the request of the Company, except if such withdrawal, delay or
abandonment is caused by the fraud, material misstatement or omission of a
material fact by a holder of Registrable Shares to be included in such
registration.
5.11. Approval of Underwriter. Any managing underwriter engaged in any
registration made pursuant to Section 5.02 shall be a nationally recognized firm
requiring the approval in writing of the holders of a majority of the
Registrable Shares requesting such registration and the consent of the Company,
which consent shall not be unreasonably withheld or delayed.
5.12. Transferability. The rights to register securities granted by the
Company under this Article V may be assigned by any holder of the Registrable
Shares provided that (i) any assignee or transferee of the Registrable Shares
acquires at least ten percent (10%) of the Registrable Shares purchased by the
Purchaser on the date hereof and is not a competitor of the Company, or is a
general or limited partner or officer or director of the Purchaser or its
affiliates, including, but not limited to, their immediate family, irrevocable
trusts for estate planning purposes and personal representatives;; (ii) such
transfer may otherwise be and is effected in accordance with applicable
securities laws; and (iii) such assignee or transferee agrees in writing to be
bound by all of the provisions of this Agreement, including, without limitation,
Section 5.13 hereof.
27
<PAGE>
5.13. "Lock-Up" Agreement.
(a) Initial Public Offering. Each holder of Registrable Shares
agrees, if so requested by the Company and an underwriter of Common Stock or
other securities of the Company, not to sell, grant any option or right to buy
or sell, or otherwise transfer or dispose of in any manner, whether in
privately-negotiated or open-market transactions, any Common Stock or other
securities of the Company held by it during the 90-day period following the
effective date of a registration statement filed pursuant to the Initial Public
Offering, provided that:
(i) Such agreement shall apply only to the Initial
Public Offering; and
(ii) All holders of Registrable Shares, any other
security holders whose securities are included in such registration statement,
and all officers, directors and Key Employees of the Company shall also enter
into similar agreements.
Such "lock-up" agreement shall be in writing and in form and substance
satisfactory to the Company and such underwriter. The Company may impose stop-
transfer instructions with respect to the shares subject to the foregoing
restrictions until the end of said 90-day period. No holder of Registrable
Shares shall be so restricted unless all holders are similarly and
proportionately restricted.
(b) Lock-Up after Initial Public Offering. Each holder of
Registrable Shares agrees that in the event the Company proposes to offer for
sale to the public any of its equity securities after the Initial Public
Offering, and (1) if such holder of Registrable Shares is an "affiliate" of the
Company (for example, because a general partner of a Purchaser is a director of
the Company) or otherwise holds beneficially or of record ten percent (10%) or
more of the outstanding equity securities of the Company; and (2) if requested
by the Company and an underwriter of Common Stock or other securities of the
Company; and (3) if all other "affiliates" and such 10% stockholders similarly
situated are requested by the Company and such underwriter to sign, and actually
do sign, any "Lock-Up Agreement" (as described herein), then it will not sell,
grant any option or right to buy or sell, or otherwise transfer or dispose of in
any manner, to the public in open market transactions, any Common Stock or other
securities of the Company held by it during the 90-day period following the
effective date of the registration statement of the Company filed under the
Securities Act. The Company agrees that it will sign a Lock-Up Agreement upon
substantially similar terms and conditions in the event of a registration
effected pursuant to Section 5.02 or 5.03 hereof. Such agreements shall be in
writing and in form and substance reasonably satisfactory to the holder of
Registrable Shares, the Company and such underwriter and pursuant to customary
and prevailing terms and conditions.
The Company may impose stop-transfer instructions with respect to the
securities subject to the foregoing restrictions until the end of said 90-day
period.
5.14. Mergers, Etc. The Company shall not, directly or indirectly,
enter into any merger, consolidation or reorganization in which the Company
shall not be the surviving corporation unless the
28
<PAGE>
proposed surviving corporation shall, prior to such merger, consolidation or
reorganization, agree in writing to assume the obligations of the Company under
Article V of this Agreement, and for that purpose references hereunder to
Registrable Shares shall be deemed to be references to the securities which the
Purchaser would be entitled to receive in exchange for Registrable Shares under
any such merger, consolidation or reorganization; provided, however, that the
provisions of this Section 5.14 shall not apply in the event of any merger,
consolidation, or reorganization in which the Company is not the surviving
corporation if all stockholders are entitled to receive in exchange for their
Registrable Shares consideration consisting solely of (i) cash, (ii) securities
of the acquiring corporation which may be immediately sold to the public without
registration under the Securities Act, or (iii) securities of the acquiring
corporation which the acquiring corporation has agreed to register within 90
days of completion of the transaction for resale to the public pursuant to the
Securities Act.
5.15 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the holders of at least a majority of the Registrable Securities, enter into
any agreement with any holder or prospective holder of any securities of the
Company which would allow such holder or prospective holder of any securities of
the Company the right to require the Company to initiate any registration of any
securities of the Company. Any right given by the Company to any holder or
prospective holder of the Company's securities in connection with the
registration of securities shall be conditioned such that it shall be consistent
with the provisions of this Article V and with the rights of the holder provided
in this Agreement. This Article V shall not limit the right of the Company to
enter into any agreements with any holder or prospective holder of any
securities of the Company giving such holder or prospective holder the right to
require the Company, upon any registration of any of its securities, to include,
among the securities which the Company is then registering, securities owned by
such holder if such rights are subordinate to the rights of a holder of
Registrable Securities.
ARTICLE VI
RIGHT OF FIRST REFUSAL
6.01. Right of First Refusal. Before the Company shall issue, sell or
exchange, agree or obligate itself to issue, sell or exchange, or reserve or set
aside for issuance, sale or exchange, any (i) shares of Common Stock, (ii) any
other equity security of the Company, including without limitation, shares of
Preferred Stock, (iii) any convertible debt security of the Company, including
without limitation, any debt security which by its terms is convertible into or
exchangeable for any equity security of the Company, (iv) any security of the
Company that is a combination of debt and equity, or (v) any option, warrant or
other right to subscribe for, purchase or otherwise acquire any such equity
security or any such debt security of the Company, the Company shall, in each
case, first offer to sell such securities (the "Offered Securities") to the
Purchaser as follows: The Company shall offer to sell to Purchaser (a) that
portion of the Offered Securities up to an aggregate price of $1,000,000 in any
investment next succeeding the investment by Purchaser pursuant hereto (the
"Next Round Investment") and (b) in respect of any next succeeding investment or
any investment thereafter that portion of the Offered Securities as the number
29
<PAGE>
of shares of Preferred Stock and Conversion Shares then held by Purchaser bears
to the total number of shares of Preferred Stock and Conversion Shares held by
all Purchasers (the "Basic Amount"), at a price and on such other terms as shall
have been specified by the Company in writing delivered to the Purchaser (the
"Offer"), which Offer by its terms shall remain open and irrevocable for a
period of thirty (30) days from receipt of the Offer.
6.02. Notice of Acceptance. Notice of Purchaser's intention to accept,
in whole or in part, any Offer made pursuant to Section 6.01 shall be evidenced
by a writing signed by Purchaser and delivered to the Company prior to the end
of the 30-day period of such offer, setting forth such of the Purchaser's Next
Round Investment or Basic Amount as the Purchaser elects to purchase.
6.03. Conditions to Acceptances and Purchase.
(a) Permitted Sales of Refused Securities. In the event that a
Notice of Acceptance are not given by the Purchaser in respect of all the
Offered Securities, the Company shall have ninety (90) days from the end of said
30-day period to sell any such Offered Securities as to which a Notice of
Acceptance has not been given by the Purchaser (the "Refused Securities") to the
Person or Persons specified in the Offer, but only for cash and otherwise in all
respects upon terms and conditions, including, without limitation, unit price
and interest rates, which are no more favorable, in the aggregate, to such other
Person or Persons or less favorable to the Company than those set forth in the
Offer.
(b) Reduction in Amount of Offered Securities. In the event
the Company shall propose to sell less than all of the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 6.03(a)
above), then Purchaser may reduce the number of shares or other units of the
Offered Securities specified in its Notice of Acceptance to an amount which
shall be not less than the amount of the Offered Securities which the Purchaser
elected to purchase pursuant to Section 6.02 multiplied by a fraction, (i) the
numerator of which shall be the amount of Offered Securities which the Company
actually proposes to sell, and (ii) the denominator of which shall be the amount
of all Offered Securities. In the event that Purchaser so elects to reduce the
number or amount of Offered Securities specified in its Notice of Acceptance,
the Company may not sell or otherwise dispose of more than the reduced amount of
the Offered Securities until such securities have again been offered to the
Purchaser in accordance with Section 6.01.
(c) Closing. Upon the closing, which shall include full
payment to the Company, of the sale to such other Person or Persons of all or
less than all the Refused Securities, the Purchaser shall purchase from the
Company, and the Company shall sell to the Purchaser, the number of Offered
Securities specified in the Notice of Acceptance, as reduced pursuant to Section
6.03(b) if the Purchaser has so elected, upon the terms and conditions specified
in the Offer. The purchase by the Purchaser of any Offered Securities is subject
in all cases to the preparation, execution and delivery by the Company and the
Purchaser of a purchase agreement relating to such Offered Securities reasonably
satisfactory in form and substance to the Purchaser and its counsel.
30
<PAGE>
6.04. Further Sale. In each case, any Offered Securities not purchased
by the Purchaser or other Person or Persons in accordance with Section 6.03 may
not be sold or otherwise disposed of until they are again offered to the
Purchaser under the procedures specified in Section 6.01, 6.02 and 6.03.
6.05. Termination and Waiver of Right of First Refusal. The rights of
the Purchaser under this Article VI may be waived only upon the prior written
consent of the holders of two-thirds in interest of the Preferred Stock and
shall terminate immediately prior to the effectiveness of the registration
statement with respect to the Initial Public Offering, but expressly conditioned
on the consummation of the Initial Public Offering.
6.06. Exception. The rights of the Purchaser under this Article VI
shall not apply to:
(a) Common Stock issued as a stock dividend to holders of
Common Stock or upon any subdivision or combination of shares of Common Stock;
(b) Preferred Stock issued as a dividend to holders of
Preferred Stock upon any subdivision or combination of shares of Preferred
Stock;
(c) the Conversion Shares;
(d) up to 210,080 shares of Common Stock, or options
exercisable therefor, issued on or after the date hereof to directors, officers,
employees or consultants of the Company and any Subsidiary pursuant to any
qualified or non-qualified stock option plan or agreement, employee stock
ownership plan, employee benefit plan, stock purchase agreement, stock plan,
stock restriction agreement, or consulting agreement or such other options,
arrangements, agreements or plans approved by two-thirds of the members of the
Compensation Committee (including any Investor Director on such committee), or
if no such committee, by two-thirds of the members of the Board of Directors of
the Company (including a majority of the Investor Directors).
Each of the foregoing numbers shall be subject to equitable adjustment
in the event of any stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event.
ARTICLE VII
DEFINITIONS AND ACCOUNTING TERMS
7.01. Certain Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Accredited Investor" shall have the meaning assigned to that term in
Rule 501 under the Securities Act.
31
<PAGE>
"Agreement" means this Preferred Stock Purchase Agreement as from time
to time amended and in effect between the parties, including all Exhibits
hereto.
"Basic Amount" shall have the meaning assigned to that term in Section
6.01.
"Board of Directors" means the board of directors of the Company as
constituted from time to time.
"Closing" shall have the meaning assigned to that term in Section 1.03.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act or Exchange Act.
"Common Stock" includes (a) the Company's Common Stock, $.01 par value,
as authorized on the date of this Agreement, (b) any other capital stock of any
class or classes (however designated) of the Company authorized on or after the
date hereof, the holders of which shall have the right, without limitation as to
amount, either to all or to a share of the balance of current dividends and
liquidating dividends after the payment of dividends and distributions on any
shares entitled to preference, and the holders of which shall ordinarily, in the
absence of contingencies or in the absence of any provision to the contrary in
the Company's Articles of Incorporation, be entitled to vote for the election of
a majority of directors of the Company (even though the right so to vote has
been suspended by the happening of such a contingency or provision), and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Company" means Water Online, Inc., a Pennsylvania corporation, and its
successors and assigns.
"Consolidated" and "consolidating" when used with reference to any term
defined herein mean that term as applied to the accounts of the Company and its
Subsidiaries consolidated in accordance with generally accepted accounting
principles consistently applied throughout reporting periods.
"Conversion Shares" shall have the meaning assigned to that term in
Section 1.02 of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
(or of any other Federal agency then administering the Exchange Act) thereunder,
all as the same shall be in effect at the time.
"Indebtedness" means (i) any liability for borrowed money or evidenced
by a note or similar obligation given in connection with the acquisition of any
property or other assets (other than trade
32
<PAGE>
accounts payable incurred in the ordinary course of business); (ii) all
guaranties, endorsements and other contingent obligations, in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company's balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business, and (iii) the present value of
any lease payments due under leases required to be capitalized in accordance
with applicable Statements of Financial Accounting Standards, determined by
discounting all such payments at the interest rate determined in accordance with
applicable Statements of Financial Accounting Standards.
"Initial Public Offering" means the first underwritten public offering
of Common Stock of the Company for the account of the Company and offered on a
"firm commitment" or "best efforts" basis pursuant to an offering registered
under the Securities Act with the Commission on Form S-1, Form S-18 or their
then equivalents.
"Intellectual Property Rights" means any and all, whether domestic or
foreign, patents, patent applications, patent right, trade secrets, confidential
business information, formula, processes, laboratory notebooks, algorithms,
copyrights, mask works, claims of infringement against third parties, licenses,
permits, license rights, contract rights with employees, consultants and third
parties, trademarks, trademark rights, inventions and discoveries, and other
such rights generally classified as intangible, intellectual property assets in
accordance with generally accepted accounting principles.
"Investor Directors" means those directors of the Company who are
representatives of the Series A Purchaser.
"Key Employee" means and includes the Chairman, President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, or any
other individual so designated by the Board of Directors of the Company or by a
majority of the Investor Directors.
"Nondisclosure Agreement" shall have the meaning assigned to that term
in Section 2.02(i).
"Notice of Acceptance" shall have the meaning assigned to that term in
Section 6.02.
"Offer" shall have the meaning assigned to that term in Section 6.01.
"Offered Securities" shall have the meaning assigned to that term in
Section 6.01.
"Person" means an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government, or any
agency or political subdivision thereof.
"Preferred Shares" shall have the meaning assigned to that term in
Section 1.01.
33
<PAGE>
"Purchaser" shall have the meaning assigned to that term in Section
1.01 of this Agreement and shall include the original Purchaser and also any
other holder of any of the Shares.
"Qualified Public Offering" means a fully underwritten, firm commitment
public offering pursuant to an effective registration under the Securities Act
covering the offer and sale by the Company of its Common Stock in which the
aggregate gross proceeds to the Company exceed $15,000,000 and in which the
price per share of such Common Stock equals or exceeds $4.00 (such price subject
to equitable adjustment in the event of any stock split, stock dividend,
combination, reorganization, reclassification or other similar event).
"Refused Securities" shall have the meaning assigned to that term in
Section 6.03.
"Registrable Shares" shall mean and include (i) the Conversion Shares;
and (ii) the shares of capital stock of the Company acquired by the Purchaser
pursuant to Article VI hereof or any shares of capital stock of the Company
acquired after the date hereof by Purchaser, including shares of Common Stock
issuable on the conversion of other securities acquired by the Purchaser
pursuant to Article VI hereof or otherwise; provided, however, that shares of
Common Stock which are Registrable Shares shall cease to be Registrable Shares
upon the consummation of any sale pursuant to a registration statement, Section
4(1) of the Securities Act or Rule 144 under the Securities Act; or capital
stock otherwise acquired primarily as, or acquired pursuant to exercise of
options or rights granted to any employee primarily as, compensation for
employment or services and not for a cash investment in the Company. Wherever
reference is made in this Agreement to a request or consent of holders of a
certain percentage of Registrable Shares, the determination of such percentage
shall include the Conversion Shares even if such conversion has not yet been
effected.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission (or of
any other Federal agency then administering the Securities Act) thereunder, all
as the same shall be in effect at the time.
"Series A Preferred Stock" means the Series A Preferred Stock of the
Company, $.01 par value, having the rights, powers, privileges and preferences
set forth in Exhibit A2 hereto.
"Series A Shares" shall have the meaning assigned to that term in
Section 1.01 of this Agreement.
"Shares" means, collectively, the Preferred Shares and the Conversion
Shares.
"Subsidiary" or "Subsidiaries" means any Person of which the Company
and/or any of its other Subsidiaries (as herein defined) directly or indirectly
owns at the time at least fifty percent (50%) of the outstanding voting shares
of every class of such corporation or trust other than directors' qualifying
shares.
"Stock Restriction Agreement" shall have the meaning assigned to that
term in Section 4.01(g) of
34
<PAGE>
this Agreement.
7.02. Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles consistently applied, and all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
ARTICLE VIII
DISPUTE RESOLUTION
8.01. Good-Faith Negotiations.
(a) If any dispute arises under this Agreement that is not
settled promptly in the ordinary course of business, the parties shall seek to
resolve any such dispute between them, first, by negotiating promptly with each
other in good faith in face-to-face negotiations. These face-to-face
negotiations shall be conducted by the respective designated senior management
representative of each party. If the parties are unable to resolve the dispute
between them through these face-to-face negotiations within 20 days (or such
period as the parties shall otherwise agree) following the date of notification
(the "Notice Date") by one party to the other of the existence of such dispute,
then any such disputes shall be resolved in the following manner.
(b) Mediation. The parties shall endeavor to resolve any
dispute arising out of or relating to this Agreement by mediation under the CPR
Mediation Procedures for Business Disputes. Unless otherwise agreed, the parties
will select a mediator from the CPR Panels of Neutrals and shall notify CPR to
initiate the selection process.
(c) Resolution of Disputes.
(i) Any action, suit or proceeding where the amount
in controversy as to at least one party, exclusive of interest and costs,
exceeds $1,000,000 ("Summary Proceeding"), arising out of or relating to this
Agreement, the Voting and Stock Restriction Agreement or any other agreement
executed in connection herewith or the breach, termination or validity thereof
which has not been resolved by mediation as provided herein within [90] days of
the Notice Date, shall be litigated exclusively in the Superior Court of the
State of Delaware (the "Delaware Superior Court") as a summary proceeding
pursuant to Rules 124-131 of the Delaware Superior Court, or any successor rules
(the "Summary Proceeding Rules"). Each of the parties hereto hereby irrevocably
and unconditionally (A) submits to the jurisdiction of the Delaware Superior
Court for any Summary Proceeding, (B) agrees not to commence any Summary
Proceeding except in the Delaware Superior Court, (C) waives, and agrees not to
plead or to make, any objection to the venue of any Summary Proceeding in the
Delaware Superior Court, (D) waives, and agrees not to plead or to make any
claim that any Summary Proceeding brought in the Delaware Superior Court has
been brought in an improper or otherwise inconvenient forum, (E)
35
<PAGE>
waives, and agrees not to plead or to make, any claim that the Delaware Superior
Court lacks personal jurisdiction over it, (F) waives its right to remove any
Summary Proceeding to the federal courts except where such courts are vested
with sole and exclusive jurisdiction by statute and (G) understands and agrees
that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this Agreement
or any other agreement executed in connection herewith or the breach,
termination or validity thereof, and waives any and all rights to any such jury
trial or to seek punitive damages.
(ii) In the event any action, suit or proceeding
where the amount in controversy as to at least one party, exclusive of interest
and costs, does not exceed $1,000,000 (a "Proceeding"), arising out of or
relating to this Agreement, or any other agreement executed in connection
herewith or the breach, termination or validity thereof is brought, the parties
to such Proceeding agree to make application to the Delaware Superior Court to
proceed under the Summary Proceeding Rules. Until such time as such application
is rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
(iii) If a Summary Proceeding is not available to
resolve any dispute hereunder, the controversy or claim shall be settled by
arbitration conducted on a confidential basis, under the U.S. Arbitration Act,
if applicable, and the then current Commercial Arbitration Rules of the American
Arbitration Association (the "Association") strictly in accordance with the
terms of this Agreement and the substantive law of the State of Delaware,
including such law in respect of the statute of limitations. The arbitration
shall be conducted at the Association's regional office located in Philadelphia,
Pennsylvania by three arbitrators, at least one of whom shall be knowledgeable
in venture capital investments, one of whom shall be an attorney and one of whom
shall be a member of a "Big Six" accounting firm familiar with businesses
engaged in [software design, programming and implementation]. The arbitrators
are not empowered to award damages in excess of compensatory damages and each
party hereby irrevocably waives any right to recover such damages with respect
to any such disputes. Judgment upon the arbitrators' aware may be entered and
enforced in any court of competent jurisdiction.
