<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1999
REGISTRATION NO. 333-79879
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERWORLD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7372 13-3818716
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
395 HUDSON STREET, 6TH FLOOR
NEW YORK, NEW YORK 10014
(212) 301-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
MICHAEL J. DONAHUE
CHAIRMAN
INTERWORLD CORPORATION
395 HUDSON STREET, 6TH FLOOR
NEW YORK, NEW YORK 10014
(212) 301-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH COPIES TO:
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<S> <C>
JAMES M. LURIE, ESQ. ALAN SINGER, ESQ.
ROBERT SEBER, ESQ. MORGAN, LEWIS & BOCKIUS LLP
O'SULLIVAN GRAEV & KARABELL, LLP 1701 MARKET STREET
30 ROCKEFELLER PLAZA PHILADELPHIA, PENNSYLVANIA 19103
NEW YORK, NEW YORK 10112 (215) 963-5000
(212) 408-2400
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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, 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 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,
check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED
AMOUNT MAXIMUM PROPOSED
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 per share.................. 3,450,000 $16.00 $55,200,000 $15,345.60(2)
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</TABLE>
(1) Includes 450,000 shares which the underwriter has the option to purchase to
cover over-allotments, if any. See "Underwriting".
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Of this amount, $13,900 was previously paid and the additional fee of
$1,445.60 resulting from the increase in the proposed maximum aggregate
offering price is paid herewith.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. 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 JULY 16, 1999
3,000,000 SHARES
INTERWORLD CORPORATION
COMMON STOCK
We are selling 3,000,000 shares of common stock. Prior to this offering,
there has been no public market for the common stock. The initial public
offering price of the common stock is expected to be between $14.00 and $16.00
per share.
The underwriter has an option to purchase a maximum of 450,000 additional
shares from us to cover over-allotments of shares.
Application has been made to list the common stock on the Nasdaq Stock
Market's National Market under the symbol "INTW."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS INTERWORLD
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share......................... $ $ $
Total............................. $ $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INVEMED ASSOCIATES
Prospectus dated , 1999
<PAGE> 3
Description of graphic material on inside front and back cover pages of the
prospectus:
Inside front cover (first page of a three page fold-out):
The page depicts in three columns the logos of InterWorld customers and
partners: Cisco Systems, Insight, USWeb/CKS, J&R Music World, EDS,
Nike, Net Perceptions, NTT, Guess?, Hewlett Packard, Trans Cosmos USA,
Every CD, The North Face, Active Software, Warnaco, Inc., American
Eagle Outfitters, Havas Interactive, OKI, Cambridge Technology
Partners, boo.com, Fort Point Partners, Agency.com, Sun Microsystems,
KPMG, ProTeam.com, CyberSource, Brooks Brothers, Whittman-Hart, Ltd.,
MicroWarehouse and Authentic Fitness.
The text in the upper left hand corner is:
A sampling of the clients and partners who are members of the
InterWorld Enterprise Commerce community.
The caption on the top of the page is:
Clients and Partners
The page also includes InterWorld's logo
Inside two pages of fold-out:
The page depicts a diagram showing a customer of our client interfacing
with our client through the Enterprise Commerce solution surrounded by
figures depicting our customer's entire buying cycle from Sales to
Order Management to Fulfillment to Customer Service, and arrows
pointing to figures depicting our customer's core enterprise systems:
Manufacturing Systems, Distribution/Fulfillment Systems, Financial
Systems and Customer Systems.
The caption at the top of the page is:
Commerce Exchange: Designed to increase revenues, reduce operating
expenses and enhance customer loyalty.
The caption at the bottom of the page is:
We are a Leading Provider of Enterprise Commerce Software Solutions
that Enable Manufacturers, Distributors and Retailers to Conduct
Business on the Internet.
The text down the left hand margin of the page is:
The InterWorld Advantage
Comprehensive Functionality - Our solution provides a comprehensive set
of applications for efficiently managing selling processes online,
including sales, order management, fulfillment and customer service.
<PAGE> 4
State-of-the-Art Technology Foundation - Our technology supports the
deployment of mission-critical online business applications and can
accommodate a client's increasing business volumes.
Process - Centric(TM) Computing Approach - Our Process-Centric(TM)
approach enables a client to create online processes based on existing
and evolving business practices.
Interoperability - Our products are designed to work with an
organization's existing business operational systems and third-party
technologies.
The text down the right hand margin of the page is:
Commerce Exchange:
Mission-Critical Enterprise Commerce
Effective Enterprise Commerce enables companies to build their online
business and integrate them with their existing business practices.
Integration of Business Processes:
We enable a client's online processes to take into account
characteristics of the client's selling environment and its customer's
preferences.
Integration of Enterprise Systems:
Our Business Adapters are designed to facilitate the seamless
integration of external business functions, allowing them to be managed
within the Commerce Exchange process framework.
The page above includes InterWorld's logo.