(d) Neither party shall be precluded hereby from securing
equitable remedies in courts of any jurisdiction, including, but not limited to,
temporary restraining orders and preliminary injunctions to protect its rights
and interests but shall not be sought as a means to avoid or stay arbitration or
Summary Proceeding.
(e) Each party is required to continue to perform its
obligations under this contract pending final resolution of any dispute arising
out of or relating to this contract, unless to do so would be impossible or
impracticable under the circumstances.
ARTICLE IX
MISCELLANEOUS
36
<PAGE>
9.01. No Waiver; Cumulative Remedies. No failure or delay on the part
of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
The remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
9.02. Amendments, Waivers and Consents. Any provision in the Agreement
to the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (i) shall obtain consent thereto in writing from the
holder or holders of at least a majority in interest of the Series A Shares and
Conversion Shares issued upon conversion thereof and (ii) shall deliver copies
of such consent in writing to any holders who did not execute such consent;
provided that no consents shall be effective to reduce the percentage in
interest of the Shares the consent of the holders of which is required under
this Section 8.02. Any waiver or consent may be given subject to satisfaction of
conditions stated therein and any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
9.03. Addresses for Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered to each applicable party at
the address set forth in Exhibit 1.01 hereto or at such other address as to
which such party may inform the other parties in writing in compliance with the
terms of this Section.
If to any other holder of the Shares: at such holder's address for
notice as set forth in the register maintained by the Company, or, as to each of
the foregoing, at the addresses set forth in Exhibit 1.01 hereto or at such
other address as shall be designated by such Person in a written notice to the
other parties complying as to delivery with the terms of this Section.
If to the Company: at the address set forth on page 1 hereof, or at
such other address as shall be designated by the Company in a written notice to
the other parties complying as to delivery with the terms of this Section.
All such notices, requests, demands and other communications shall,
when mailed (which mailing must be accomplished by first class mail, postage
prepaid; electronic facsimile transmission; express overnight courier service;
or registered or certified mail, return receipt requested) or telegraphed, and
shall be considered to be delivered three (3) days after dispatch.
9.04. Costs, Expenses and Taxes. As a condition precedent to the
Closing, the Company agrees to pay at the Closing in connection with the
preparation, execution and delivery of this Agreement and the issuance of the
Preferred Shares at the Closing, the reasonable fees, not to exceed $20,000, and
other out-of-pocket expenses of special counsel for the Purchaser. In addition,
the Company shall pay the
37
<PAGE>
reasonable fees and out-of-pocket expenses of legal counsel, independent public
accountants, consultants and other outside experts retained by the Purchaser in
connection with any amendment or waiver to this Agreement (initiated by the
Company) or the successful enforcement of this Agreement by the Purchaser. In
addition, the Company shall pay any and all stamp, or other similar taxes
payable or determined to be payable in connection with the execution and
delivery of this Agreement, the issuance of the Preferred Shares and the other
instruments and documents to be delivered hereunder or thereunder, and agrees to
save the Purchaser harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes.
9.05. Binding Effect; Assignment. Except as provided in Section 5.12,
this Agreement shall be binding upon and inure to the benefit of the Company and
the Purchaser and their respective heirs, successors and assigns, except that
the Company shall not have the right to delegate its obligations hereunder or to
assign its rights hereunder or any interest herein without the prior written
consent of the holders of at least a majority in interest of the Shares.
9.06. Survival of Representations and Warranties. All representations
and warranties made in this Agreement, the Shares, or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof.
9.07. Prior Agreements. This Agreement, the terms of the Preferred
Stock, and the other agreements executed and delivered herewith constitute the
entire agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
9.08. Severability. The provisions of this Agreement, the Voting and
Stock Restriction Agreement, the Noncompetition Agreements and the terms of the
Preferred Stock are severable and, in the event that any court of competent
jurisdiction shall determine that any one or more of the provisions or part of a
provision contained in this Agreement, the Voting and Stock Restriction
Agreement, the Noncompetition Agreements or the terms of the Preferred Stock
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Voting and Stock
Restriction Agreement, the Noncompetition Agreements or the terms of the
Preferred Stock; but this Agreement, the Voting and Stock Restriction Agreement,
the Noncompetition Agreements and the terms of the Preferred Stock shall be
reformed and construed as if such invalid or illegal or unenforceable provision,
or part of a provision, had never been contained herein, and such provisions or
part reformed so that it would be valid, legal and enforceable to the maximum
extent possible.
9.09. Confidentiality. The Purchaser agrees that it will keep
confidential and will not disclose or divulge any confidential, proprietary or
secret information which the Purchaser may obtain from the Company pursuant to
financial statements, reports and other materials submitted by the Company to
the Purchaser pursuant to this Agreement, or pursuant to visitation or
inspection rights granted hereunder, unless such information is known, or until
such information becomes known, to the public; provided, however, that the
Purchaser may disclose such information (i) on a confidential basis to its
attorneys,
38
<PAGE>
accountants, consultants and other professionals to the extent necessary to
obtain their services in connection with its investment in the Company, (ii) to
any prospective purchaser of any Preferred Shares or Conversion Shares from the
Purchaser as long as such prospective purchaser agrees in writing to be bound by
the provisions of this Section 9.09, (iii) to any affiliate or partner of the
Purchaser and (iv) as required by applicable law.
9.10. Public Announcements. The Company shall not use the Purchaser's
name or refer to the Purchaser directly or indirectly in connection with the
Purchaser's relationship with the Company in any advertisement, news release or
professional or trade publication, or in any other manner, unless otherwise
required by law or with the Purchaser's prior written consent. [The parties
agree that there will be no press release or other public statement issued by
any party relating to this Agreement or the transactions contemplated hereby
unless required by law.] If the Company determines that it is required by law to
file this Agreement with the SEC, it shall at a reasonable time before making
any such filing, consult with the Purchaser regarding such filing and seek
confidential treatment for such portions of the Agreement as may be requested by
the Purchaser.
9.11. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the internal laws of the State of Delaware, and without
giving effect to choice of laws provisions.
9.12. Headings. Article, section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
9.13. Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
9.14. Further Assurances. From and after the date of this Agreement,
upon the request of the Purchaser or the Company, the Company and the Purchaser
shall execute and deliver such instruments, documents and other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement and the Shares.
IN WITNESS WHEREOF, the parties hereto have caused this Preferred Stock
Purchase Agreement to be executed as of the date first above written.
WATER ONLINE, INC.
By: Michael P. McNulty
Title: President
39
<PAGE>
INTERNET CAPITAL GROUP, L.L.C.
By: Ivan Inerfeld
Title: Principal
40
<PAGE>
Exhibit 10.13
INVESTORS RIGHTS AGREEMENT
--------------------------
This Agreement is made as of the 8th day of May, 1998 by and among
VerticalNet, Inc., a Pennsylvania corporation (the "Company") and each of the
persons listed on Schedule 1 attached hereto (collectively, the "Investors" and
individually, an "Investor").
BACKGROUND
----------
The Company currently has issued and outstanding 4,927,836 shares of
its Common Stock, 1,000,000 shares of Series A Preferred Stock (which, in
aggregate, are currently convertible into 4,761,900 shares of Common Stock),
5,030,181 shares of Series B Preferred Stock (which, in aggregate, are currently
convertible into 5,030,181 shares of Common Stock) and 301,978 shares of Series
C Preferred Stock (which, in aggregate, are currently convertible into 301,978
shares of Common Stock).
On the date of this Agreement, the Company is issuing and selling
shares of its Series D Preferred Stock ("Series D Shares") pursuant to the
Series D Preferred Stock Purchase Agreement dated as of the date hereof (the
"Series D Stock Purchase Agreement").
The purchasers of the Series D Shares have required this Agreement as
a condition to the closing of their investment under the Series D Stock Purchase
Agreement.
Certain defined terms are defined in Article IV.
AGREEMENT
---------
ARTICLE I
COVENANTS OF THE COMPANY
1.1 Affirmative Covenants of the Company. The Company covenants and
------------------------------------
agrees that, until the consummation of a Qualified Public Offering (except with
regard to Section 1.1(o)), it will perform and observe the following covenants
and provisions, and will cause each Subsidiary, if and when such Subsidiary
exists, to perform and observe such of the following covenants and provisions as
are applicable to such Subsidiary:
(a) Key Man Insurance. After May 20, 1998, maintain term life
-----------------
insurance on the lives of Michael J. Hagan, Michael P. McNulty and Mark L.
Walsh, each in the amount of $1,000,000, in each case for so long as such person
remains an officer or employee of the Company, the proceeds of which are payable
to the Company.
<PAGE>
(b) Financing. Promptly, fully and in detail, inform the Board of
---------
Directors of any discussions, offers or contracts relating to possible financing
of any material nature for the Company, whether initiated by the Company or any
other Person.
(c) New Developments. Cause all new technological developments,
----------------
patentable or unpatentable inventions, discoveries or improvements by the
Company's or any Subsidiary's employees or consultants to be documented in a
reasonable manner and, where prudent and appropriate, to file and prosecute
United States and foreign patent, copyright, trademark, mask work or other
Intellectual Property Right applications relating to and protecting the
Company's inventions, discoveries or developments on behalf of the Company or
any Subsidiary.
(d) Agreements of Officers and Employees. Cause each employee of the
------------------------------------
Company or any Subsidiary now or hereafter employed and all consultants of the
Company or any Subsidiary involved in the design, review, evaluation or
development of products or Intellectual Property Rights to execute and deliver a
Confidentiality and Invention Assignment Agreement in form and substance
reasonably satisfactory to the Board of Directors of the Company, and the
Company shall not amend or waive any of the provisions of any such
Confidentiality and Invention Assignment Agreement in any material respect
without the approval of the Board of Directors. The form of Confidentiality and
Invention Assignment Agreement that shall be used, absent modification by the
Board, is attached as Exhibit A for employees and Exhibit B for consultants.
(e) Indemnification. The Company shall at all times maintain
---------------
provisions in its By-laws or Articles of Incorporation exculpating and
indemnifying all Directors from and against liability to the maximum extent
permitted under the laws of the state of its incorporation.
(f) Corporate Existence. Maintain and cause each of its Subsidiaries
-------------------
to maintain their respective corporate existence, Intellectual Property Rights,
other rights and franchises in full force and effect to the extent appropriate
in accordance with good business practice.
(g) Properties, Business, Insurance. Maintain and cause each of its
-------------------------------
Subsidiaries to maintain as to their respective properties and business, with
financially sound and reputable insurers, insurance against such casualties and
contingencies and of such types and in such amounts as is customary for
companies of a similar size and financial condition similarly situated within
the same industry.
(h) Size of Board. Fix the number of Directors on the Board of
-------------
Directors of the Company at seven (7) members and use its best efforts to
maintain the number of Directors on the Board of Directors of the Company at
seven (7) members, including one Director elected by the Investors as holders of
Series D Shares, one Director nominated by a majority of the then current
members of the Board of Directors and approved by the holders of at least 85% of
the Series D Shares and one Director appointed by the holders of a majority of
the shares of capital stock of the Company held by executives of the Company and
approved by the holders of a
<PAGE>
majority of the Series A and B Preferred Stock voting together as a class and
the holders of a majority of Series D Shares.
(i) Expenses of Directors. Promptly reimburse in full each Director
---------------------
of the Company for all of his reasonable out-of-pocket expenses incurred in
attending each meeting of the Board of Directors of the Company or any committee
thereof.
(j) Compliance with Laws. Comply, and cause each subsidiary to
--------------------
comply, with all applicable laws, rules, regulations and orders, noncompliance
with which could materially adversely affect its business, assets, Intellectual
Property Rights, operations or condition, financial or otherwise.
(k) Keeping of Records and Books of Account. Keep, and cause each
---------------------------------------
Subsidiary to keep, adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting principles
consistently applied, reflecting all financial transactions of the Company and
such Subsidiary, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
(l) Foreign Corrupt Practices Act Undertaking. Neither the Company
-----------------------------------------
nor any subsidiary of the Company shall take any action which would cause the
Company or any Subsidiary of the Company to be in violation of the Foreign
Corrupt Practices Act.
(m) Controls. The Company currently maintains and will maintain a
--------
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(n) Rule 144A Information. At all times during which the Company is
---------------------
neither subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under the
Exchange Act, it will provide as promptly as practicable (in any event not later
than twenty (20) days after the initial request) in written form, upon the
request of an Investor or a prospective buyer of Shares, from any Investor, all
information required by Rule 144A(d)(4)(i) of the General Regulations
promulgated by the Commission under the Securities Act (the "Rule 144A
Information"). The Company further covenants, upon written request, as promptly
as practicable (in any event not later than twenty (20) days after the initial
request) to cooperate with and assist the Investors or any member of the NASD
system for Private Offerings Resales and Trading through Automated Linkage
("PORTAL") in applying to designate and thereafter maintain the eligibility of
the Shares for trading through PORTAL. The Company's obligations under this
Section 1.1(n) shall at all times be contingent upon the Investors obtaining
from a prospective purchaser an agreement to take all
<PAGE>
reasonable precautions to safeguard the Rule 144A Information from disclosure to
anyone other than a person who will assist such purchaser in evaluating the
purchase of the Shares.
(o) Preferential Rights. So long as Koch Ventures, Inc. or any of its
-------------------
Affiliates (collectively, "Koch") holds Common Shares or Preferred Shares, Koch
shall receive "most favored nations" pricing and terms on all products and
services sold or provided by the Company. For purposes of this Section 1.1(o)
"Affiliates" means with respect to any person (i) each person, that directly or
indirectly, owns or controls, whether beneficially, or as trustee, guardian or
other fiduciary, fifteen percent (15%) or more of the stock having ordinary
voting power in the election of directors of such person or (ii) each person
that controls, is controlled by or is under common control with such person or
an Affiliate of such person. For purposes of this Section 1.1(o), "most favored
nations" shall mean a price no higher than the lowest price offered to any other
customer of the Company for purchases on similar Terms. For purposes of this
Section 1.1(o), Terms shall mean the terms of any sale, including without
limitation, (i) the number of storefronts purchased in any vertical (examples of
verticals include Water Online, Pollution Online, etc.), (ii) the vertical such
storefronts are purchased in or (iii) the specified combination of storefronts
in different verticals. By way of illustration, if Koch purchases two
storefronts in each of four verticals, Koch shall be offered a total price that
is no higher than the lowest total price offered to any other customer of the
Company for the purchase of two storefronts in each of the same four verticals.
The Company will provide Koch upon request with sales reports indicating the
Terms, including but not limited to price, for any period in question in a form
to be agreed upon by the Company and Koch.
(p) Observer Rights. If Koch Ventures, Inc. or a representative of
---------------
Koch Ventures, Inc. is not a member of the Company's Board of Directors for
whatever reason, the Company shall invite, at Koch Ventures, Inc.'s expense, a
representative of Koch Ventures, Inc., who shall be reasonably acceptable to the
Company, to attend all meetings of its Board of Directors in a nonvoting
observer capacity and, in this respect, shall give such representative copies of
all notices, minutes, consents, and other materials that it provides to its
directors. If Wheatley Partners, L.P. or Wheatley Foreign Partners, L.P.
(collectively, "Wheatley") or a representative of Wheatley is not a member of
the Company's Board of Directors for whatever reason, the Company shall invite,
at Wheatley's, expense, a representative of Wheatley, who shall be reasonably
acceptable to the Company, to attend all meetings of its Board of Directors in a
nonvoting observer capacity and, in this respect, shall give such representative
copies of all notices, minutes, consents, and other materials that it provides
to its directors. If EnerTech Capital Partners, L.P. or a representative of
EnerTech Capital Partners, L.P. is not a member of the Company's Board of
Directors for whatever reason, the Company shall invite, at EnerTech Capital
Partners, L.P.'s expense, a representative of EnerTech Capital Partners, L.P.,
who shall be reasonably acceptable to the Company, to attend all meetings of its
Board of Directors in a nonvoting observer capacity and, in this respect, shall
give such representative copies of all notices, minutes, consents, and other
materials that it provides to its directors. Provided, however, that any such
representative invited pursuant to this Section 1.1(p) shall agree to hold in
confidence and trust all information provided pursuant to this Section 1.1(p);
and provided further, that the Company reserves the right to withhold any
information and to exclude such
<PAGE>
representative from any meeting or portion thereof if access to such information
or attendance at such meeting could adversely affect the attorney-client
privilege between the Company and its counsel.
1.2 Reporting Requirements. Until the consummation of a Qualified Public
----------------------
Offering, the Company will furnish the following to each Investor, subject to
the confidentiality provisions of Section 5.8, unless such Investor waives in
writing its rights to receive such reports:
(a) Quarterly Reports. As soon as available and in any event within 45
-----------------
days after the end of the first three fiscal quarters of each fiscal year,
consolidated and consolidating balance sheets of the Company and its
Subsidiaries as of the end of such quarter and consolidated and consolidating
statements of income and a summary statement of quarterly cash flow of the
Company and its Subsidiaries for such quarter and for the period commencing at
the end of the previous fiscal year and ending with the end of such quarter,
setting forth in each case in comparative form the corresponding figures for the
corresponding period of the preceding fiscal year, and including comparisons to
the quarterly budget or business plan and an analysis of the variances from the
budget or plan, prepared in accordance with generally accepted accounting
principles consistently applied (except for the exclusion of footnotes). All
such quarterly financial statements may be unaudited.
(b) Annual Reports. As soon as available and in any event within 120
--------------
days after the end of each fiscal year of the Company, an unaudited statement
comparing actual operating results for such year to budgeted operations for such
year and a copy of the annual audit report for such year for the Company and its
Subsidiaries, including therein consolidated and consolidating balance sheets of
the Company and its Subsidiaries as of the end of such fiscal year and
consolidated and consolidating statements of income and of cash flow of the
Company and its Subsidiaries for such fiscal year, setting forth in each case in
comparative form the corresponding figures for the preceding fiscal year, all
such consolidated statements to be duly certified by the chief financial officer
of the Company and a firm of independent public accountants approved by the
Board of Directors accompanied by a management control letter prepared by such
independent public accounting firm.
(c) Budgets and Business Plan. As soon as available and in any event
-------------------------
at least 30 days before the beginning of each fiscal year of the Company, a
business plan and prepared on a monthly basis, operating budget for the
forthcoming fiscal year, and as soon as available, any revisions thereto.
(d) Reports and Other Information. Promptly upon receipt,
-----------------------------
publication, commencement or occurrence provide to each Investor copies of all
consulting reports, notices of all material actions, suits or proceedings,
copies of all accountant's reviews, and reports to management, and such other
information as the Company shall make available to its Directors or stockholders
or as the Investors shall reasonably request.
1.3 Inspection Rights. Until the consummation of a Qualified Public
-----------------
Offering, the Company will permit each Investor and such Investor's employees,
agents or representatives,
<PAGE>
upon reasonable notice and during normal business hours, to examine and make
copies of and extracts from the records and books of account of, and visit and
inspect the properties, assets, operations and business of the Company and any
Subsidiary, and to discuss the affairs, finances and accounts of the Company and
any Subsidiary with any of its officers, consultants, directors, employees,
attorneys or independent accountants; provided, however, that any Investor,
employee, agent or representative, as the case may be, agrees to hold all
information confidential on the terms set forth in Section 5. 8 hereof. The
Company shall permit the Investors, or any one of them, and their agents and
representatives, to conduct an audit of the Company's financial statements at
the expense of such Investor(s) at any time on reasonable notice.
ARTICLE II
REGISTRATION RIGHTS
2.1 Piggy-Back Registrations. If at any time the Company shall determine
------------------------
to register for its own account or the account of others under the Securities
Act (including without limitation pursuant to the Qualified Public Offering, the
Initial Public Offering or a demand for registration of any stockholder of the
Company) any of its equity securities, other than on Form S-8 or Form S-4 or
their then equivalents (a "Piggy-Back Registration"), it shall send to each
holder of Registrable Shares, written notice of such determination and, if
within fifteen (15) days after receipt of such notice, such holder shall so
request in writing, the Company shall use its best efforts to include in such
registration statement all or any part of the Registrable Shares such holder
requests to be registered, except that if, in connection with any offering
involving an underwriting of Common Stock to be issued by the Company, the
managing underwriter determines in good faith that market or economic conditions
limit the amount of Common Stock which may reasonably be expected to be sold,
the Company may limit the number of shares of Common Stock included by persons
other than the Company, including, without limitation, the Registrable Shares to
be included in such registration (the "Piggyback Stock") and the holders of the
Piggyback Stock will be allowed to register their Piggyback Stock pro rata based
on the number of shares of Piggyback Stock held by such holders, respectively.
Provided, that in connection with the preceding sentence, the Company shall
first exclude all shares which are not Piggyback Stock and second, Piggyback
Stock which is requested to be included. If any holder of Piggyback Stock
disapproves of the terms of any such underwriting, he may elect to withdraw
therefrom by written notice to the Company and the managing underwriter. If, by
the withdrawal of such Piggyback Stock, a greater number of Piggyback Stock held
by other holders of Piggyback Stock may be included in such registration (up to
the limit imposed by the underwriters), the Company shall offer to all holders
of Piggyback Stock who have included Piggyback Stock in the registration the
right to include additional Piggyback Stock, pro rata. Any Piggyback Stock
excluded or withdrawn from such underwriting shall be withdrawn from such
registration. No right under this Section 2. 1 shall be construed to limit any
registration required under Section 2.2.
2.2 Demand Registration. If on any occasion any Investor shall notify the
-------------------
Company in writing that it or they intend to offer or cause to be offered for
public sale at least 35% of the
<PAGE>
Registrable Shares (or any lesser percentage if the aggregate market value of
the shares to be registered, is greater than $10,000,000), the Company will so
notify all Investors. Upon written request of any Investor given within fifteen
(15) days after the receipt by such Investor from the Company of such
notification, the Company will use its best efforts to cause such of the
Registrable Shares as may be requested by any Investor (including the Investor
giving the initial notice of intent to offer) to be registered under the
Securities Act as expeditiously as possible (a "Demand Registration"). The
Company shall not be required to effect more than two Demand Registrations. If
(i) in the good faith judgment of the Board of Directors of the Company, a
Demand Registration would be materially detrimental to the Company and the Board
of Directors of the Company concludes, as a result, that it is essential to
defer the filing of such registration statement at such time, and (ii) the
Company shall furnish to each Investor a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be materially detrimental to the Company for such
registration statement to be filed in the near future, then the Company shall
have the right to defer such filing for the period during which such Demand
Registration is materially detrimental, provided that the Company may not defer
the filing for a period of more than 120 days after receipt of the request for a
Demand Registration, or more than once in any 12-month period. If the Company
determines to include shares to be sold by it in any registration requested
pursuant to this Section 2.2, such registration shall be deemed to have been a
"Piggy-Back" Registration under Section 2.1, and not a Demand Registration under
this Section 2.2, if the Investors are unable to include in any such
registration statement all of the Registrable Shares initially requested by them
for inclusion in such registration statement. The Investors may not exercise
their rights under this Section 2.2 until the earlier to occur of (i) twenty-
four (24) months following the date of this Agreement or (ii) ninety (90) days
after the effectiveness of any registration statement covering the Initial
Public Offering.
2.3 Registrations on Form S-3. In addition to the rights provided the
-------------------------
holders of Registrable Shares in Sections 2.1 and 2.2 above, if the registration
of Registrable Shares under the Securities Act can be effected on Form S-3 (or
any equivalent successor form promulgated by the Commission), then the Company
shall provide the holders of Registrable Shares with the following rights:
(a) For the Investors. Upon the written request of one or more
-----------------
Investors, the Company will so notify each Investor, and then will, as
expeditiously as possible, use its best efforts to effect qualification and
registration under the Securities Act on Form S-3 of all or such portion of the
Registrable Shares as the Investors shall specify; provided, however, the
Company shall not be required to effect a registration pursuant to this Section
2.3(a) unless the market value of the Registrable Shares to be sold by the
Investor in any such registration shall be at least $500,000 at the time of
filing such registration statement, and further provided that the Company shall
not be required to effect more than one registration during any 12 month period
pursuant to this Section 2.3(a).
(b) Conflicts. In the event that, in a registration under this
---------
Section 2.3 which is effected through an underwriter, the underwriter imposes a
limitation on the number of
<PAGE>
Registrable Shares which may be included in the registration statement in order
to effect an orderly public distribution, then the Company shall exclude from
such registration statement, first, all shares which are not Registrable Shares,
and second, Registrable Shares which are requested to be included pursuant to
Section 2.3. If holders of Registrable Shares are required to exclude
Registrable Shares requested to be included, such exclusion shall be on a pro
rata basis based on the number of Registrable Shares requested to be included
held by each holder.
2.4 Effectiveness. The Company will use its best efforts to maintain the
-------------
effectiveness for up to ninety (90) days (or such shorter period of time as the
underwriters need to complete the distribution of the registered offering, or
one year in the case of a "shelf' registration statement on Form S-3) of any
registration statement pursuant to which any of the Registrable Shares are being
offered, and from time to time will amend or supplement such registration
statement and the prospectus contained therein to the extent necessary to comply
with the Securities Act and any applicable state securities statute or
regulation. The Company will also provide each holder of Registrable Shares
with as many copies of the prospectus contained in any such registration
statement as it may reasonably request.
2.5 Indemnification of Holders of Registrable Shares. In the event that
------------------------------------------------
the Company registers any of the Registrable Shares under the Securities Act,
the Company will indemnify and hold harmless each holder and each underwriter of
the Registrable Shares (including their officers, directors, affiliates and
partners) so registered (including any broker or dealer through whom such shares
may be sold) and each Person, if any, who controls such holder or any such
underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages, expenses or liabilities, joint or
several, to which they or any of them become subject under the Securities Act,
applicable state securities laws or under any other statute or at common law or
otherwise, as incurred, and, except as hereinafter provided, will reimburse each
such holder, each such underwriter and each such controlling Person, if any, for
any legal or other expenses reasonably incurred by them or any of them in
connection with investigating or defending any actions whether or not resulting
in any liability, as incurred, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, in any preliminary or amended preliminary prospectus or
in the final prospectus (or the registration statement or prospectus as from
time to time amended or supplemented by the Company) or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration, unless (i) such untrue statement
or alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary or amended preliminary prospectus or final
prospectus in reliance upon and in conformity with information furnished in
writing to the Company in connection therewith by any such holder of Registrable
Shares or its controlling person (in the case of indemnification of such holder
or its controlling person), or any such underwriter or its controlling person
(in the case of indemnification of such underwriter or its controlling person)
expressly for use therein, or unless
<PAGE>
(ii) in the case of a sale directly by such holder of Registrable Shares
(including a sale of such Registrable Shares through any underwriter retained by
such holder of Registrable Shares to engage in a distribution on behalf of such
holder of Registrable Shares), such untrue statement or alleged untrue statement
or omission or alleged omission was contained in a preliminary prospectus and
corrected in a final or amended prospectus copies of which were delivered to
such holder of Registrable Shares or such underwriter on a timely basis, and
such holder of Registrable Shares failed to deliver a copy of the final or
amended prospectus at or prior to the confirmation for the sale of the
Registrable Shares to the person asserting any such loss, claim, damage or
liability in any case where such delivery is required by the Securities Act.
Promptly after receipt by any holder of Registrable Shares, any
underwriter or any controlling Person of notice of the commencement of any
action in respect of which indemnity may be sought against the Company, such
holder of Registrable Shares, or such underwriter or such controlling person, as
the case may be, will notify the Company in writing of the commencement thereof
(provided, that failure to so notify the Company shall not relieve the Company
--------
from any liability it may have hereunder) and, subject to the provisions
hereinafter stated, the Company shall be entitled to assume the defense of such
action (including the employment of counsel, who shall be counsel reasonably
satisfactory to such holder of Registrable Shares, such underwriter or such
controlling Person, as the case may be), and the payment of expenses insofar as
such action shall relate to any alleged liability in respect of which indemnity
may be sought against the Company.
Such holder of Registrable Shares, any such underwriter or any such
controlling Person shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel subsequent to any assumption of the defense by the Company shall
not be at the expense of the Company unless the employment of such counsel has
been specifically authorized in writing by the Company. The Company shall not
be liable to indemnify any Person for any settlement of any such action effected
without the Company's written consent. The Company shall not, except with the
approval of each party being indemnified under this Section 2.5, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
parties being so indemnified of a release from all liability in respect to such
claim or litigation.
In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which any holder of
Registrable Shares exercising rights under this Article II, or any controlling
Person of any such holder, makes a claim for indemnification pursuant to this
Section 2.5 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 2.5 provides
for indemnification in such case, then, the Company and such holder will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and of
the holder of Registrable Shares
<PAGE>
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand and
of the holder of Registrable Shares on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or by the holder
of Registrable Shares on the other, and each party's relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission; provided, however, that, in any such case, (A) no such holder will be
-------- -------
required to contribute any amount in excess of the public offering price of all
such Registrable Shares offered by such holder pursuant to such registration
statement; and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
2.6 Indemnification of Company. In the event that the Company registers
--------------------------
any of the Registrable Shares under the Securities Act, each holder of the
Registrable Shares so registered will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed or otherwise
participated in the preparation of the registration statement, each underwriter
of the Registrable Shares so registered (including any broker or dealer through
whom such of the shares may be sold) and each Person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act from and against
any and all losses, claims, damages, expenses or liabilities, joint or several,
to which they or any of them may become subject under the Securities Act,
applicable state securities laws or under any other statute or at common law or
otherwise, and, except as hereinafter provided, will reimburse the Company and
each such director, officer, underwriter or controlling Person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement, in any
preliminary or amended preliminary prospectus or in the final prospectus (or in
the registration statement or prospectus as from time to time amended or
supplemented) or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, but only insofar as any
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company in connection therewith by such
holder of Registrable Shares expressly for use therein; provided, however, that
-------- -------
such holder's obligations hereunder shall be limited to an amount equal to the
proceeds received by such holder of Registrable Shares sold in such registration
Promptly after receipt of notice of the commencement of any action in
respect of which indemnity may be sought against such holder of Registrable
Shares, the Company will notify such holder of Registrable Shares in writing of
the commencement thereof (provided, that failure to so notify such holder shall
--------
not relieve such holder from any liability it may have hereunder), and such
holder of Registrable Shares shall, subject to the provisions hereinafter
stated, be entitled to assume the defense of such action (including the
employment of counsel,
<PAGE>
who shall be counsel reasonably satisfactory to the Company) and the payment of
expenses insofar as such action shall relate to the alleged liability in respect
of which indemnity may be sought against such holder of Registrable Shares. The
Company and each such director, officer, underwriter or controlling Person shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof, but the fees and expenses of such counsel subsequent to
any assumption of the defense by such holder of Registrable Shares shall not be
at the expense of such holder of Registrable Shares unless employment of such
counsel has been specifically authorized in writing by such holder of
Registrable Shares. Such holder of Registrable Shares shall not be liable to
indemnify any Person for any settlement of any such action effected without such
holder's written consent.
In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which the Company exercising
its rights under this Article II makes a claim for indemnification pursuant to
this Section 2.6, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding that this
Section 2.6 provides for indemnification, in such case, then, the Company and
such holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion as is appropriate to reflect the relative fault of the Company
on the one hand and of the holder of Registrable Shares on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company on the one hand and of the
holder of Registrable Shares on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the holder of
Registrable Shares on the other, and each party's relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission; provided, however, that, in any such case, (A) no such holder will be
-------- -------
required to contribute any amount in excess of the public offering price of all
such Registrable Shares offered by it pursuant to such registration statement;
and (B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
2.7 Exchange Act Registration. If the Company at any time shall list any
-------------------------
class of equity securities of the type which may be issued upon the conversion
of the Preferred Stock on any national securities exchange and shall register
such class of equity securities under the Exchange Act, the Company will, at its
expense, simultaneously list on such exchange and maintain such listing of, the
Common Stock. If the Company becomes subject to the reporting requirements of
either Section 13 or Section 15(d) of the Exchange Act, the Company will use its
best efforts to timely file with the Commission such information as the
Commission may require under either of said Sections; and in such event, the
Company shall use its best efforts to take all action as may be required as a
condition to the availability of Rule 144 or Rule 144A under the Securities Act
(or any successor exemptive rule hereinafter in effect) with respect to such
<PAGE>
Common Stock. The Company shall furnish to any holder of Registrable Shares
forthwith upon request (i) a written statement by the Company as to its
compliance with the reporting requirements of Rule 144, (ii) a copy of the most
recent annual or quarterly report of the Company as filed with the Commission,
and (iii) such other reports and documents as a holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a holder to
sell any such Registrable Securities without registration. After the occurrence
of the Initial Public Offering, the Company agrees to use its best efforts to
facilitate and expedite transfers of the Shares pursuant to Rule 144 under the
Securities Act, which efforts shall include timely notice to its transfer agent
to expedite such transfers of Shares.
2.8 Damages. The Company recognizes and agrees that the holders of
-------
Registrable Shares will not have an adequate remedy if the Company fails to
comply with this Article II and that damages may not be readily ascertainable,
and the Company expressly agrees that, in the event of such failure, it shall
not oppose an application by any holder of Registrable Shares or any other
Person entitled to the benefits of this Article II requiring specific
performance of any and all provisions hereof or enjoining the Company from
continuing to commit any such breach of this Article II.
2.9 Further Obligations of the Company. Whenever under the preceding
----------------------------------
Sections of this Article II, the Company is required hereunder to register
Registrable Shares, it agrees that it shall also do the following:
(a) Furnish to each selling holder such copies of each preliminary and
final prospectus and such other documents as said holder may reasonably request
to facilitate the public offering of its Registrable Shares;
(b) Use its best efforts to register or qualify the Registrable Shares
covered by said registration statement under the applicable securities or "blue
sky" laws of such jurisdictions as any selling holder may reasonably request;
provided, however, that the Company shall not be obligated to qualify to do
business in any jurisdictions where it is not then so qualified or to take any
action which would subject it to the service of process in suits other than
those arising out of the offer or sale of the securities covered by the
registration statement in any jurisdiction where it is not then so subject;
(c) Furnish to each selling holder a signed counterpart, addressed to
the selling holders, of
(i) an opinion of counsel for the Company, dated the
effective date of the registration statement, and
(ii) "comfort" letters signed by the Company's independent
public accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent permitted by
the standards of the American Institute of Certified Public Accountants,
covering substantially the same matters with respect to the registration
statement (and the prospectus included therein) and (in the case of the
accountants'
<PAGE>
"comfort" letters) with respect to events subsequent to the date of the
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' "comfort" letters delivered to the underwriters in
underwritten public offerings of securities;
(d) Permit each selling holder of Registrable Shares or his or its
counsel or other representatives to inspect and copy such corporate documents
and records as may reasonably be requested by them;
(e) Furnish to each selling holder of Registrable Shares a copy of all
documents filed with and all correspondence from or to the Commission in
connection with any such offering of securities;
(f) Cooperate to the extent reasonably requested to obtain all
necessary approvals from the NASD; and
(g) Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, an earning statement covering the period of
at least twelve months, but not more than eighteen months, beginning with the
first month after the effective date of the registration statement covering the
Initial Public Offering, which earning statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder.
Whenever under the preceding Sections of this Article II the holders
of Registrable Shares are registering such shares pursuant to any registration
statement, each such holder agrees to (i) timely provide to the Company, at its
request, such information and materials as it may reasonably request in order to
effect the registration of such Registrable Shares and (ii) convert all shares
of Preferred Stock included in any registration statement to shares of Common
Stock, such conversion to be effective at the closing of such offering pursuant
to such registration statement.
2.10 Expenses. In the case of all Piggy-Back Registrations effected under
--------
Section 2.1, two Demand Registrations effected under Section 2.2, and one
registration per 12-month period effected under Section 2.3, the Company shall
bear all reasonable costs and expenses of each such registration, including, but
not limited to, the Company's printing, legal and accounting fees and expenses,
Commission and NASD filing fees and "Blue Sky" fees and expenses, or the fees
and expenses of one counsel for the selling holders of Registrable Shares (such
fees and expenses of such counsel not to exceed $30,000) in connection with the
registration of the Registrable Shares; provided, however, that the Company
shall have no obligation to pay or otherwise bear any portion of the
underwriters' commissions or discounts attributable to the Registrable Shares
being offered and sold by the holders of the Registrable Shares. The Company
shall pay all expenses in connection with any registration initiated pursuant to
this Article II which is withdrawn, delayed or abandoned at the request of the
Company, except if such withdrawal, delay or abandonment is caused by the fraud,
material misstatement or omission of a material fact by a holder of Registrable
Shares to be included in such registration.
2.11 "Lock-Up" Agreement.
-------------------
<PAGE>
(a) Initial Public Offering. Each holder of Registrable Shares
-----------------------
agrees, if so requested by the Company and an underwriter of Common Stock or
other securities of the Company, not to sell, transfer or dispose of any Common
Stock or other securities of the Company held by it during a period of up to 180
days following the effective date of a registration statement filed pursuant to
the Initial Public Offering, provided that:
(i) Such agreement shall apply only to the Initial Public
Offering; and
(ii) Any other security holders whose securities are included in
such registration statement and all executive officers and directors of the
Company shall also enter into similar agreements.
Such "lock-up" agreement shall be in writing and in form and substance
satisfactory to the Company and such underwriter. The Company may impose stop-
transfer instructions with respect to the shares subject to the foregoing
restrictions until the end of said "lock-up" period.
(b) Lock-Up after Initial Public Offering. Each holder of Registrable
-------------------------------------
Shares agrees, (1) if such holder of Registrable Shares is an "affiliate" of the
Company or otherwise holds beneficially or of record ten percent (10%) or more
of the outstanding equity securities of the Company, (2) if so requested by the
Company and an underwriter of Common Stock or other securities of the Company,
and (3) if all other "affiliates" and such 10% stockholders similarly situated
and any other security holders whose securities are included in such
registration statement are requested by the Company and such underwriter to
sign, and actually do sign, any "lock-up agreement" (as described herein), that
it will not sell, transfer or dispose of any Common Stock or other securities of
the Company held by it during a period of up to 90 days following the effective
date of a registration statement filed pursuant to the first underwritten public
offering after the Initial Public Offering.
Such "lock-up" agreement shall be in writing and in form and substance
satisfactory to the Company and such underwriter. The Company may impose stop-
transfer instructions with respect to the shares subject to the foregoing
restrictions until the end of said "lock-up" period.
2.12 Mergers, Etc. The Company shall not, directly or indirectly, enter
------------
into any merger, consolidation or reorganization in which the Company shall not
be the surviving corporation unless the proposed surviving corporation shall,
prior to such merger, consolidation or reorganization, agree in writing to
assume the obligations of the Company under Article II of this Agreement, and
for that purpose references hereunder to Registrable Shares shall be deemed to
be references to the securities which the holders of Registrable Shares would be
entitled to receive in exchange for Registrable Shares under any such merger,
consolidation or reorganization; provided, however, that the provisions of this
Section 2.12 shall not apply in the event of any merger, consolidation, or
reorganization in which the Company is not the surviving corporation if all
stockholders are entitled to receive, in exchange for their Registrable Shares
consideration
<PAGE>
consisting solely of (i) cash, and/or (ii) securities of the acquiring
corporation which may be immediately sold to the public without registration
under the Securities Act.
2.13 Other Registration Rights. The Company represents and warrants to the
-------------------------
Investors that, except as set forth in the Series D Purchase Agreement or the
schedules thereto, there are no other registration rights outstanding with
respect to capital stock of the Company pursuant to any other agreement or
commitment by which the Company is bound. The Company shall not grant any
registration rights to any other Person which registration rights are senior to
the registration rights of the Investors, unless the Company shall first obtain
the written consent of the Investors holding more than 75% of the Series D
Shares.
2.14 S-8 Registration. Reasonably promptly after completion of the Initial
----------------
Public Offering, the Company shall use its reasonable best efforts to file with
the Commission a registration statement on Form S-8 (or its equivalent successor
form) to register all shares of Common Stock issuable pursuant to options
granted under the Company's stock option plans adopted by the Company's Board of
Directors and approved by the Company's stockholders.
ARTICLE III
RIGHT OF FIRST OFFER
3.1 Right of First Offer. Subject to Section 3.6, before the Company
--------------------
shall issue, sell or exchange, agree or obligate itself to issue, sell or
exchange, or reserve or set aside for issuance, sale or exchange, any (i) shares
of Common Stock, (ii) any other equity security of the Company, including
without limitation, shares of Preferred Stock, (iii) any debt security of the
Company which by its terms is convertible into or exchangeable for any equity
security of the Company, (iv) any security of the Company that is a combination
of debt and equity, or (v) any option, warrant or other right to subscribe for,
purchase or otherwise acquire any such equity security or any such debt security
of the Company, the Company shall, in each case, first offer to sell such
securities (the "Offered Securities") to the Investors, as follows: The Company
shall offer to sell to each Investor (a) that portion of the Offered Securities
as the number of Common Shares which such Investor then holds or has the right
to acquire bears to the sum of the total number of issued and outstanding Common
Shares plus the number of Common Shares reserved for issuance upon conversion of
outstanding shares of convertible securities of the Company (including the
Preferred Stock) and upon exercise of warrants, options and rights outstanding,
at a pace and on such other terms as shall have been specified by the Company in
writing delivered to the Investors (the "Offer"), which Offer by its terms shall
remain open and irrevocable for a period of thirty (30) days from the receipt of
the Offer.