Inside back cover:
This page depicts a diagram showing our client interfacing with the
Commerce Exchange solution surrounded by figures depicting the programs
and services we or our partners provide to our clients throughout
implementation and ongoing support. Next to each figure is a box
indicating the program and service provided. The text in the boxes next
to the figures is:
Advice on client online strategy and practices
bullet InterWorld one-on-one Workshops
Enterprise Commerce project planning
bullet InterWorld Professional Services
bullet System Integration Partners
Commerce site design
bullet InterWorld Professional Services
bullet Web Design Partners
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<PAGE> 5
Site implementation and enterprise systems integration
bullet InterWorld Professional Services
bullet System Integration Partners
Review
bullet InterWorld Professional Services
bullet System Integration Partners
Technical, educational and training services
bullet InterWorld Client Education Programs
Participation in product direction
bullet InterWorld Client Input Sessions
Client care
bullet InterWorld Client Satisfaction Team
Client support
bullet 24x7 Technical Support
The caption on the top of the page is:
How We Serve Our Clients
3
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 14
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Consolidated Financial
Data.............................. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 31
Management.......................... 41
Certain Transactions................ 50
Principal Stockholders.............. 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 58
Underwriting........................ 59
Legal Matters....................... 61
Experts............................. 61
Change in Independent Accountants... 62
Additional Information.............. 62
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF
THESE SECURITIES.
------------------------
We were incorporated in Delaware in 1995. Our principal executive offices
are located at 395 Hudson Street, 6th Floor, New York, New York 10014, (212)
301-2500. Our website is located at www.interworld.com. INFORMATION IN OUR
WEBSITE IS NOT A PART OF THIS PROSPECTUS.
Unless otherwise stated, all information contained in this prospectus
assumes no exercise of the over-allotment option to purchase up to 450,000
shares of common stock granted by us to the underwriter of this offering. Also,
unless otherwise stated, all information contained in this prospectus reflects
the conversion of all outstanding shares of preferred stock into shares of
common stock at the time of the closing of this offering.
InterWorld is our registered service mark and trademark, and
Process-Centric is our trademark. Trademarks of other companies appearing in
this prospectus are the property of their respective holders.
------------------------
Delivery of the shares of common stock will be made on or about
, 1999.
------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 7
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the discussion
regarding the risks of investing in our common stock discussed under "Risk
Factors", before investing in our common stock.
INTERWORLD
We are a leading provider of Internet commerce software solutions that
enable manufacturers, distributors and retailers to conduct business over the
Internet. Our products, which we call "enterprise commerce" software, enable
companies to build their online businesses and integrate them with their
existing business practices and systems. Commerce Exchange is our family of
enterprise commerce software, consisting of our Commerce Exchange platform,
applications, tools and business adapters. Commerce Exchange enables our clients
to address their principal selling and support processes, including sales, order
management, fulfillment and customer service. Our solution is designed to enable
businesses to:
- increase revenues by extending their sales efforts to include an
Internet-based distribution channel;
- reduce operating expenses by streamlining and automating their selling
and support processes;
- enhance customer loyalty by offering a personalized, online buying
experience; and
- create online processes based on existing and evolving business practices
and integrate information from existing systems with their online
systems.
Our solution can be expanded to meet the demand of large organizations with
complex selling processes, and can handle a large number of simultaneous users,
high transaction rates and large datastores.
Our Commerce Exchange family of products may be arranged in a variety of
ways to meet clients' specific requirements. Our software platform and
applications include:
- Process Application Server, which provides an open, flexible foundation
to operate a sophisticated Internet business;
- WebBroker, which enables an enterprise commerce system to support
increasing demand; and
- Commerce Exchange applications, including Product Merchandising, Order
Management and Account Management.
The Commerce Exchange tools include development tools to add functions to
the system, administration tools to manage the system and reporting tools to
measure the results of the system. The Commerce Exchange business adapters
enable integration of the Commerce Exchange solution with existing
computer-based operational and reporting systems within the organization or
across the Internet with third parties. We also provide a range of services to
enable clients to implement and use the Commerce Exchange family of products.
Our professional services include project management, implementation and
integration, education and training and client support services.
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<PAGE> 8
Our solution has the following advantages:
- Comprehensive Functionality -- Our solution provides a comprehensive set
of applications for efficiently managing selling and support processes
online.
- State-of-the-Art Technology Foundation -- Our technology is specifically
designed to support the deployment of mission-critical online business
applications without which an enterprise would not be able to operate an
online business. The Commerce Exchange software architecture is designed
to operate on different computing platforms and to provide a reliable,
secure and flexible environment.
- Process-Centric(TM) Computing Approach -- Our Process-Centric computing
approach allows the Commerce Exchange solution to adapt to dynamically
changing business and technology conditions. Process-Centric computing is
an adaptable approach that enables a client's online processes to take
into account characteristics of the client's selling environment and its
customers' preferences.
- Interoperability -- Our products are designed to work in conjunction with
new Internet technologies and with an organization's existing business
systems.
We market our products and services primarily through our global direct
sales organization, which includes nine offices in the U.S. and four
international offices. In addition, we have strategic marketing relationships
with Active Software, Inc., Cambridge Technology Partners, Inc., Cisco Systems,
Inc., Electronic Data Systems Corporation, Fort Point Partners, Inc., KPMG LLP,
Net Perceptions, Inc., Sun Microsystems, Inc., Trans Cosmos USA, Inc., USWeb
Corporation and Whittman-Hart, Ltd. We also have technology and distribution
partnerships with CyberSource Corporation, Federal Express Corporation,
Hewlett-Packard Company and Cisco Systems, Inc.