3.2 Notice of Acceptance. Notice of each Investor's intention to accept,
--------------------
in whole or in part, any Offer made pursuant to Section 3.1 shall be evidenced
by a writing signed by such Investor and delivered to the Company prior to the
end of the 30-day period of such Offer, setting forth the number of shares or
securities such Investor elects to purchase (the "Notice of
<PAGE>
Acceptance"). Failure of any Investor to deliver a Notice of Acceptance within
said 30 days will be deemed to be a rejection of the Offer.
3.3 Conditions to Acceptances and Purchase.
--------------------------------------
(a) Permitted Sales of Refused Securities. The Company shall have
-------------------------------------
ninety (90) days from the end of said 30-day period to sell any such Offered
Securities as to which a Notice of Acceptance has not been given (the "Refused
Securities") to any Person or Persons, but only for cash and otherwise in all
respects upon terms and conditions, including, without limitation, unit price
and interest rates, which are no more favorable, in the aggregate, to such other
Person or Persons or less favorable to the Company than those set forth in the
Offer.
(b) Reduction in Amount of Offered Securities. In the event the
-----------------------------------------
Company shall propose to sell less than all of the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 3.3(a) above),
then each Investor may reduce the number of shares or other units of the Offered
Securities specified in its respective Notice of Acceptance to an amount which
shall be not less than the amount of the Offered Securities which the Investor
elected to purchase pursuant to Section 3.2 multiplied by a fraction, (i) the
numerator of which shall be the amount of Offered Securities which the Company
actually proposes to sell, and (ii) the denominator of which shall be the amount
of all Offered Securities. In the event that any Investor so elects to reduce
the number or amount of Offered Securities specified in its respective Notice of
Acceptance, the Company may not sell or otherwise dispose of more than the
reduced amount of the Offered Securities until such securities have again been
offered to the Investors in accordance with Section 3.1.
(c) Closing. Upon the closing, which shall include full payment to
-------
the Company, of the sale to such other Person or Persons of all or less than all
the Refused Securities, the Investors shall purchase from the Company, and the
Company shall sell to the Investors, the number of Offered Securities specified
in the Notices of Acceptance, as reduced pursuant to Section 3.3(b) if the
Investors have so elected, upon the terms and conditions specified in the Offer.
The purchase by the Investors of any Offered Securities is subject in all cases
to the preparation, execution and delivery by the Company and the Investors of a
purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Investors and their respective counsel.
3.4 Further Sale. In each case, any Offered Securities not purchased by
------------
the Investors or other Person or Persons in accordance with Section 3.3 may not
be sold or otherwise disposed of until they are again offered to the Investors
under the procedures specified in Section 3.1, 3.2 and 3.3.
3.5 Termination and Waiver of Right of First Offer. The rights of the
----------------------------------------------
Investors under this Article III may only be waived upon the prior written
consent of the holders of more than 75% of the Series D Shares, and shall
terminate immediately prior to the effectiveness of the registration statement
with respect to the Initial Public Offering (except as provided in Section
3.1(b)), but expressly conditioned on the consummation of the Initial Public
Offering; provided
--------
<PAGE>
that any waiver affecting the rights of a holder(s) of the Series D Shares in a
disproportionate manner as to the other holders of Series D Shares shall only be
effective upon the consent of such holder(s) so disadvantaged.
3.6 Exception. The rights of the Investors under this Article III shall
---------
not apply to:
(a) Common Stock issued as a stock dividend to holders of Common Stock
or Series D Shares or upon any subdivision or combination of shares of Common
Stock;
(b) Preferred Stock issued as a dividend to holders of Preferred Stock
or upon any subdivision or combination of shares of Preferred Stock;
(c) the issuance of any Conversion Shares;
(d) Common Stock issued upon exercise of options, warrants and rights
outstanding as of the date of this Agreement;
(e) options for Common Stock of the Company issued after the date
hereof to directors, officers, employees or consultants of the Company and any
Subsidiary pursuant to any qualified or non-qualified stock option plan,
employee stock ownership plan, employee benefit plan, stock plan, or such other
options, arrangements, agreements or plans intended principally as a means of
providing compensation or incentive compensation for employment or services,
approved by the Board of Directors of the Company;
(f) shares of capital stock issued in a merger or consolidation or as
consideration for the acquisition by the Company of any other corporation or
other business entity or of the assets and business thereof.
ARTICLE IV
DEFINITIONS AND ACCOUNTING TERMS
4.1 Certain Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Agreement" means this Investor Rights Agreement as from time to time
amended and in effect between the parties, including all Exhibits hereto.
"Board" or "Board of Directors" means the board of directors of the
Company as constituted from time to time.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act or Exchange Act.
<PAGE>
"Common Stock" includes (a) the Company's Common Stock, (b) any other
capital stock of any class or classes (however designated) of the Company
authorized on or after the date hereof, the holders of which shall have the
right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating distributions after the payment of
dividends and distributions on any shares entitled to preference, and (c) any
other securities into which or for which any of the securities described in (a)
or (b) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
"Common Shares" means shares of the Company's Common Stock.
"Company" means VerticalNet, Inc., a Pennsylvania corporation, and its
successors and assigns.
"Consolidated" and "consolidating" when used with reference to any
term defined herein mean that term as applied to the accounts of the Company and
its Subsidiaries consolidated in accordance with generally accepted accounting
principles consistently applied throughout reporting periods.
"Conversion Shares" means shares of Common Stock issuable upon
conversion of the Preferred Shares.
"Directors" means the members from time to time of the Board of
Directors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar federal statute, and the rules and regulations of the Commission
(or of any other Federal agency then administering the Exchange Act) thereunder,
all as the same shall be in effect at the time.
"Initial Public Offering" means the first underwritten public offering
of Common Stock of the Company for the account of the Company and offered on a
"firm commitment" basis pursuant to an offering registered under the Securities
Act with the Commission on Form S-1, Form SB-1, Form SB-2 or their then
equivalents.
"Intellectual Property Rights" means any and all, whether domestic or
foreign, patents, patent applications, patent rights, trade secrets,
confidential business information, formulae, processes, laboratory notebooks,
algorithms, copyrights, mask works, claims of infringement against third
parties, licenses, permits, license rights, contract rights with employees,
consultants; and third parties, trademarks, trade names, service marks,
inventions and discoveries, and other such rights generally classified as
intangible property assets in accordance with generally accepted accounting
principles.
"Investors" means the Persons who are listed as Investors on the
signature pages hereof, or any Person to whom any of them shall sell or transfer
its shares, provided that such Person agrees to be bound by this Agreement.
<PAGE>
"NASD" means the National Association of Securities Dealers, Inc.
"Notice of Acceptance" shall have the meaning assigned to that term in
Section 3.2.
"Offer" shall have the meaning assigned to that term in Section 3.1.
"Offered Securities" shall have the meaning assigned to that term in
Section 3.1.
"Person" means an individual, corporation, partnership, joint venture,
trust, university, or unincorporated organization, or a government, or any
agency or political subdivision thereof.
"Preferred Shares" means the shares of preferred stock of the Company
now held or hereafter acquired by any Investor, other than shares of the
Company's Series A, Series B or Series C Preferred Stock.
"Qualified Public Offering" means (i) an underwritten public offering
on a firm commitment basis pursuant to an effective registration statement filed
pursuant to the Securities Act covering the offer and sale of Common Stock of
the Company in which the gross proceeds of the offering to the Company equal or
exceed $15,000,000, and in which the price per share of the Common Stock equals
or exceeds $3.60 (subject to appropriate adjustment for stock splits, stock
dividends, stock recapitalizations and the like).
"Refused Securities" shall have the meaning assigned to that term in
Section 3.3.
"Registrable Shares" shall mean and include (i) the Conversion Shares
and (ii) all shares of Common Stock issued or issuable upon the exercise or
conversion of any warrant, right or convertible security issued as a dividend or
distribution with respect to, or shares of Common Stock issued as a dividend to
the Preferred Shares, or in exchange or replacement for, Preferred Shares or
Conversion Shares; provided, however, that (i) shares of Common Stock which are
-------- -------
Registrable Shares shall cease to be Registrable Shares upon the consummation of
any sale of such shares pursuant to a registration statement or Rule 144 under
the Securities Act; (ii) Registrable Shares shall not include capital stock
acquired primarily as, or acquired pursuant to exercise of options or rights
granted to any employee, officer, director or consultant primarily as,
compensation for employment or services, and (iii) shares of Common Stock which
are eligible to be sold by the holder thereof under Rule 144(k) under the
Securities Act without volume limitation shall cease to be Registrable Shares,
unless the holder of such Shares owns 5% or more of the then outstanding capital
stock of the Company. Wherever reference is made in this Agreement to holders
of Registrable Shares or to a request or consent of holders of a certain
percentage of Registrable Shares, each holder of Preferred Shares shall be
deemed to hold the Conversion Shares issuable upon conversion of the Preferred
Shares, even if such conversion has not yet been effected.
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission (or of
any other Federal agency then administering the Securities Act) thereunder, all
as the same shall be in effect at the time.
"Shares" means, collectively, the Preferred Shares and the Conversion
Shares.
"Subsidiary" or "Subsidiaries" means any Person of which the Company
and/or any of its other Subsidiaries (as herein defined) directly or indirectly
owns at the time at least fifty percent (50%) of the outstanding voting
securities.
4.2 Accounting Terms. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with generally accepted accounting
principles consistently applied, and all financial data submitted pursuant to
this Agreement shall be prepared in accordance with such principles.
ARTICLE V
MISCELLANEOUS
5.1 No Waiver; Cumulative Remedies. No failure or delay on the part of
------------------------------
any party to this Agreement in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.
5.2 Amendments, Waivers and Consents. Any provision in the Agreement to
--------------------------------
the contrary notwithstanding, and except as hereinafter provided, changes in,
termination or amendments of or additions to this Agreement may be made, and
compliance with any covenant or provision set forth herein may be omitted or
waived, if the Company (i) shall obtain consent thereto in writing from the
holder or holders of at least a majority of the Registrable Shares, (ii) shall
obtain consent thereto in writing from the holder or holders of more than 75% of
the Series D Shares and (iii) shall deliver copies of such consent in writing to
any Investors who did not execute such consent; provided that no consents shall
be effective to reduce the percentage of the Registrable Shares the consent of
the holders of which is required under this Section 5.2; provided that any
--------
changes, termination, amendments, additions, or waivers affecting the rights of
a holder(s) of the Series D Shares in a disproportionate manner as to the other
holders of Series D Shares shall only be effective upon the consent of such
holder(s) so disadvantaged. Any waiver or consent may be given subject to
satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
5.3 Addresses for Notices. All notices, requests, demands and other
---------------------
communications provided for hereunder shall be in writing (including telegraphic
communication) and mailed, telegraphed or delivered to each applicable party at
the address set forth in the records of the
<PAGE>
Company or at such other address as to which such party may inform the other
parties in writing in compliance with the terms of this Section.
If to an Investor: at such Investor's address set forth on Schedule 1
hereto, or at such other address as shall be designated by such Person in a
written notice to the other parties complying as to delivery with the terms of
this Section.
If to the Company: at 2 Walnut Grove Drive, Suite 150, Horsham, PA
19044, or at such other address as shall be designated by the Company in a
written notice to the other parties complying as to delivery with the terms of
this Section.
All such notices, requests, demands and other communications shall,
shall be deemed delivered: three days after mailed (which mailing must be
accomplished by certified mail, return receipt requested and postage prepaid);
when transmitted by successful facsimile transmission; one business day after
deposited with a guaranteed overnight courier service (charged to sender); or
when delivered in hand or dispatched by telegraph.
5.4 Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the Company and the Series D Investors and their
respective heirs, successors and permitted assigns except that, with regard to
Section 1.1(o), Koch Ventures, Inc. shall not have the right to assign its
interest except as set forth therein, and, except that the Company shall not
have the right to delegate its obligations hereunder or to assign its rights
hereunder or any interest herein without the prior written consent of the
holders of at least a majority of the Shares.
5.5 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties made in this Agreement, the Shares or any other instrument or
document delivered in connection herewith or therewith, shall survive the
execution and delivery hereof or thereof.
5.6 Other Agreement. This Agreement and the Series D Stock Purchase
---------------
Agreement, the Company's Second Amended and Restated Articles of Incorporation,
and the other agreements executed and delivered herewith and therewith (the
"Concurrent Agreements") constitute the entire agreement between the parties and
supersedes any prior understandings or agreements concerning the subject matter
hereof.
5.7 Severability. The provisions of this Agreement and the Concurrent
------------
Agreements are severable and, in the event that any court of competent
jurisdiction one or more of the provisions or part of a provision contained in
this Agreement or in any Concurrent Agreement, shall, for any reason, be held to
be invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision or part of a provision
of this Agreement, but this Agreement shall be reformed and construed as if such
invalid or illegal or unenforceable provision, or part of a provision, had never
been contained herein, and such provisions or part reformed so that it would be
valid, legal and enforceable to the maximum extent possible.
<PAGE>
5.8 Confidentiality. Each Investor agrees that it will keep confidential
---------------
and will not disclose or divulge any confidential, proprietary, secret or non-
public information which such Investor may obtain from the Company pursuant to
financial statements, reports and other materials submitted by the Company to
such Investor pursuant to this Agreement, or pursuant to visitation or
inspection rights granted hereunder, unless such information is known, or until
such information becomes known, to the public; provided, however, that a
Investor may disclose such information (i) on a confidential basis to its
attorneys, accountants, consultants and other professionals to the extent
necessary to obtain their services in connection with its investment in the
Company, (ii) to any prospective purchaser of any Preferred Shares or Conversion
Shares from such Investor as long as such prospective purchaser agrees in
writing to be bound by the provisions of this Section 5.8, (iii) on a
confidential basis to any affiliate or partner of such Investor and (iv) as
required by applicable law.
5.9 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with the internal laws of the Commonwealth of Pennsylvania without
giving effect to choice of laws provisions.
5.10 Headings. Article, section and subsection headings in this Agreement
--------
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
5.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
5.12 Further Assurances. From and after the date of this Agreement, upon
------------------
the request of any Investor or the Company, the Company and the Investor shall
execute and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
5.13 Attorney's Fees. In the event that any dispute among the parties to
---------------
this Agreement should result in a legal proceeding, the prevailing party shall
be entitled to recover from the other party(ies) to such dispute, all fees,
costs and expenses of enforcing any right under or with respect to this
Agreement, including without limitation, such fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
5.14 Subsequent Closings. Any shares of Series D Shares sold pursuant to
-------------------
Section 2.3 of the Series D Stock Purchase Agreement shall be deemed to be
Series D Shares hereunder, and purchasers thereof shall be deemed to be
"Investors" for all purposes under this Agreement. The new purchasers shall
become parties to this Agreement by signing a counterpart signature page hereto.
<PAGE>
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
THE COMPANY:
VERTICALNET, INC.
By: /s/ Michael J. Hagan
--------------------------------------
Name: Michael J. Hagan
--------------------------------------
Title: Senior V.P. / Founder
--------------------------------------
INVESTORS:
KOCH VENTURES, INC.
By: /s/ Matthew J. Warta
--------------------------------------
Name: Matthew J .Warta
--------------------------------------
Title: Vice President
--------------------------------------
INTERNET CAPITAL GROUP, LLC
By: /s/ Douglas A. Alexander
--------------------------------------
Name: Douglas A. Alexander
--------------------------------------
Title: Managing Director
--------------------------------------
ENERTECH CAPITAL PARTNERS, L. P.
By: /s/ David F. Lincoln
--------------------------------------
Name: David F. Lincoln
--------------------------------------
Title: Managing Director
--------------------------------------
<PAGE>
(INVESTORS CONT.)
WHEATLEY PARTNERS, L. P.
By: Wheatley Partners, LLC,
General Partner
By: /s/ Matthew Smith
--------------------------------------
Name: Matthew Smith
--------------------------------------
Title: Vice President
--------------------------------------
WHEATLEY FOREIGN PARTNERS, L. P.
By: Wheatley Partners, LLC,
General Partner
By: /s/ Matthew Smith
--------------------------------------
Name: Matthew Smith
--------------------------------------
Title: Vice President
--------------------------------------
<PAGE>
(INVESTORS CONT.)
LAMBROS L. P.
By: /s/ C. Dennis Kemper
--------------------------------------
Name: C. Dennis Kemper
--------------------------------------
Title: Sr. V.P., Mercantile Trust Agent
--------------------------------------
SMART TECHNOLOGY VENTURES I, LLC
By: /s/ David Nazarian
--------------------------------------
Name: David Nazarian
--------------------------------------
Title: CEO
--------------------------------------
<PAGE>
(INVESTORS CONT.)
WOLFSON EQUITIES
By: /s/ Aaron Wolfson
--------------------------------------
Name: Aaron Wolfson
--------------------------------------
Title: General Partner
--------------------------------------
SOUTH FERRY BUILDING COMPANY
By: /s/ Abraham Wolfson
--------------------------------------
Name: Abraham Wolfson
--------------------------------------
Title: General Partner
--------------------------------------
AARON WOLFSON
/s/ Arron Wolfson
--------------------------------------------
Aaron Wolfson
CHANA SASHA FOUNDATION
By: /s/ Morris Wolfson
--------------------------------------
Name: Morris Wolfson
--------------------------------------
Title: President
--------------------------------------
ELI LEVITIN
/s/ Eli Levitin
--------------------------------------------
Eli Levitin
<PAGE>
(INVESTORS CONT.)
LEHMAN BROTHERS VENTURE CAPTIAL PARTNERS I, L.P.
By: LBI Group Inc., as General Partner
By: /s/ Steven Berkenfeld
--------------------------------------
Name: Steven Berkenfeld
--------------------------------------
Title: Vice President
--------------------------------------
<PAGE>
SCHEDULE 1
REVISED SCHEDULE OF INVESTORS
Name and Address
----------------
Koch Ventures, Inc.
4111 East 37/th/ Street North
Wichita, Kansas 67220
Internet Capital Group, LLC
435 Devon Park Drive
Wayne, Pennsylvania 19087
EnerTech Capital Partners, L. P.
435 Devon Park Drive, Suite 410
Wayne, Pennsylvania 19087
Wheatley Partners, L. P.
c/o Wheatley Partners, LLC
80 Cutter Mill Road, Suite 311
Great Neck, New York 11021
Wheatley Foreign Partners, L .P.
c/o Wheatley Partners, LLC
80 Cutter Mill Road, Suite 311
Great Neck, New York 11021
Lambros L. P.
c/o Mercantile Trust
1 Mercantile Center
Seventh & Washington
St. Louis, Missouri 63166
Smart Technology Ventures I, LLC
9300 Wilshire Blvd.
Suite 600
Beverly Hills, California 90212
Wolfson Equities
1 State Street Plaza
New York, New York 10004
South Ferry Building Company
1 State Street Plaza
New York, New York 10004
Aaron Wolfson
1 State Street Plaza
New York, New York 10004
Chana Sasha Foundation
1 State Street Plaza
New York, New York 10004
Eli Levitin
1 State Street Plaza
New York, New York 10004
Lehman Brothers Venture Capital
Partners I, L.P.
Three World Financial Center
Eighteenth Floor
New York, New York 10285
<PAGE>
Exhibit 10.14
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT made as of this 25th day of November, 1998
between VerticalNet, Inc., a Pennsylvania corporation (the "Company") and each
of the undersigned (together with their respective affiliates and any assignee
or transferee of all of their respective rights hereunder (the "Investors")).
R E C I T A L S:
A. The Company has issued to the Investors certain Convertible Notes
dated November 25, 1998 in the aggregate principal amount of $5,000,000 (the
"Notes") and certain Common Stock Purchase Warrants dated November 25, 1998 to
purchase an aggregate of 160,000 shares of Common Stock (the "Warrants");
B. The Company and the Investor desire to enter into this Registration
Rights Agreement to provide for registration rights with respect to the Common
Stock underlying the Notes and the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each of the
Investors hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
-------------------
Section 1. As used in this Agreement, the following terms shall have
the following meanings:
1.1. Commission means the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act and the
Exchange Act.
1.2. Common Stock means (i) the Company's Common Stock, $0.01 par
------------
value, as authorized on the date of this Agreement, (ii) any other capital stock
of any class or classes (however designated) of the Company, authorized on or
after the date hereof, the holders of which shall have the right, without
limitation as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies or in the absence of any
provision to the contrary in the Company's Articles of Incorporation, be
entitled to vote for the election of a majority of directors of the Company
(even though the right so to vote has been suspended by the happening of such a
contingency or provision), and (iii) any other
<PAGE>
securities into which or for which any of the securities described in (i) or
(ii) may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
1.3. Exchange Act means the Securities Exchange Act of 1934, or any
------------
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
1.4. Holders has the meaning set forth in Section 2.1.
-------
1.5. Initial Public Offering means the first underwritten public
-----------------------
offering of Common Stock of the Company for the account of the Company and
offered on a "firm commitment" or "best efforts" basis pursuant to an offering
registered under the Securities Act with the Commission on Form S-1 or its then
equivalent.
1.6. Person means an individual, corporation, partnership, limited
------
liability company, joint venture, trust or unincorporated organization or a
government or any agency or political subdivision thereof.
1.7. Prior Purchase Agreements means (i) the Preferred Stock Purchase
-------------------------
Agreement by and between the Company and Internet Capital Group, L.L.C., dated
as of September 12, 1996, (ii) the Preferred Stock Purchase Agreement by and
between the Company and Internet Capital Group, L.L.C., dated as of July 18,
1997, (iii) the Subscription Agreement by and between the Company and Robert
Lessin, dated as of October 10, 1997 and (iv) the Series D Preferred Stock
Purchase Agreement by and among the Company and the Purchasers (as defined
therein), dated as of May 8, 1998.
1.8. Registrable Securities means (i) any shares of Common Stock
----------------------
issued upon conversion of the Notes owned by any Investor and (ii) any shares of
Common Stock issued upon exercise of the Warrants owned by any Investor;
provided, however, that shares of Common Stock which are Registrable Securities
- -------- -------
shall cease to be Registrable Securities upon the consummation of any sale
pursuant to a registration statement, Section 4(i) of the Securities Act or Rule
144 under the Securities Act.
1.9. Securities Act means the Securities Act of 1933, or any similar
--------------
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
ARTICLE II
REGISTRATION RIGHTS
-------------------
Section 2.1. Piggyback Registration. If at any time after the Initial
----------------------
Public Offering, the Company shall determine to register for its own account or
the account of others under the Securities Act (including pursuant to a demand
for registration of any shareholder of the Company) any of its equity
securities, other than on Form S-8 or Form S-4 or their then equivalents
relating to shares of
<PAGE>
Common Stock to be issued solely in connection with any acquisition of any
entity or business or shares of Common Stock issuable in connection with stock
option or other employee benefit plans, it shall send to each holder of
Registrable Securities, including each holder who has the right to acquire
Registrable Securities, written notice of such determination and, if within
fifteen (15) days after receipt of such notice, such holder shall so request in
writing, the Company shall use its best efforts to include in such registration
statement all or any part of the Registrable Securities such holder requests to
be registered, except that if, in connection with any offering involving an
underwriting of Common Stock to be issued by the Company, the managing
underwriter shall impose a limitation on the number of shares of such Common
Stock which may be included in the registration statement because, in its
judgment, such limitation is necessary to effect an orderly public distribution,
then the Company shall be obligated to include in such registration statement
only such limited portion of the Registrable Securities with respect to which
such holder has requested inclusion hereunder; provided, however, that all
-------- -------
shares of Common Stock, or capital stock of the Company convertible into Common
Stock, that have been granted registration rights pursuant to the terms of any
of the Prior Purchase Agreements that are permitted to be included have been
included that have been requested inclusion in such registration; provided,
--------
further, however, that the Company shall not so exclude any Registrable
- ------- -------
Securities unless it has first excluded any securities (other than Registrable
Securities) to be offered and sold by directors, officers or other employees of
the Company or by holders who do not have contractual, incidental rights to
include such securities (collectively, "Excludable Shares"); and provided,
--------
further, however, that if all requested Registrable Securities are included in
- ------- -------
such registration, that as between the Company and holders of Registrable
Securities, in no event shall the Registrable Securities included in such
offering be limited to less than twenty-five percent (25%) of the aggregated
shares offered. Any exclusion of Registrable Securities shall be made pro rata
among the Investors (or their assigns) seeking to include such shares, in
proportion to the number of such shares sought to be included by such Investors
(or their assigns). No incidental right under this Section 2.1 shall be
construed to limit any registration required under Section 2.2. The obligations
of the Company under this Section 2.1 may be waived at any time upon the written
consent of holders of sixty percent (60%) in interest of the Notes and shall
expire on the tenth anniversary following the consummation of an Initial Public
Offering.
Section 2.2. Demand Registrations. If on any occasion one or more holders
--------------------
of at least sixty percent (60%) of the outstanding principal amount of the Notes
shall notify the Company in writing that it or they intend to offer or cause to
be offered for public sale at least thirty percent (30%) of the Registrable
Securities, the Company will so notify all holders of Registrable Securities,
including all holders who have a right to acquire Registrable Securities. Upon
written request of any holder given within fifteen (15) days after the receipt
by such holder from the Company of such notification, the Company will use its
best efforts to cause such of the Registrable Securities as may be requested by
any holder thereof (including the holder or holders giving the initial notice of
intent to offer) to be registered under the Securities Act as expeditiously as
possible. The Company shall not be required to effect more than one registration
during any twelve (12) month period pursuant to this Section 2.2 and two such
registrations in the aggregate. If the Company determines to include shares to
be sold by it or by other selling shareholders in any registration request
pursuant to this Section 2.2, such registration shall be deemed to have been a
"piggy back" registration under Section 2.1, and not a "demand" registration
under this Section 2.2 if the holders of Registrable Securities are unable to
<PAGE>
include in any such registration statement eighty-five percent (85%) of the
Registrable Securities initially requested for inclusion in such registration
statement. The Company shall not be required to effect a registration pursuant
to this Section 2.2 unless the minimum market value of any offering and
registration of Registrable Securities made pursuant thereto is at least
$1,000,000, before calculation of underwriting discounts and commissions. The
holders of Registrable Securities may not exercise their rights under this
Section 2.2 until 90 days after the effectiveness of any registration statement
covering the Initial Public Offering.
Section 2.3. Registrations on Form S-3. In addition to the rights
-------------------------
provided the holder of Registrable Securities in Sections 2.1 and 2.2 above, if
the registration of Registrable Securities under the Securities Act can be
effected on Form S-3 (or any similar form promulgated by the Commission), then
upon the written request of one or more holders of at least sixty percent (60%)
of outstanding principal amount of the Notes, the Company will so notify each
holder of Registrable Securities, including each holder who has a right to
acquire Registrable Securities, and then will, as expeditiously as possible, use
its best efforts to effect qualification and registration under the Securities
Act on Form S-3 of all or such portion of the Registrable Securities as the
holder or holders shall specify; provided, however, the Company shall not be
-------- -------
required to effect a registration pursuant to this Section 2.3 unless the market
value of the Registrable Securities to be sold in any such registration shall be
estimated to be at least $500,000 at the time of filing such registration
statement, and further provided that the Company shall not be required to effect
more than one (1) registration during any twelve (12) month period pursuant to
this Section 2.3.
Section 2.4. Effectiveness. The Company will use its best efforts to
-------------
maintain the effectiveness for up to 90 days (or such shorter period of time as
the underwriters need to complete the distribution of the registered offering,
or one year in the case of a "shelf" registration statement on Form S-3) of any
registration statement pursuant to which any of the Registrable Securities are
being offered, and from time to time will amend or supplement such registration
statement and the prospectus contained therein to the extent necessary to comply
with the Securities Act and any applicable state securities statute or
regulation. The Company will also provide each holder of Registrable Securities
with as many copies of the prospectus contained in any such registration
statement as it may reasonably request.
Section 2.5. Registration Expenses. In the case of each registration
---------------------
effected under Section 2.1, 2.2 or 2.3, the Company shall bear all reasonable
costs and expenses of each such registration on behalf of the selling holders of
Registrable Securities, including, but not limited to, the Company's printing,
legal and accounting fees and expenses, Commission and NASD filing fees and
"Blue Sky" fees and expenses and the reasonable fees and disbursements (such
fees not to exceed $25,000) of one counsel for the selling holders of
Registrable Securities in connection with the registration of their Registrable
Securities; provided, however, that the Company shall have no obligation to pay
-------- -------
or otherwise bear any portion of the underwriters' commissions or discounts
attributable to the Registrable Securities being offered and sold by the holders
of the Registrable Securities, or the fees and expenses of more than one counsel
for the selling holders of Registrable Securities in connection with the
registration of the Registrable Securities. The Company shall pay all expenses
of the holders of the Registrable Securities in connection with any registration
initiated
<PAGE>
pursuant to this Article II which is withdrawn, delayed or abandoned at the
request of the Company, except if such withdrawal, delay or abandonment is
caused by the fraud, material misstatement or omission of a material fact by a
holder of Registrable Securities to be included in such registration.
Section 2.6. Further Obligations of the Company. Whenever under the
----------------------------------
preceding Sections of this Article II, the Company is required hereunder to
register Registrable Securities, it agrees that it shall also do the following:
(a) Furnish to each selling holder such copies of each preliminary
and final prospectus and such other documents as said holder may reasonably
request to facilitate the public offering of its Registrable Securities;
(b) Use its best efforts to register or qualify the Registrable
Securities covered by said registration statement under the applicable
securities or "blue sky" laws of such jurisdictions as any selling holder may
reasonably request; provided, however, that the Company shall not be obligated
to qualify to do business in any jurisdictions where it is not then so qualified
or to take any action which would subject it to the service of process in suits
other than those arising out of the offer or sale of the securities covered by
the registration statement in any jurisdiction where it is not then so subject;
(c) Furnish to each selling holder a signed counterpart, addressed
to the selling holders, of
(i) an opinion of counsel for the Company, dated the effective
date of the registration statement, and
(ii) "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial statements
included in the registration statement, to the extent permitted by the standards
of the American Institute of Certified Public Accountants, covering
substantially the same matters with respect to the registration statement (and
the prospectus included therein) and (in the case of the accountants' "comfort"
letters) with respect to events subsequent to the date of the financial
statements, as are customarily covered in opinions of issuer's counsel and in
accountants' "comfort" letters delivered to the underwriters in underwritten
public offerings of securities, to the extent that the Company is required to
deliver or cause the delivery of such opinion or "comfort" letters to the
underwriters in an underwritten public offering of securities;
(d) Permit each selling holder of Registrable Securities or his
counsel or other representatives to inspect and copy such corporate documents
and records as may reasonably be requested by them;
(e) Furnish to each selling holder of Registrable Securities a copy
of all documents filed with and all correspondence from or to the Commission in
connection with any such offering of securities;
<PAGE>
(f) Use its best efforts to insure the obtaining of all necessary
approvals from the National Association of Securities Dealers, Inc.; and
(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earning statement covering the
period of at least twelve months, but not more than eighteen months, beginning
with the first month after the effective date of the registration statement
covering the Initial Public Offering, which earning statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder.
Whenever under the preceding Sections of this Article II the holders of
Registrable Securities are registering such shares pursuant to any registration
statement, each such holder agrees to (i) timely provide to the Company, at its
request, such information and materials as it may reasonably request in order to
effect the registration of such Registrable Securities and (ii) convert all
shares of Preferred Stock included in any registration statement to shares of
Common Stock, such conversion to be effective at the closing of such offering
pursuant to such registration statement.
Section 2.7 Approval of Underwriter. Any managing underwriter engaged in
-----------------------
any registration made pursuant to Section 2.2 shall be a nationally recognized
firm requiring the approval in writing of the holders of a majority of the
Registrable Securities requesting such registration and the consent of the
Company, which consent shall not be unreasonably withheld or delayed.
Section 2.8. "Lock-Up" Agreement.
-------------------
(a) Initial Public Offering. Each holder of Registrable Securities
-----------------------
agrees, if so requested by the Company and an underwriter of Common Stock or
other securities of the Company, not to sell, grant any option or right to buy
or sell, or otherwise transfer or dispose of in any manner, whether in
privately-negotiated or open-market transactions, any Common Stock or other
securities of the Company held by it during the 90-day period following the
effective date of a registration statement filed pursuant to the Initial Public
Offering, provided that:
(i) Such agreement shall apply only to the Initial Public
Offering; and
(ii) All holders of Registrable Securities, any other security
holders whose securities are included in such registration statement, and all
officers, directors and Key Employees of the Company shall also enter into
similar agreements.
Such "lock-up" agreement shall be in writing and in form and substance
satisfactory to the Company and such underwriter. The Company may impose stop-
transfer instructions with respect to the shares subject to the foregoing
restrictions until the end of said 90-day period. No holder of Registrable
Securities shall be so restricted unless all holders are similarly and
proportionately restricted.
<PAGE>
(b) Lock-Up after Initial Public Offering. Each holder of
-------------------------------------
Registrable Securities agrees that in the event the Company proposes to offer
for sale to the public any of its equity securities after the Initial Public
Offering, and (1) if such holder of Registrable Securities is an "affiliate" of
the Company (for example, because a general partner of a Purchaser is a director
of the Company) or otherwise holds beneficially or of record ten percent (10%)
or more of the outstanding equity securities of the Company; and (2) if
requested by the Company and an underwriter of Common Stock or other securities
of the Company; and (3) if all other "affiliates" and such 10% stockholders
similarly situated are requested by the Company and such underwriter to sign,
and actually do sign, any "Lock-Up Agreement" (as described herein), then it
will not sell, grant any option or right to buy or sell, or otherwise transfer
or dispose of in any manner, to the public in open market transactions, any
Common Stock or other securities of the Company held by it during the 90-day
period following the effective date of the registration statement of the Company
filed under the Securities Act. The Company agrees that it will sign a Lock-Up
Agreement upon substantially similar terms and conditions in the event of a
registration effected pursuant to Sections 2.2 or 2.3 hereof. Such agreements
shall be in writing and in form and substance reasonably satisfactory to the
holder of Registrable Securities, the Company and such underwriter and pursuant
to customary and prevailing terms and conditions.
The Company may impose stop-transfer instructions with respect to the
securities subject to the foregoing restrictions until the end of said 90-day
period.
Section 2.9. Mergers, Etc. The Company shall not, directly or indirectly,
------------
enter into any merger, consolidation or reorganization in which the Company
shall not be the surviving corporation unless the proposed surviving corporation
shall, prior to such merger, consolidation or reorganization, agree in writing
to assume the obligations of the Company under this Agreement, and for that
purpose references hereunder to Registrable Securities shall be deemed to be
references to the securities which the Investor would be entitled to receive in
exchange for Registrable Securities under any such merger, consolidation or
reorganization; provided, however, that the provisions of this Section 2.9 shall
-------- -------
not apply in the event of any merger, consolidation, or reorganization in which
the Company is not the surviving corporation if all stockholders are entitled to
receive in exchange for their Registrable Securities consideration consisting
solely of (i) cash, (ii) securities of the acquiring corporation which may be
immediately sold to the public without registration under the Securities Act, or
(iii) securities of the acquiring corporation which the acquiring corporation
has agreed to register within 90 days of completion of the transaction for
resale to the public pursuant to the Securities Act.
Section 2.10.Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, the Company shall not, without the prior written
consent of the holders of at least a majority of the Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder of any
securities of the Company the right to require the Company to initiate any
registration of any securities of the Company. Any right given by the Company to
any holder or prospective holder of the Company's securities in connection with
the registration of securities, shall be conditioned such that it shall be
consistent with the provisions and with the rights of the holder provided in
this
<PAGE>
Agreement. This Section 2.10 shall not limit the right of the Company to enter
into any agreements with any holder or prospective holder of any securities of
the Company giving such holder or prospective holder the right to require the
Company, upon any registration of any of its securities, to include, among the
securities which the Company is then registering, securities owned by such
holder if such rights are subordinate to the rights of a holder of Registrable
Securities.
ARTICLE III
INDEMNIFICATION
---------------
Section 3.1. Indemnification of Holder of Registrable Securities. In the
---------------------------------------------------
event that the Company registers any of the Registrable Securities under the
Securities Act, the Company will indemnify and hold harmless each holder and
each underwriter of the Registrable Securities (including their officers,
directors, affiliates and partners) so registered (including any broker or
dealer through whom such shares may be sold) and each Person, if any, who
controls such holder or any such underwriter within the meaning of Section 15 of
the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them become
subject under the Securities Act, applicable state securities laws or under any
other statute or at common law or otherwise, as incurred, and, except as
hereinafter provided, will reimburse each such holder, each such underwriter and
each such controlling Person, if any, for any legal or other expenses reasonably
incurred by them or any of them in connection with investigating or defending
any actions whether or not resulting in any liability, as incurred, insofar as
such losses, claims, damages, expenses, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or the registration statement
or prospectus as from time to time amended or supplemented by the Company) or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or any violation by the Company of any rule
or regulation promulgated under the Securities Act or any state securities laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration, unless (i) such untrue statement
or alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary or amended preliminary prospectus or final
prospectus in reliance upon and in conformity with information furnished in
writing to the Company in connection therewith by any such holder of Registrable
Securities (in the case of indemnification of such holder), any such underwriter
(in the case of indemnification of such underwriter) or any such controlling
Person (in the case of indemnification of such controlling person) expressly for
use therein, or unless (ii) in the case of a sale directly by such holder of
Registrable Securities (including a sale of such Registrable Securities through
any underwriter retained by such holder of Registrable Securities to engage in a
distribution solely on behalf of such holder of Registrable Securities), such
untrue statement or alleged untrue statement or omission or alleged omission was
contained in a preliminary prospectus and corrected in a final or amended
prospectus copies of which were delivered to such holder of Registrable
Securities or such underwriter on a timely basis, and such holder of Registrable
Securities failed to deliver a copy of the final or amended prospectus at or
prior to the confirmation for the sale of the Registrable Securities to the
person
<PAGE>
asserting any such loss, claim, damage or liability in any case where such
delivery is required by the Securities Act.
Promptly after receipt by any holder of Registrable Securities, any
underwriter or any controlling Person of notice of the commencement of any
action in respect of which indemnity may be sought against the Company, such
holder of Registrable Securities, or such underwriter or such controlling
Person, as the case may be, will notify the Company in writing of the
commencement thereof (provided, that failure to so notify the Company shall not
relieve the Company from any liability it may have hereunder) and, subject to
the provisions hereinafter stated, the Company shall be entitled to assume the
defense of such action (including the employment of counsel, who shall be
counsel reasonably satisfactory to such holder of Registrable Securities, such
underwriter or such controlling Person, as the case may be), and the payment of
expenses insofar as such action shall relate to any alleged liability in respect
of which indemnity may be sought against the Company.
Such holder of Registrable Securities, any such underwriter or any such
controlling Person shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel subsequent to any assumption of the defense by the Company shall
not be at the expense of the Company unless the employment of such counsel has
been specifically authorized in writing by the Company. The Company shall not
be liable to indemnify any Person for any settlement of any such action effected
without the Company's written consent. The Company shall not, except with the
approval of each party being indemnified under this Section 3.1, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to the
parties being so indemnified of a release from all liability in respect to such
claim or litigation.
In order to provide for just and equitable contribution to joint liability
under the Securities Act in any case in which any holder of Registrable
Securities exercising rights under this Article III, or any controlling Person
of any such holder, makes a claim for indemnification pursuant to this Section
3.1 but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 3.1 provides
for indemnification in such case, then, the Company and such holder will
contribute to the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and of
the holder of Registrable Securities on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of the holder of Registrable
Securities on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company on the one hand or by the holder of Registrable Securities on the other,
and each party's relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided, however,
that, in any such case, (A) no such holder will be required to contribute any
amount in excess of the public offering price of all such Registrable Securities
offered by it pursuant to such
<PAGE>
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
Section 3.2. Indemnification of Company. In the event that the Company
--------------------------
registers any of the Registrable Securities under the Securities Act, each
holder of the Registrable Securities so registered will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed or otherwise participated in the preparation of the registration
statement, each underwriter of the Registrable Securities so registered
(including any broker or dealer through whom such of the shares may be sold) and
each Person, if any, who controls the Company within the meaning of Section 15
of the Securities Act from and against any and all losses, claims, damages,
expenses or liabilities, joint or several, to which they or any of them may
become subject under the Securities Act, applicable state securities laws or
under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse the Company and each such director,
officer, underwriter or controlling Person for any legal or other expenses
reasonably incurred by them or any of them in connection with investigating or
defending any actions whether or not resulting in any liability, insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement, in any preliminary or amended
preliminary prospectus or in the final prospectus (or in the registration
statement or prospectus as from time to time amended or supplemented) or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, but only insofar as any such statement or
omission was made in reliance upon and in conformity with information furnished
in writing to the Company in connection therewith by such holder of Registrable
Securities expressly for use therein; provided, however, that such holder's
obligations hereunder shall be limited to an amount equal to the proceeds
received by such holder of Registrable Securities sold in such registration.
Promptly after receipt of notice of the commencement of any action in
respect of which indemnity may be sought against such holder of Registrable
Securities, the Company will notify such holder of Registrable Securities in
writing of the commencement thereof (provided, that failure to so notify such
holder shall not relieve such holder from any liability it may have hereunder),
and such holder of Registrable Securities shall, subject to the provisions
hereinafter stated, be entitled to assume the defense of such action (including
the employment of counsel, who shall be counsel reasonably satisfactory to the
Company) and the payment of expenses insofar as such action shall relate to the
alleged liability in respect of which indemnity may be sought against such
holder of Registrable Securities. The Company and each such director, officer,
underwriter or controlling Person shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel subsequent to any assumption of the defense by
such holder of Registrable Securities shall not be at the expense of such holder
of Registrable Securities unless employment of such counsel has been
specifically authorized in writing by such holder of Registrable Securities.
Such holder of Registrable Securities shall not be liable to indemnify any
Person for any settlement of any such action effected without such holder's
written consent.
<PAGE>
In order to provide for just and equitable contribution to joint liability
under the Securities Act in any case in which the Company exercising its rights
under this Article III, makes a claim for indemnification pursuant to this
Section 3.2, but it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding that this Section 3.2 provides for
indemnification, in such case, then, the Company and such holder will contribute
to the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion as is appropriate to
reflect the relative fault of the Company on the one hand and of the holder of
Registrable Securities on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the holder of Registrable Securities on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company on the one
hand or by the holder of Registrable Securities on the other, and each party's
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission; provided, however, that, in any such case,
(A) no such holder will be required to contribute any amount in excess of the
public offering price of all such Registrable Securities offered by it pursuant
to such registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
ARTICLE IV
EXCHANGE ACT REGISTRATION
-------------------------
Section 4.1 Exchange Act Registration. If the Company at any time shall
-------------------------
list any class of equity securities of the type which may be issued upon the
conversion of the Preferred Stock on any national securities exchange and shall
register such class of equity securities under the Exchange Act, the Company
will, at its expense, simultaneously list on such exchange and maintain such
listing of, the Common Stock. If the Company becomes subject to the reporting
requirements of either Section 13 or Section 15(d) of the Exchange Act, the
Company will use its best efforts to timely file with the Commission such
information as the Commission may require under either of said Sections; and in
such event, the Company shall use its best efforts to take all action as may be
required as a condition to the availability of Rule 144 or Rule 144A under the
Securities Act (or any successor exemptive rule hereinafter in effect) with
respect to such Common Stock. The Company shall furnish to any holder of
Registrable Securities forthwith upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of Rule 144, (ii) a
copy of the most recent annual or quarterly report of the Company as filed with
the Commission, and (iii) such other reports and documents as a holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing a holder to sell any such Registrable Securities without
registration. After the occurrence of the Initial Public Offering, the Company
agrees to use its best efforts to facilitate and expedite transfers of the
Shares pursuant to Rule 144 under the Securities Act, which efforts shall
include timely notice to its transfer agent to expedite such transfers of
Shares.
<PAGE>
ARTICLE V
TRANSFER OF REGISTRATION RIGHTS
-------------------------------
Section 5.1 Transfer of Registration Rights. The rights to register
-------------------------------
securities granted by the Company under this Agreement may be assigned by any
holder of the Registrable Securities provided that (i) any assignee or
transferee of the Registrable Securities acquires at least ten percent (10%) of
the Registrable Securities purchased by the Investor on the date hereof and is
not a competitor of the Company, or is a general or limited partner or officer
or director of the Investor or its affiliates, including, but not limited to,
their immediate family, irrevocable trusts for estate planning purposes and
personal representatives;; (ii) such transfer may otherwise be and is effected
in accordance with applicable securities laws; and (iii) such assignee or
transferee agrees in writing to be bound by all of the provisions of this
Agreement.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1. No Waiver; Cumulative Remedies. No failure or delay on the
------------------------------
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
These remedies are cumulative and not exclusive of any remedies provided by law.
Section 6.2. Amendments, Waivers and Consents. Any provision in this
--------------------------------
Agreement to the contrary notwithstanding, and except as hereafter provided,
changes in, termination or amendments of or additions to this Agreement may be
made, and compliance with any covenant or provision set forth herein may be
omitted or waived, if the Company (i) shall obtain consent thereto in writing
from the holder or holders of at least a majority in interest of the then
outstanding principal amount of the Notes and (ii) shall deliver copies of such
consent in writing to any holders who did not execute such consent; provided,
---------
that, no consents shall be effective to reduce the percentage in interest of the
- ----
Notes the consent of the holders of which is required under this Section 6.2.
Any waiver or consent may be given subject to satisfaction of conditions stated
therein and any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
Section 6.3. Addresses for Notices. All notices, requests demands and
---------------------
other communications required by this Agreement shall be in writing (including
telegraphic communication) and mailed, telegraphed or delivered to each
applicable party at the address set forth in Exhibit 6.3 hereto or at such other
-----------
address any party may inform the party in writing in compliance with this
Section.
All such notices, requests, demands and other communications shall, when
mailed (which mailing must be accomplished by first class mail, postage prepaid,
electronic facsimile transmission, express overnight courier service, or
registered mail, return receipt requested) or telegraphed, and shall be
considered to be delivered three (3) days after dispatch.
<PAGE>
Section 6.4. Binding Effect; Assignment. This Agreement shall bind and
--------------------------
inure to the benefit of the parties and their respective heirs, successors and
assigns, except that the Company shall not have the right to delegate its
obligations hereunder or to assign its rights hereunder or any interest herein
without the prior written consent of the holders of at least a majority in
interest of the Registrable Securities.
Section 6.5. Prior Agreements. This Agreement constitutes the entire
----------------
agreement between the parties and supersedes any prior understandings or
agreements concerning the subject matter hereof.
Section 6.6. Severability. The provisions of this Agreement are severable
------------
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of a provision contained in this
Agreement, for any reason, is invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement, but this Agreement shall be
reformed and construed as if such invalid or illegal or unenforceable provision,
or part of a provision, had never been contained herein, and such provisions or
part reformed so that it would be valid, legal and enforceable to the maximum
extent possible.
Section 6.7. Governing Law TC{ REF _Ref423758297 \r\h\00 Jurisdiction and
-------------------------------------------
Venue"\f C\1 "2". This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware, and without giving
effect to choice of law provisions.
Section 6.8. Damages. The Company recognizes and agrees that the holder
-------
of Registrable Securities will not have an adequate remedy if the Company fails
to comply with this Article V and that damages may not be readily ascertainable,
and the Company expressly agrees that, in the event of such failure, it shall
not oppose an application by the holder of Registrable Securities or any other
Person entitled to the benefits of this Article V requiring specific performance
of any and all provisions hereof or enjoining the Company from continuing to
commit any such breach of this Article V.
Section 6.9. Headings. Article, section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 6.10.Counterparts. This Agreement may be executed in any number
------------
of counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
Section 6.11.Further Assurances. From and after the date of this
------------------
Agreement, on the request of any party, the other parties shall execute and
deliver such instruments documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
<PAGE>
IN WITNESS, the undersigned have executed this Registration Rights
Agreement as the day and year first above written.
CHANA SASHA FOUNDATION
By: /s/ Morris Wolfson
--------------------------------
Name: Morris Wolfson
--------------------------------
Title: President
--------------------------------
INTERNET CAPITAL GROUP L.L.C.
By: /s/ Walter W. Buckley
--------------------------------
Name: Walter W. Buckley
--------------------------------
Title: President & CEO
--------------------------------
SMART TECHNOLOGY VENTURES LLC
By: /s/ David Nazarian
--------------------------------
Name: David Nazarian
--------------------------------
Title: Chief Investment Officer
--------------------------------
WHEATLEY FOREIGN PARTNERS, L.P.
By: Wheatley Partners, LLC, General Partner
By: /s/ Jonathan Lieber
--------------------------------
Name: Jonathan Lieber
--------------------------------
Title: Vice President
--------------------------------
WOLFSON EQUITIES
By: /s/ Aaron Wolfson
--------------------------------
Name: Aaron Wolfson
--------------------------------
Title: General Partner
--------------------------------
/s/ Aaron Wolfson
- -------------------------------------
AARON WOLFSON
VERTICALNET, INC.
By: /s/ Gene S. Godick
--------------------------------
Name: Gene S. Godick
--------------------------------
Title: Vice President Finance and CFO
--------------------------------
ENERTECH CAPITAL PARTNERS, L.P.
By: /s/ David Lincoln
--------------------------------
Name: David Lincoln
--------------------------------
Title: Managing Director
--------------------------------
LAMBROS, L.P.
By: /s/
--------------------------------
Name:
--------------------------------
Title: President, Lambros Mngt., G.P.
--------------------------------
SOUTH FERRY BUILDING COMPANY
By: /s/ Abraham Wolfson
--------------------------------
Name: Abraham Wolfson
--------------------------------
Title: General Partner
--------------------------------
WHEATLEY PARTNERS, L.P.
By: Wheatley Partners, LLC, General Partner
By: /s/ Jonathan Lieber
--------------------------------
Name: Jonathan Lieber
--------------------------------
Title: Vice President
--------------------------------
/s/ Eli Levitin
- -------------------------------------
ELI LEVITIN
<PAGE>
Exhibit 21
Subsidiaries
Boulder Interactive Technology Services Co.
Informatrix Acquisition Corp.
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors VerticalNet, Inc.:
The audits referred to in our report dated December 22, 1998, except as to
the last paragraph of Note 14 which is as of February 7, 1999, included the
related financial statement schedule for the period from July 28, 1995
(inception) to December 31, 1995, the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.
KPMG LLP
Philadelphia, Pennsylvania
February 8, 1999
<PAGE>
EXHIBIT 23.1A
Consent of Independent Auditors
The Board of Directors
VerticalNet Inc.:
We consent to the use of our report dated August 21, 1998, with respect to
the balance sheets of Boulder Interactive Technology Services Company as of
December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for the period from March 22, 1996
(inception) through December 31, 1996 and for the year ended December 31,
1997, which report is included herein and to the reference to our firm under
the heading "Experts" and "Selected Financial Data" in the prospectus.
KPMG LLP
Philadelphia, Pennsylvania
February 8, 1999
<PAGE>
EXHIBIT 23.1 B
Consent of Independent Auditors
The Board of Directors
VerticalNet Inc.:
We consent to the use of our report dated August 21, 1998, with respect to
the balance sheet of Informatrix Worldwide, Inc. as of December 31, 1997, and
the related statements of operations, shareholders' deficit, and cash flows for
the period from October 15, 1997 (inception) through December 31, 1997, which
report is included herein and to the reference to our firm under the heading
"Experts" and "Selected Financial Data" in the prospectus.
KPMG LLP
Philadelphia, Pennsylvania
February 8, 1999
<PAGE>
Exhibit 99
RULE 134 EMAIL NOTICE, WIT CAPITAL MEMBERS
SUBJECT: IPO Alert: VerticalNet, Inc. available through Wit Capital
Wit Capital Corporation is pleased to announce that we are able to offer a
participation in the Initial Public Offering of VerticalNet, Inc., lead managed
by Lehman Brothers, as described below:
ISSUER: VerticalNet owns and operates 33 industry-specific communities of
commerce on the Internet. These vertical trade communities are
business-to-business Web sites that act as comprehensive sources of information,
interaction and electronic commerce--the buying and selling of goods and
services over the Internet.
SECURITY: Common Stock
EXPECTED SIZE OF OFFERING: 3,500,000
EXPECTED PRICE RANGE: $12.00 to $14.00
NASDAQ SYMBOL: VERT
MANAGING UNDERWRITERS: Lehman Brothers, Hambrecht & Quist, Volpe Brown Whelan
and Company and Wit Capital Corporation as e-Manager/TM/
If you think you may be interested in this Initial Public Offering available
through Wit Capital, please visit [hyperlink to Wit Capital Web site] or call
-----------------------------------
(888) 494-8227 x4427.
You can view, download and print the Preliminary Prospectus from a dedicated
section of Wit Capital's web site at [hyperlink to Wit Capital Web site]. You
-----------------------------------
may also obtain a prospectus by calling Wit Capital at the above number or
writing Wit Capital at: 826 Broadway, 6/th/ Floor, New York, NY 10003.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION 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 JURISDICTION IN WHICH SUCH
- ---------
* THROUGHOUT EXHIBIT, UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A
NAVIGATION BUTTON OR LINK TO ANOTHER SCREEN.
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE, AND ANY SUCH
OFFER MAY BE WITHDRAWN AND REVOKED WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND,
AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. AN
INDICATION OF INTEREST IN RESPONSE TO THIS ADVERTISEMENT WILL INVOLVE NO
OBLIGATION OR COMMITMENT OF ANY KIND.
Wit Capital Corporation is a Member NASD/SIPC
-1-
<PAGE>
RULE 134 EMAIL NOTICE, E-DEALER CUSTOMERS
SUBJECT: IPO Alert: VerticalNet, Inc. available through (e-Dealer name).
[e-Dealer name], in connection with Wit Capital Corporation acting as
e-Manager/TM/, is pleased to announce that we are able to offer a participation
in the Initial Public Offering of VerticalNet, Inc., lead managed by Lehman
Brothers, as described below:
ISSUER: VerticalNet owns and operates 33 industry-specific communities of
commerce on the Internet. These vertical trade communities are
business-to-business Web sites that act as comprehensive sources of information,
interaction and electronic commerce--the buying and selling of goods and
services over the Internet.
SECURITY: Common Stock
EXPECTED SIZE OF OFFERING: 3,500,000
EXPECTED PRICE RANGE: $12.00 to $14.00
NASDAQ SYMBOL: VERT
MANAGING UNDERWRITERS: Lehman Brothers, Hambrecht & Quist, Volpe Brown Whelan
and Company and Wit Capital Corporation as e-Manager/TM/
If you think you may be interested in this Initial Public Offering available
through [e-Dealer name], please visit [Hyperlink to e-Dealer Web site] or call
-------------------------------
[e-Dealer telephone number].
You can view, download and print the Preliminary Prospectus from a dedicated
section of [e-Dealer's] web site at [Hyperlink to e-Dealer Web site]. You may
-------------------------------
also obtain a prospectus by calling [e-Dealer name] at the above number or
writing [e-Dealer name] at [street and city address].
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION 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 JURISDICTION IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE, AND ANY SUCH
OFFER MAY BE WITHDRAWN AND REVOKED WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND,
AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. AN
INDICATION OF INTEREST IN RESPONSE TO THIS ADVERTISEMENT WILL INVOLVE NO
OBLIGATION OR COMMITMENT OF ANY KIND.
[e-Dealer name] is a Member NASD/SIPC
-2-
<PAGE>
RULE 134 EMAIL NOTICE, VETICALNET VISITORS/ USERS
SUBJECT: VerticalNet, Inc. IPO available through Wit Capital
Dear [Visitor/ User]:
VerticalNet, Inc., in connection with Wit Capital Corporation, is pleased to
announce that we are able to offer a participation in our Initial Public
Offering, lead managed by Lehman Brothers, as described below:
ISSUER: VerticalNet owns and operates 33 industry-specific communities of
commerce on the Internet. These vertical trade communities are
business-to-business Web sites that act as comprehensive sources of information,
interaction and electronic commerce--the buying and selling of goods and
services over the Internet.
SECURITY: Common Stock
EXPECTED SIZE OF OFFERING: 3,500,000
EXPECTED PRICE RANGE: $12.00 to $14.00
EXPECTED SYMBOL: VERT
MANAGING UNDERWRITERS: Lehman Brothers, Hambrecht & Quist, Volpe Brown Whelan
and Company and Wit Capital Corporation as e-Manager/TM/
The Underwriters, at the request of the Company, have reserved for sale at the
Initial Public Offering price up to [ x ] shares of common stock to visitors and
users of the Company's services or its Web site who express an interest in
purchasing such shares. If you think you may be interested in this Initial
Public Offering available through Wit Capital, please visit [Hyperlink to Wit
Capital Web site] or call (888) 494-8227 x4427. -------------------
- -----------------
You can view, download and print the Preliminary Prospectus from a dedicated
section of Wit Capital's web site at [Hyperlink to Wit Capital Web site]. You
-----------------------------------
may also obtain a prospectus by calling Wit Capital at the above number or
writing Wit Capital at: 826 Broadway, 6/th/ Floor, New York, NY 10003. To
purchase shares, you must first open an account, which can be done online.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION 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 JURISDICTION IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.
NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE, AND ANY SUCH
OFFER MAY BE WITHDRAWN AND REVOKED WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND,
AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. AN
INDICATION OF INTEREST IN RESPONSE TO THIS ADVERTISEMENT WILL INVOLVE NO
OBLIGATION OR COMMITMENT OF ANY KIND.
Wit Capital Corporation is a Member NASD/SIPC
-3-
<PAGE>
Text of Wit Capital/ e-Dealer Web site
(a) GATEWAY PAGE SCREEN SHOT - consists of a parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
-----------------------------------------------------------------
Contact Us, Mailing List./*/
-------------------------
. CHILD FRAME - the following text appears in the child frame:
. Initial Public Offering for VerticalNet, Inc.
. Issuer Logo
. Get Preliminary Prospectus, Place Conditional Offer, Open Account
-------------------------- ----------------------- ------------
. Expected Size of Offering: 3,500,000
. Expected Price Range: $12.00 to $14.00
. Managing Underwriters: Lehman Brothers
Hambrecht & Quist
Volpe Brown Whelan & Company
Wit Capital Corporation as e-Manager/TM/
. Summary:
VerticalNet owns and operates 33 industry-specific communities of
commerce on the Internet. These vertical trade communities are
business-to-business Web sites that act as comprehensive sources
of information, interaction and electronic commerce--the buying
and selling of goods and services over the Internet.
. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME
EFFECTIVE. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE
ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS COMMUNICATION SHALL NOT
- ----------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY,
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH
JURISDICTION.
. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE
PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT
BECOMES EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN AND REVOKED
WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO
NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. AN
INDICATION OF INTEREST IN RESPONSE TO THIS ADVERTISEMENT WILL INVOLVE
NO OBLIGATION OR COMMITMENT OF ANY KIND.
-4-
<PAGE>
(b) REGISTRATION - STEP 1 PAGE SCREEN SHOT - E-DEALER SITE ONLY- consists of a
parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
------- -- -------------
. CHILD FRAME - the following text appears in the child frame:
. REGISTRATION - Step One
. (If Client has not yet been required to enter a username and
password)
. To view the VerticalNet, Inc. preliminary prospectus at no
charge, please enter your username and password below. Remember, to
view a prospectus or to submit a request to buy shares, you must
already have opened an account.
. Interactive dialogue boxes appear requiring the user to enter
his/her "Username" and "Password."
. Two command buttons appear allowing the user to "Submit" or "Reset"
the information entered.
. Rules and Procedures, FAQs, Contact Us, Mailing List
-------------------- ---- ---------- ------------
- ------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-5-
<PAGE>
(c) REGISTRATION - STEP 2 PAGE SCREEN SHOT - E-DEALER SITE ONLY- consists of a
parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ----------------
. CHILD FRAME - the following text appears in the child frame:
. REGISTRATION - Step Two
. In order to keep our records updated, please answer the following
questions: After completing the information below, click the submit
button.
. These securities may not be sole nor may offers to buy be accepted
from anyone other than United States Nationals or Residents.
. 1. Are you a United States National or Resident? Yes [_] No [_]
. In addition, (b/d) will not distribute the prospectus outside of
the United States.
. 2. Are you currently in the United States? Yes [_] No [_]
. 3. Do you hold any NASD licenses? Yes [_] No [_]
. If you (or any member of your immediate family, or any business
entity with which you are affiliated, or any account in which you
have a beneficial interest) are an officer, director, general
partner, employee or agent of a member firm, or a stock exchange or
the National Association of Securities Dealers, or you are
associated with, have an affiliation with or have contributed
capital to a broker/dealer, you must disclose below. Or if you (or
a member of your household or immediate family) are a senior
officer of a bank, savings and loan institution, insurance company,
investment company, investment advisor or other similar
institution, or are an employee of the securities department of
such institution, you must disclose below.
- -----------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-6-
<PAGE>
. 4. Stock Exchange [_] NASD [_] Bank [_] Insurance Company [_]
Investment Advisor [_]
. Company Name: followed by interactive dialogue box allowing user to
enter a response.
. In order to participate in new issues of securities, your objective
must allow for speculation. Speculative investments are risky and are
not appropriate for everyone. You should assess whether such
investments are suitable for you.
. 5. Do your investment objectives allow for speculation? Yes [_] No [_]
-7-
<PAGE>
(d) REGISTRATION PAGE SCREEN SHOT - consists of a parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ----------------
. CHILD FRAME - the following text appears in the child frame:
. REGISTRATION
. In order to continue, simply complete the required information
below and click submit. Remember, to place a conditional offer with
Wit Capital, you must first open an account with Wit Capital.
. Required:
. Please enter your e-mail address: followed by an interactive
dialogue box allowing the user to enter a response.
. If you are not a member, please answer these optional questions as
well.
. The user is asked to enter his/her first name, last name, day time
phone, evening phone and state via interactive dialogue boxes.
. Two command buttons appear allowing the user to "submit" or "Reset"
the information entered.
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
- --------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-8-
<PAGE>
(e) REQUIRED INFORMATION PAGE SCREEN SHOT - consists of a parent frame and
child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ----------------
. CHILD FRAME - the following text appears in the child frame:
. REQUIRED INFORMATION
. You did not provide an answer for all of the required fields. Use
your back button to return to the registration page and complete all
----
required fields. Please contact [email protected] for more information.
-----------
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
- ------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-9-
<PAGE>
(f) SECURITIES LAW DOES NOT PERMIT PAGE SCREEN SHOT - consists of a parent frame
and child frame
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ----------------
. CHILD FRAME - the following text appears in the child frame:
. Securities Law Does Not Permit
. We're sorry. Due to (Foreign securities laws) we are not permitted to
give you access to the prospectus. Please contact [email protected] for
-----------
more information.
. (OR)
. Affiliation Does Not Permit
. We're sorry. Due to (affiliation requirements) we are not permitted
to give you access to the prospectus. Please contact [email protected] for
-----------
more information.
. (OR)
. Suitability Does Not Permit
. We're sorry. Due to (suitability requirements) we are not permitted
to give you access to the prospectus. Please contact [email protected] for
-----------
more information.
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
- -------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-10-
<PAGE>
(g) PROSPECTUS LINKS PAGE SCREEN SHOT - consists of a parent frame and child
frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List.*/
---------- ---------------
. CHILD FRAME - the following text appears in the child frame:
. VerticalNet, Inc. Logo
IF YOU ARE INTERESTED IN THIS OFFERING, YOU SHOULD READ THE
PRELIMINARY PROSPECTUS BEFORE PLACING A CONDITIONAL OFFER.
. Please choose from the following:
1. Download the preliminary prospectus. (To open the PDF version
you will need to download Adobe Acrobat Reader.
--------------------
. PDF Prospectus - [ ]
---------------
. HTML Prospectus - [ ]
---------------
2. Place Conditional Offer.
-----------------------
3. Open an account.
---------------
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
- ---------------------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-11-
<PAGE>
(h) PROSPECTUS PAGE SCREEN SHOT - consists of a parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
---------------- ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ----------------
. CHILD FRAME - the following text appears in the child frame:
[VerticalNet, Inc. prospectus]
- ---------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-12-
<PAGE>
(i) OPEN AN ACCOUNT - STEP 1 PAGE SCREEN SHOT - consists of a parent frame and
child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ---------------
. CHILD FRAME - the following text appears in the child frame:
. Open An Account
. Three Easy Choices:
. Please read the following choices and select the one that best suits
you.
. [graphic of two computers] 1. Apply Online. This is the fastest way
------------
to open your account. If you open an individual account you may
immediately enter a Conditional Offer to buy a new issue. We recommend
this option for those using Netscape 3.0 or higher or Microsoft
1.E.4.0 or higher and are familiar with their use.
. [graphic of pen and clipboard] 2. Print Application. Use this option
-----------------
if you would prefer to fill out the application by hand. An account
application may be printed from our site and mailed back to Wit
Capital.
. [graphic of telephone] 3. Over the Telephone. You may call a Wit
------------------
Capital representative at 1-888-4WITCAP (888-494-8227) to open your
account over the telephone between the hours of 8:30 a.m.-7:00 p.m.
Monday through Friday.
. Non U.S. Residents:
. Please follow either choice 2, or 3.
. Rules & Procedures, FAQ's, Contact Us, Mailing List
------------------ ----- ---------- ------------
- -------------------------------
*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-13-
<PAGE>
(j) OPEN AN ACCOUNT -STEP 2 PAGE SCREEN SHOT - consists of a parent frame and
child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ------------
. CHILD FRAME - the following text appears in the child frame:
. Open An Account
. If you live in the United States, you should complete a customized
online account application that starts on this screen. The process is
straight forward. Just follow the directions.
. Step 1 - Account Registration.
. Select how you would like your account registered. The most common
registration types are individual, Joint Tenants with Rights of
Survivorship, and IRA's. For descriptions of these and other
registration types visit Types of Account Registrations.
------------------------------
. A drop down dialogue box appears displaying the types of accounts.
. Step 2 - Account Type
. Indicate whether you want to open a cash account or a margin account.
A cash account enables you to buy or sell securities on a cash basis.
A margin account gives you the option to buy or sell on a cash basis
or borrow funds using your marginable securities or cash as
collateral.
. A drop down dialogue box appears displaying the types of accounts.
. Step 3 - State of Residence
- -------------------------------
/*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-14-
<PAGE>
. Specify your state of residence. If you are a non U.S. resident
please indicate so below.
. A drop down dialog box appears allowing the user to enter his/her
state of residency or other.
. Step 4 - Preliminary Data
. Check all of the following that apply:
. [ ] I would like to authorize someone else to trade on my account.
. [ ] I am not a permanent resident or citizen of U.S.A.
. [ ] I would like to fund my account by transferring funds or
securities from another existing brokerage account.
. Command button allowing the user to "continue".
. Step 5 - Primary Data
. Provide all of the following information. Optional data is indicated
as such.
. Account Information
. The user (account owner) is required to enter his/her title, first
name, middle initial, last name, date of birth, social security
number, marital status, number of dependants, daytime phone, evening
phone, e-mail address, gender, legal address, city, state, zip code,
mailing address, city, state, zip code via interactive dialogue boxes.
. Citizenship
. Are you a U.S. Citizen? Yes [ ] No [ ]
. If you are not a U.S. Citizen, answer the following questions.
. Please specify country of citizenship:
. A drop down dialogue box appears allowing the user to enter his/her
country of citizenship.
. And enter passport number:
-15-
<PAGE>
. A drop down dialogue box appears allowing the user to enter his/her
passport number.
. Also enter country that issued passport
. A drop down dialogue box appears allowing the user to enter the name
of the country issuing his/her passport.
. Are you a non-resident alien? Yes [ ] No [ ]
. Financial Information
. Annual Income: followed by a drop down dialogue box.
. Liquid Net Worth: followed by a drop down dialogue box
. Net Worth Excluding Home: followed by a drop down dialogue box
. Estimated Tax Bracket: followed by a drop down dialogue box
. Accredited Investor Information
. To participate in private placements you must be an Accredited
Investor. To establish your status as an Accredited Investor complete
the following:
. Do you and your spouse have a combined net worth of $1,000,000 or
more?
. Yes [ ] No [ ]
. For each of the past two years has your annual income been greater
than or equal to $200,000 or has the combined annual income of you and
your spouse been greater than or equal to $300,000?
. Yes [ ] No [ ]
. Do you anticipate your income will continue at that level?
. Yes [ ] No [ ]
. Employment/Occupational Information
-16-
<PAGE>
. The user is required to enter his/her employer name, employment
status, position/title, years employed, type of business; employer
street address, city, state and zip code via interactive dialogue
boxes.
. Affiliation Status
. Are you (or a member of your household or if a business entity anyone
affiliated with you) a director, 10% shareholder, or policy-making
officer of a publicly traded company?
. A drop down dialogue box appears allowing the user to enter response.
. If YES, please specify the Company Symbol:
. A drop down dialogue box appears allowing the user to enter response.
. Do you (or a member of your household or if a business entity anyone
affiliated with you) have an affiliation with, or work for, a member
firm of a stock exchange or the National Association of Securities
Dealers, Inc.? Or, are you (or a member of your household or immediate
family) a senior officer of a bank, trust or insurance company, or
other similar institution, or an employee of the securities department
of such institution?
. If YES, please specify the firm or company:
. A drop down dialogue box appears allowing the user to enter response.
. Do you hold any NASD Licenses: Yes [_] No [_]
. Money Fund Instructions
. Designate which Money Market fund you wish to use for your uninvested
cash:
. An Alliance Money Market Prospectus is available for each fund. You
must read this prospectus before investing. We suggest you also
download or print a copy after you complete this application and
retain it for your records. PLEASE READ IT CAREFULLY before you
invest.
. Banking Reference Information
. The user is required to enter his/her bank and branch name, account
number and bank state via interactive dialogue boxes.
-17-
<PAGE>
. Investing Experience
. Indicate how many years of prior trading or investing experience you
have with each of the following.
. Certificate of Deposit: followed by an interactive dialogue box
allowing the user to enter a response.
. Mutual Funds: followed by an interactive dialogue box allowing the
user to enter a response.
. Stocks: followed by an interactive dialogue box allowing the user to
enter a response.
. Bonds: followed by an interactive dialogue box allowing the user to
enter a response.
. Options: followed by an interactive dialogue box allowing the user to
enter a response.
. Limited Partnerships: followed by an interactive dialogue box
allowing the user to enter a response.
. Futures: followed by an interactive dialogue box allowing the user to
enter a response.
. Investment Objectives
. What are your Investment Objectives? You may check all that apply.
. Growth: followed by an interactive dialogue box allowing the user to
enter a response.
. Current Income: followed by an interactive dialogue box allowing the
user to enter a response.
. Tax Deferral: followed by an interactive dialogue box allowing the
user to enter a response.
. Liquidity: followed by an interactive dialogue box allowing the user
to enter a response.
-18-
<PAGE>
. Credit Preferences: followed by a drop down dialogue box allowing the
user to enter a response.
. In order to participate in new issues of securities, your objectives
must allow for speculation. Speculative investments are risky and are
not appropriate for everyone. You should assess whether such
investments are suitable for you. Do your investment objectives allow
for speculation?
. Yes [_] No [_]
. Duplicate Confirmations/Statements
. Complete this section if you want duplicate confirmations/statements
sent to a third party. If you have any affiliation with, or work for,
a member firm of a stock exchange or the NASD, or a bank, trust, or
insurance company, you must complete this section so that duplicate
confirmations/statements can be sent to your firm. Confirmations to
member NASD firms are free. Duplicate confirmations/statements are
free so long as your recipient's e-mail address has been provided.
. The user is asked to enter the individual name/NASD firm name, mailing
address, city, state, zip code and e-mail via interactive dialogue
boxes.
. Optional Information
. How did you hear about Wit Capital? Followed by a drop down dialogue
box.
. If other please specify. Followed by an interactive dialogue box.
. Which brokerage firm holds the largest portion of your assets?
Followed by an interactive dialogue box.
. Which brokerage firm handles most of your trades? Followed by an
interactive dialogue box.
. Please indicate your modem speed at the location where you most often
conduct your online investing. Followed by an interactive dialogue
box.
. "Continue" command button.
-19-
<PAGE>
(j1) PRE-CONDITIONAL OFFER PAGE SCREEN SHOT - consists of a parent frame and
child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation
buttons for Open Account, Place Conditional Offer, Rules & Procedures,
------------ ----------------------- ------------------
FAQ's, Contact Us, Mailing List.*/
------ ---------- ------------
CHILD FRAME - the following text appears in the child frame:
. IF YOU ARE INTERESTED IN THIS OFFERING, YOU SHOULD READ THE
PRELIMINARY PROSPECTUS BEFORE PLACING A CONDITIONAL OFFER.
. I hereby acknowledge that a preliminary prospectus for this offering
has been made available to me for downloading and viewing on this Web
site.
. I hereby affirm my authorization for Wit Capital to deliver certain
communications electronically via email as outlined in section 2 of the
Customer Account Agreement.
--------------------------
(k) CONDITIONAL OFFER PAGE SCREEN SHOT - consists of a parent frame and child
frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
---------------- ----------------------- ------------------ -----
Contact Us, Mailing List.*/
---------- -------------
. CHILD FRAME - the following text appears in the child frame:
. IPO CONDITIONAL OFFER
. Issuer: -VERT-
. I'd like to place a Conditional Offer for the following number of
shares: followed by an interactive dialogue box.
. The user may choose from:
. At the offering price [ ]
. or
. Limit Price [ ]: followed by an interactive dialogue box allowing the
user to enter a price
. Two command buttons allowing the user to "Submit Offer" or "Clear
Offer"
. This order is based on my review of the most current version of the
-VERT- preliminary prospectus as linked.
----------------------
. No offer to buy the securities can be accepted and no part of the
purchase price can be received until the registration statement has
become effective, and any such offer may be withdrawn or revoked,
without obligation or commitment of any kind, at any time prior to
notice of its acceptance given after the effective date.
- -----------------------------
*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-20-
<PAGE>
(l) GATEWAY PAGE SCREEN SHOT - consists of a parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
---------------- ----------------------- ------------------ -----
Contact Us, Mailing List.*/
---------- ------------
. CHILD FRAME - the following text appears in the child frame:
. [X] RULES AND PROCEDURES
. PURCHASING NEW ISSUES
. . Types of new issues
-------------------
. Risks and suitability
---------------------
. Initial Public Offerings
------------------------
. Viewing offering materials
--------------------------
. Entering Conditional Offers
---------------------------
. Changing or canceling Conditional Offers
----------------------------------------
. Blue Sky and foreign securities laws
------------------------------------
. Buying limits
-------------
. Funding deadlines
-----------------
. Re-circulations
---------------
. Allocations
-----------
. Flippers will lose priority
---------------------------
. Affinity groups may gain priority
---------------------------------
. Confirmation of purchase
------------------------
. Final prospectus delivery
-------------------------
. Secondary and Follow-On Offerings
---------------------------------
. Viewing offering materials
--------------------------
. Entering Conditional Offers
---------------------------
. Changing or canceling Conditional Offers
----------------------------------------
. Blue Sky and foreign securities laws
------------------------------------
. Buying limits
-------------
. Funding deadlines
-----------------
. Re-circulations
---------------
. Allocations
-----------
. Flippers will lose priority
---------------------------
. Affinity groups may gain priority
---------------------------------
--------------------------------
*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR LINK
TO ANOTHER SCREEN.
-21-
<PAGE>
. Confirmation of purchase
------------------------
. Final prospectus
----------------
. Wit Capital does not provide tax, legal, or accounting advice and
does not recommend the suitability of any investment or investment
strategy. You assume full responsibility for all of your investment
decisions.
. Types of New Issues. Wit Capital offers its Members opportunities
to participate in new issues of securities, including:
. Initial Public Offerings. A new issue in which an issuer sells
shares to an underwriter who, in turn, resells to investors at the
offering price. Typically, the shares begin trading immediately on a
national market such as NASDAQ or the New York Stock Exchange. The
first time a company sells stock that trades publicly is called an
Initial Public Offering or IPO.
. Secondary, Follow-On and Combination Offerings. The public sale by
shareholders of previously issued securities that are already
trading publicly is called a Secondary Offering. The public sale by
an issuer of newly issued securities by a company which already has
publicly traded securities is called a Follow-On Offering.
Frequently offerings have both a primary (Follow-On) and secondary
component. These offerings are known as Combination Offerings. In
underwritten Secondary, Follow-On and Combination Offerings, a
selling shareholder(s) and/or corporate issuer sells securities to
an underwriter who, in turn, resells the securities to investors at
the offering price.
. Risks and Suitability: Investing in new issues is speculative and
highly risky and is only appropriate for certain investors. Members
assume full responsibility for determining whether any new issue is
appropriate for them.
. Initial Public Offerings.
. Viewing offering materials. Initial Public Offerings are offered and
sold by way of an official offering document called a prospectus.
The prospectus is filed with federal and state securities regulators
as part of the registration statement which must be declared
effective prior to the issue.
. After the prospectus has been filed but before the offering is
declared effective, offers to sell the securities can be made using
a preliminary prospectus or "red herring." The preliminary
prospectus generally indicates a range of prices within which the
issue is expected to be made. Issues typically also prepare roadshow
presentations during the period when the preliminary prospectus is
pending.
-22-
<PAGE>
. In each public offering in which Wit Capital participates as an
underwriter, Members may view an online copy of the preliminary
prospectus together with any roadshow material made available by the
issuer. Guest Users may also view this material if they first
provide some basic personal information and an e-mail address.
. Entering Conditional Offers. If you are a Member, during the
period when the preliminary prospectus is pending, you will be able
to enter "Conditional Offers" to purchase securities when and if
issued. Conditional Offers are in effect conditional offers to
purchase securities. These offers cannot be accepted until the
registration statement for the offering has been declared effective
by the Securities and Exchange Commission. Upon the registration
statement being declared effective by the Securities and Exchange
Commission, we will contact you by e-mail or telephone to notify you
of the effectiveness of the registration statement. YOU WILL THEN
NEED TO RESPOND TO US ON THE DATE THAT WE CONTACT YOU AND REAFFIRM
YOUR PREVIOUSLY SUBMITTED CONDITIONAL
OFFER. IF YOU FAIL TO REAFFIRM YOUR PREVIOUS OFFER, WE MAY NOT BE
ABLE TO INCLUDE YOU IN THE OFFERING. Please note that if there are
not enough shares for all customers who have placed conditional
offers, you may not have the opportunity to affirmatively confirm
your conditional offer or, if you do affirmatively confirm your
conditional offer, we may not be able to offer you shares in the
offering.
. Conditional Offers may be entered as "limit orders" which means that
you are willing to purchase the securities at up to a particular
price. Alternatively, Conditional Offers may be entered "at the
offering price" which means that you are willing to purchase
securities at the price at which the issue is made (so long as it is
within the range specified in the preliminary prospectus.)
. To enter a Conditional Offer, follow these steps:
. Complete the Conditional Offer form that appears, specifying the
number of shares, the type of order and for limit orders, the price.
. Click on the review button to review your offer. Once you have
reviewed it, click on the submit conditional offer button to
transmit it to Wit Capital.
. Wait until your Conditional Offer has been received. You will be
notified of its receipt by an acknowledgement message on your
screen. Your Conditional Offer will also appear as an open order in
your account.
. Canceling or changing Conditional Offers. To cancel or modify
Conditional Offers, simply go to your Open Orders page, which
appears in the Manage My
-23-
<PAGE>
Account section of our main website. Look for the Conditional Offer
and click either of the buttons next to it marked Change or Cancel.
. Blue Sky and foreign securities laws. Conditional Offers will be
accepted only from Members residing in jurisdictions where the
offering has been registered under local securities laws or where
such registration is not required. Not all offerings are registered
in every state or available in every country and therefore not every
Member will be eligible to participate in every public offering.
. Buying limits. For our mutual protection, Wit Capital may set limits
on the amount or proportion of investments you can make in
speculative securities including Initial Public Offerings. Although
Wit Capital reserves the right to reject or cancel your Conditional
Offers at any time and without notice, generally you will receive
notice of any rejection or cancellation.
. Funding deadlines. Conditional Offers may be entered as soon as a
preliminary prospectus has been posted, without available funds in
your account. However if you do not have on deposit $1,000 (which is
the minimum account balance for all trades with Wit Capital) as of
the time immediately after the registration statement has been
declared effective, Wit Capital may cancel your Conditional Offer
and/or your priority. The full amount of the purchase price must be
paid by the settlement date.
. Initial Public Offerings must be purchased in the cash portion of
your account.
. Re-circulations. On occasion, an amended prospectus is prepared
during the public offering process that contains material changes to
the information provided in the preliminary prospectus. In these
cases, a revised preliminary prospectus must be circulated to buyers
in the offering.
. In the event of re-circulations, Members who have entered
Conditional Offers will be sent an e-mail message directing them to
a site on the World Wide Web where a copy of the amended preliminary
prospectus is posted. From the site the amended preliminary
prospectus can be read and printed or downloaded. As agreed by each
Member in the customer agreement governing all Wit Capital accounts,
such delivery shall constitute good and effective delivery of the
amended preliminary prospectus whether or not you follow the
instructions and actually access the new prospectus via the Web.
. Allocations. Wit Capital's general rule of allocation is first-
come first-served, and our proprietary electronic order book has
been designed to record the time and date of each Conditional Offer.
Generally, Members submitting Conditional
-24-
<PAGE>
Offers first will have priority over those who submit them later,
subject to minimum and maximum limits that will be set on a deal by
deal basis.
. There are, however, two important exceptions to the first-come
first-served allocation principle:
. Flippers will lose priority. Members who have track records for
buying public offering shares and holding them for at least 60 days
will have priority over Members who do not have such records. Thus,
Wit Capital shall attempt to penalize "flippers" by reducing their
likelihood of obtaining shares in subsequent public offerings.
. To enforce this anti-flipping policy, Wit Capital will maintain for
each Member a rating score that tracks their record for buying and
holding public offering shares. Members will score positive points
based on the number of Initial Public Offering shares purchased and
held. If you sell these shares, or transfer them out of your
account, within 60 days, then you will score negative points.
. Affinity groups may gain priority. In certain offerings, Wit Capital
may agree with an issuer to favor Members who are also customers or
employees of the issuer or who have some other preexisting
relationship with the issuer. In these transactions general Members
will be able to purchase after shares are allocated to the Members
who are also part of the issuer's affinity group.
. Wit Capital reserves the right to allocate shares on any basis or to
change its method of allocating shares at any time and without
notice, and Members should not expect that entering a Conditional
Offer in any way entities them to purchase any securities.
. Confirmation of purchase. On the new issue date, Members whose
Conditional Offers have been accepted and who have reaffirmed their
Conditional Offers by telephone or e-mail will receive by e-mail a
confirmation specifying the number of shares purchased and the issue
price. The shares will automatically be deposited into your account.
. If you did not receive shares in the allocation, then you will
receive by e-mail a message indicating that your Conditional Offer
has been cancelled.
. Final prospectus delivery. Members whose Conditional Offers are
accepted will also receive an e-mail message directing them to a
site on the World Wide Web where a final prospectus is posted. From
the site the final prospectus can be read and printed or downloaded.
As agreed by each Member in the customer agreement governing all Wit
Capital accounts, such delivery shall constitute good
-25-
<PAGE>
and effective delivery of the final prospectus whether or not you
follow the instructions and actually access the final prospectus via
the Web. Federal and state securities laws require delivery of the
final prospectus.
. Secondary, Follow-On and Combination Offerings.
. Viewing offering materials. Registered Secondary, Follow-On and
Combination Offerings are offered and sold by way of an official
offering document called a prospectus. The prospectus is filed with
federal and state securities regulators unless exempt from such
requirements as part of the registration statement which must be
declared effective prior to the issue.
. After the prospectus has been filed but before the offering is
declared effective, offers to sell the securities can be made using
a preliminary prospectus or "red herring." The preliminary
prospectus generally indicates the last sale price of the security
prior to the filing of the registration statement. Issuers typically
also prepare roadshow presentations during the period when the
preliminary prospectus is pending.
. In each Secondary, Follow-On and Combination Offering in which Wit
Capital participates as an underwriter, Members may view an online
copy of the preliminary prospectus together with any roadshow
material made available by the issuer. Guest Users may also view
this material if they first provide some basic personal information
and an e-mail address.
. Entering Conditional Offers. If you are a Member, during the period
when the preliminary prospectus is pending, you will be able to
enter "Conditional Offers" to purchase securities when and if
issued. Conditional Offers are in effect conditional offers to
purchase securities. These offers cannot be accepted until the
registration statement for the offering has been declared effective
by the Securities and Exchange Commission. Upon the registration
statement being declared effective by the Securities and Exchange
Commission, we will contact you by e-mail or telephone to notify you
of the effectiveness of the registration statement. YOU WILL THEN
NEED TO RESPOND TO US ON THE DATE THAT WE CONTACT YOU AND REAFFIRM
YOUR PREVIOUSLY SUBMITTED CONDITIONAL OFFER. IF YOU FAIL TO REAFFIRM
YOUR PREVIOUS OFFER, WE MAY NOT BE ABLE TO INCLUDE YOU IN THE
OFFERING. Please note that if there are not enough shares for all
customers who have placed conditional offers, you may not have the
opportunity to affirmatively confirm your conditional offer or, if
you do affirmatively confirm your conditional offer, we may not be
able to offer you shares in the offering.
-26-
<PAGE>
. You shall be entitled to cancel any Conditional Offer at any time
prior to such time as you are sent notice that the Time of
Effectiveness has occurred and your offer has been accepted.
. Conditional Offers may be entered as "limit orders" which means that
you are willing to purchase the securities at up to a particular
price. Alternatively, Conditional Offers may be entered "at the
offering price" which means that you are willing to purchase
securities at the price at which the issue is made. For Secondary,
Follow-On and Combination Offerings, typically the offering price is
subject to market conditions and frequently is in close proximity to
the last sale price of the security in its principle trading market
prior to the pricing terms of the offering being set.
. To enter a Conditional Offer, follow these steps:
. Complete the Conditional Offer form that appears, specifying the
number of shares, the type of order and for limit orders, the price.
. Click on the review button to review your offer. Once you have
reviewed it, click on the submit conditional offer button to
transmit it to Wit Capital.
. Wait until your Conditional Offer has been received. You will be
notified of its receipt by an acknowledgement message on your
screen. Your Conditional Offer will also appear as an open order in
your account.
. Canceling or changing Conditional Offers. To cancel or modify
Conditional Offers, simply go to your Open Orders page, which
appears in the Manage My Account section of our main website. Look
for the Conditional Offer and click either of the buttons next to it
marked Change or Cancel.
. Blue Sky and foreign securities laws. Conditional Offers will be
accepted only from Members residing in jurisdictions where the
offering has been registered under local securities laws or where
such registration is not required. Not all offerings are registered
in every state or available in every country and therefore not every
Member will be eligible to participate in every Secondary, Follow-On
and Combination Offering.
. Buying limits. For our mutual protection, Wit Capital may set limits
on the amount or proportion of investments you can make in
speculative securities including Secondary, Follow-On and
Combination Offerings. Although Wit Capital reserves the right to
reject or cancel your Conditional Offers at any time and without
notice, generally you will receive notice of any rejection or
cancellation.
-27-
<PAGE>
. Funding deadlines. Conditional Offers may be entered as soon as a
preliminary prospectus has been posted, without available funds in
your account. However if you do not have on deposit $1,000 (which is
the minimum account balance for all trades with Wit Capital) as of
the time immediately after the registration statement has been
declared effective, Wit Capital may cancel your Conditional Offer
and/or your priority. The full amount of the purchase price must be
paid by the settlement date.
. Secondary, Follow-On and Combination Offerings generally must be
purchased in the cash portion of your account.
. Re-circulations. On occasion, an amended prospectus is prepared
during the public offering process that contains material changes to
the information provided in the preliminary prospectus. In these
cases, a revised preliminary prospectus must be circulated to buyers
in the offering.
. In the event of re-circulations, Members who have entered
Conditional Offers will be sent an e-mail message directing them to
a site on the World Wide Web where a copy of the amended preliminary
prospectus is posted. From the site the amended preliminary
prospectus can be read and printed or downloaded. As agreed by each
Member in the customer agreement governing all Wit Capital accounts,
such delivery shall constitute good and effective delivery of the
amended preliminary prospectus whether or not you follow the
instructions and actually access the new prospectus via the Web.
. Allocations. Wit Capital's general rule of allocation is first-come
first-served, and our proprietary electronic order book has been
designed to record the time and date of each Conditional Offer.
Generally, Members submitting Conditional Offers first will have
priority over those who submit them later, subject to minimum and
maximum limits that will be set on a deal by deal basis.
. There are, however, two important exceptions to the first-come
first-served allocation principle:
. Flippers will lose priority. Members who have track records for
buying Secondary, Follow-On and Combination offerings and holding
them for at least 30 days will have priority over Members who do not
have such records. Thus, Wit Capital shall attempt to penalize
"flippers" by reducing their likelihood of obtaining shares in
subsequent public offerings.
. To enforce this anti-flipping policy, Wit Capital will maintain for
each Member a rating score that tracks their record for buying and
holding public offering shares. Members will score positive points
based on the number of public offering shares
-28-
<PAGE>
purchased and held. If you sell these shares, or transfer them out
of your account, within 30 days (60 days for Initial Public
Offerings), then you will score negative points.
. Affinity groups may gain priority. In certain offerings, Wit Capital
may agree with an issuer to favor Members who are also customers or
employees of the issuer or who have some other preexisting
relationship with the issuer. In these transactions general Members
will be able to purchase after shares are allocated to the Members
who are also part of the issuer's affinity group.
. Wit Capital reserves the right to allocate shares on any basis or to
change its method of allocating shares at any time and without
notice, and Members should not expect that entering a Conditional
Offer in any way entitles them to purchase any securities.
. Confirmation of purchase. On the new issue date, Members whose
Conditional Offers have been accepted and who have reaffirmed their
Conditional Offers by telephone or e-mail will receive by e-mail a
confirmation specifying the number of shares purchased and the issue
price. The shares will automatically be deposited into your account.
. Final prospectus delivery. Members whose Conditional Offers are
accepted will also receive an e-mail message directing them to a
site on the World Wide Web where a final prospectus is posted. From
the site the final prospectus can be read and printed or downloaded.
As agreed by each Member in the customer agreement governing all Wit
Capital accounts, such delivery shall constitute good and effective
delivery of the final prospectus whether or not you follow the
instructions and actually access the final prospectus via the Web.
Federal and state securities laws require delivery of the final
prospectus.
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
-29-
<PAGE>
(m) FREQUENTLY ASKED QUESTIONS (FAQS) PAGE SCREEN SHOT - consists of a parent
frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
------------------------
. CHILD FRAME - the following text appears in the child frame:
. FAQs
. Initial Public Offerings
. 1. What is an Initial Public Offering?
----------------------------------
. 2. Why are individual investors often excluded from traditional IPOS?
-----------------------------------------------------------------
. 3. What is the process for subscribing to a Wit Capital IPO?
--------------------------------------------------------
. 4. How can I learn more about the companies being issued?
-----------------------------------------------------
. 5. What happens if there are not enough shares to meet demand?
----------------------------------------------------------
. 6. How long should I hold shares I purchase in an IPO?
--------------------------------------------------
. Secondary, Follow-On and Combination Offerings
. 1. What is a Secondary Offering?
----------------------------
. 2. What is a Follow-On Offering?
----------------------------
. 3. What is a Combination Offering?
------------------------------
. 4. Why are individual investors often excluded from traditional
------------------------------------------------------------
Secondary, Follow-On and Combination Offerings?
----------------------------------------------
. 5. What is the process for subscribing to a Wit Capital Secondary,
--------------------------------------------------------------
Follow-On or Combination Offering?
---------------------------------
. 6. How can I learn more about the companies being issued?
-----------------------------------------------------
. 7. What happens if there are not enough shares to meet demand?
----------------------------------------------------------
. 8. How long should I hold shares I purchase in a Secondary, Follow-On
------------------------------------------------------------------
or Combination Offering?
-----------------------
. Q. What is an Initial Public Offering?
- ------------------------------
*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-30-
<PAGE>
. A. An IPO is a corporation's first offering of a security
representing shares of the company to the public. Growing companies
typically use IPOs to raise capital for future business expansion.
Generally, an underwriter prepays the issuer for its stock and then goes
----------- ------
to the public market to sell it.
. Q. Why are individual investors often excluded from traditional
IPOs?
. A. Shares sold in a traditional IPO are generally marketed to, and
reserved for, institutional investors and their preferred customers. A
Wit Capital IPO however, gives Members equal opportunity to buy stock in
emerging growth companies at the offering price.
. Q. What is the process for subscribing to a Wit Capital IPO?
. A. When you become a Member, you'll receive an e-mail message
---------------
notifying you whenever a new preliminary prospectus is posted on our web
----------------------
site. After you review the prospectus, you may enter a Conditional Offer
if you want to subscribe. You will need to affirmatively confirm your
conditional offer to buy after the registration statement for the
offering has been declared effective. This is described in more detail
under Rules and Procedures. If you do not have on deposit $1,000 (which
--------------------
is the minimum account balance for all trades with Wit Capital) as of the
time immediately after the registration statement for the offering has
been declared effective, Wit Capital may cancel your Conditional Offer
-----------------
and/or your priority. You will be notified by e-mail on the pricing date
if you have received shares in an offering. Full payment of the purchase
price is due on the settlement date for the initial public offering.
. Q. How can I learn more about the companies being issued?
. A. The first step to learning about a potential investment is to
review the issuing company's preliminary prospectus or "red herring".
----------------------
These documents, which have been submitted to the SEC, are available for
all Wit Capital Public Offerings online at the Wit Capital web site. A
company's prospectus includes company background information, financial
data and specifics about the offering. Prospectuses can either be viewed
online or downloaded.
. Q. What happens if there are not enough shares to meet demand?
. A. Wit Capital's general rule of allocation will be first-come
first-served. That means that no special preferences will be made to
reward special
-31-
<PAGE>
customers or big accounts. This is the cornerstone of a fair system, and
Wit Capital is committed above all else to fair treatment of its Members.
News of each offering will be simultaneously e-mailed to all
Members, and Wit Capital's proprietary electronic order book will
record the time and date of each Member's Conditional Offer.
-----------------
Generally, Members submitting Conditional Offers first will have
priority over those who submit later.
. Q. How long should I hold shares I purchase in an IPO?
. A. As long as you believe that it is in your interest to hold them.
Members who have track records
for buying IPO shares and holding them in their account beyond 60
days will have priority in future IPO share allocations over
Members who do not, although the general rule of allocation will
----------
be first-come first-served.
To encourage this buy-and-hold approach, Wit Capital will
maintain for each Member a rating score that tracks their record
for buying and holding public offering shares. When you buy an
IPO issue, you score positive points based on the number of
shares purchased. If you then sell the shares within 60 days, or
transfer the shares out of your account, then you score negative
points.
. Q. What is a Secondary Offering?
. A. A Secondary Offering is the public sale by shareholders of
previously issued securities that are already trading publicly.
In underwritten Secondary Offerings, a selling shareholder or
corporate issuer sells securities to an underwriter who, in turn,
-----------
resells the securities to investors at the offering price.
Registered Secondary Offerings are priced in negotiations between
the selling shareholder(s), issuer and the representative(s) of
------
the underwriter(s) taking into account the representative(s)
assessment of demand for the securities. Typically these
offerings are priced in close proximity to the last sale price of
the security in its principal trading market prior to the pricing
terms of the offering being set.
Typically, the offering shares begin trading on a stock exchange
or "over-the-counter" through the NASDAQ stock market shortly
after the pricing terms have been set.
-32-
<PAGE>
. Q. What is a Follow-On Offering?
. A. A Follow-On Offering is the public sale by an issuer of
------
newly issued securities by a company which already has
publicly traded securities. In underwritten Follow-On
Offerings, a selling shareholder or corporate issuer
sells securities to an underwriter who, in turn, resells
-----------
the securities to investors at the offering price.
Registered Follow-On Offerings are priced in negotiations between
the selling shareholder(s), issuer and the representative(s) of
the underwriter(s) taking into account the representative(s)
assessment of demand for the securities. Typically these
offerings are priced in close proximity to the last sale price of
the security in its principal trading market prior to the pricing
terms of the offering being set.
Typically, the offering shares begin trading on a stock exchange
or "over-the-counter" through the NASDAQ stock market shortly
after the pricing terms have been set.
. Q. What is a Combination Offering?
. A. Frequently offerings have both a primary (Follow-On) and
secondary component. These offerings are known as
Combination Offerings. In underwritten Combination
Offerings, a selling shareholder or corporate issuer
sells securities to an underwriter who, in turn, resells
-----------
the securities to investors at the offering price.
Registered Combination Offerings are priced in
negotiations between the selling shareholder(s), issuer
------
and the representative(s) of the underwriter(s) taking into
account the representative(s) assessment of demand for the
securities. Typically these offerings are priced in close
proximity to the last sale price of the security in its principal
trading market prior to the pricing terms of the offering being
set.
Typically, the offering shares begin trading on a stock exchange
or "over-the-counter" through the NASDAQ stock market shortly
after the pricing terms have been set.
. Q. Why are individual investors often excluded from traditional
Secondary, Follow-On and Combination Offerings?
-33-
<PAGE>
. A. Shares sold in a traditional Secondary, Follow-On and
Combination Offerings are generally marketed to, and reserved
for, institutional investors and their preferred customers. A
Wit Capital Secondary, Follow-On or Combination Offering
however, gives Members equal opportunity to buy stock in
emerging growth and other companies at the offering price.
. Q. What is the process for subscribing to a Wit Capital
Secondary, Follow-On or Combination Offering?
. A. When you become a Member, you'll receive an e-mail message
---------------
notifying you whenever a new preliminary prospectus is
----------------------
posted on our web site. After you review the prospectus,
you may enter a Conditional Offer if you want to
subscribe. You will need to affirmatively confirm your
conditional offer to buy after the registration statement
for the offering has been declared effective. This is
described in more detail under Rules and Procedures. If
--------------------
you do not have on deposit $1,000 (which is the minimum
account balance for all trades with Wit Capital) as of
the time immediately after the registration statement for
the offering has been declared effective, Wit Capital may
cancel your Conditional Offer and/or your priority. You
-----------------
will be notified by e-mail on the pricing date if you have
received shares in an offering. Full payment of the purchase
price is due on the settlement date for the Secondary, Follow-On
or Combination Offering.
Investing in Secondary, Follow-On or Combination Offerings is
speculative and highly risky and is only appropriate for certain
investors. Members assume full responsibility for determining
whether investing in new issues is appropriate for them.
. Q. How can I learn more about the companies being issued?
. A. The first step to learning about a potential investment is
to review the issuing company's preliminary prospectus or
----------------------
"red herring". These documents, which have been submitted to the
SEC, are available for all Secondary, Follow-On and Combination
Offerings in which Wit Capital is participating on the Wit
Capital web site. A company's prospectus includes company
background information, financial data and specifics about the
offering. Prospectuses can either be viewed online or
downloaded.
-34-
<PAGE>
. Q. What happens if there are not enough shares to meet demand?
. A. Wit Capital's general rule of allocation will be first-come
first-served. That means that no special preferences will
be made to reward special customers or big accounts.
This is the cornerstone of a fair system, and Wit Capital
is committed above all else to fair treatment of its
Members.
News of each offering will be simultaneously e-mailed to all
Members, and Wit Capital's proprietary electronic order book
will record the time and date of each Member's
Conditional Offer. Generally, Members submitting
-----------------
Conditional Offers first will have priority over those who
submit later.
. Q. How long should I hold shares I purchase in a Secondary,
Follow-On or Combination Offering?
. A. As long as you believe that it is in your interest to hold
them. Members who have
track records for buying Secondary, Follow-On or
Combination Offering shares and holding them in their
account beyond 30 days will have priority in future new
issue share allocations over Members who do not, although
the general rule of allocation will be first-come first-
----------
served.
To encourage this buy-and-hold approach, Wit Capital will
maintain for each Member a rating score that tracks their record
for buying and holding public offering shares. When you buy a
Secondary, Follow-On or Combination Offering, you score positive
points based on the number of shares purchased. If you then sell
the shares within 30 days, or transfer the shares out of your
account, then you score negative points.
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
-35-
<PAGE>
(n) CONTACT US PAGE SCREEN SHOT - consists of a parent frame and child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List.*/
------------------------
. CHILD FRAME - the following text appears in the child frame:
. Contact Us
. For additional information including trading, account management and
research, please visit our website at (website address) or call us at
(telephone number)
. Mail address: [x]
. E-mail address: [x]
. Rules & Procedures, FAQs, Contact Us, Mailing List
------------------ ---- ---------- ------------
- -------------------------------
*/ UNDERLINED TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR
LINK TO ANOTHER SCREEN.
-36-
<PAGE>
(o) JOIN OUR MAILING LIST PAGE SCREEN SHOT - consists of a parent frame and
child frame.
. PARENT FRAME - contains the text "BROKER/DEALER" and navigation buttons
for Open Account, Place Conditional Offer, Rules & Procedures, FAQ's,
------------ ----------------------- ------------------ -----
Contact Us, Mailing List./*/
---------- ------------
. CHILD FRAME - the following text appears in the child frame:
. JOIN OUR MAILING LIST
. To be notified by e-mail whenever Wit Capital has a new development,
complete the following form. If you are a Member, you are already on
our mailing list and need not fill this out.
. Required Data
. E-mail (primary): followed by an interactive dialogue box.
. E-mail (secondary - if applicable): followed by an interactive
dialogue box.
. Optional Data
. The user is asked to enter his/her first name, middle initial, last
name, address, city, state, zip code, country, telephone (day),
telephone (evening), age, sex and modem speed via interactive
dialogue boxes.
- ---------------------
*/ UNDERLINES TEXT DENOTES THAT SUCH TEXT APPEARS AS A NAVIGATION BUTTON OR LINK
TO ANOTHER SCREEN.
-37-