As of May 1, 1999, we had over 70 clients, including BP Australia Ltd.,
Electronic Data Systems Corporation, GTE Communication Systems Corporation,
Guess? Inc., Insight Enterprises, Inc., Mattel, Inc., Micro Warehouse, Inc.,
Multiple Zones International, Inc., Nike, Inc., Nippon Telegram and Telephone
Corp., PETsMART.com, Inc., Seagate Technology, Inc. and Warnaco Inc.
2
<PAGE> 9
THE OFFERING
Common Stock Offered by
InterWorld...................... 3,000,000 shares
Common Stock to be Outstanding
After this Offering........... 26,348,482 shares
Use of Proceeds................. We expect to use the net proceeds from the
sale of shares offered by us for working
capital and general corporate purposes.
Dividend Policy................. We currently intend to retain all future
earnings to fund the development and growth
of our business. Therefore, we do not
currently anticipate paying cash dividends.
Proposed Nasdaq National Market
Symbol........................ INTW
We are permitted, and in some cases obligated, to issue shares of common
stock in addition to the common stock to be outstanding after this offering. If
and when we issue these shares, the percentage of our common stock that you own
will decrease. The following is a summary of these additional shares of common
stock:
- 6,088,114 shares of common stock reserved for issuance under our stock
option plan, of which options to purchase 4,716,331 were outstanding as
of March 31, 1999 at a weighted average exercise price of $5.18 per
share;
- 1,000,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
- 534,070 shares of common stock reserved for issuance at March 31, 1999
under outstanding warrants at a weighted average exercise price of $6.98
per share.
The common stock to be outstanding after this offering reflects 23,348,482
shares outstanding on July 1, 1999 and includes 146,597 shares issued upon
exercise of stock options subsequent to March 31, 1999.
3
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes our financial data. You should read the
following information in conjunction with the financial statements and related
notes appearing elsewhere in this prospectus. You should also see the
information in this prospectus under the captions "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<CAPTION>
THREE MONTHS
INCEPTION ENDED
(MARCH 28, 1995) YEAR ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, ----------------------------- -----------------
1995 1996 1997 1998 1998 1999
---------------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Product licenses......... $ 25 $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services................. 331 1,241 3,073 4,834 866 2,615
Other.................... 3 408 100 2 -- --
------ ------- -------- -------- ------- -------
Total revenues, net.... 359 2,428 8,056 14,590 2,412 7,001
Gross profit............... 228 289 927 7,867 1,208 4,037
Loss from continuing
operations............... (264) (7,197) (21,675) (22,062) (4,644) (7,151)
Basic loss per share and
diluted loss per share
from continuing
operations............... $(0.02) $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======= =======
</TABLE>
The following table is a summary of our balance sheet at March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable
preferred stock into an aggregate of 9,189,999 shares of common stock,
which will occur at the same time as the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale by us of 3,000,000
shares of common stock in this offering, assuming an initial public
offering price of $15.00 per share and after deducting estimated
underwriting discounts and commissions and estimated expenses payable by
us.
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MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 7,103 $ 7,103 $47,953
Working capital..................................... 5,307 5,307 46,217
Total assets........................................ 22,785 22,785 63,635
Mandatorily redeemable preferred stock.............. 62,948 -- --
Total stockholders' equity (deficit)................ (51,545) 11,403 52,253
</TABLE>
Please note the following in reviewing the above data:
- On March 30, 1998, we completed a spin-off distribution of a subsidiary,
UGO Networks, Inc., formerly ActionWorld, Inc., reducing our majority
ownership of UGO Networks to a minority interest of approximately 18%.
Since March 30, 1998,
4
<PAGE> 11
our minority interest in UGO Networks has decreased to approximately 8%
due to private equity financings by UGO Networks. UGO Networks is an
online entertainment information and game company that commenced
operations in 1997. The spin-off was made in order to permit UGO Networks
to build a separate management team that would concentrate on creating an
online entertainment information and game company and to position UGO
Networks to seek private equity financing. UGO Networks has been
presented as a discontinued operation in our consolidated statement of
operations for the year ended December 31, 1997. A provision of $627 for
estimated operating losses through the disposal date was recorded at
December 31, 1997. See Note 13 of Notes to Consolidated Financial
Statements.
- In January 1999, we issued 1,650,000 shares of Series B mandatorily
redeemable preferred stock for an aggregate of $16.5 million in cash.
Upon the closing of this offering, all outstanding shares of our Series A
and Series B mandatorily redeemable preferred stock will automatically
convert into an aggregate of 9,189,999 shares of common stock. For the
year ended December 31, 1998, the pro forma basic and diluted loss per
share reflecting the effects of the conversion would have been $(0.96).
See Note 16 of Notes to Consolidated Financial Statements.
5
<PAGE> 12
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following factors and other information in this
prospectus before deciding to invest in shares of our common stock. If any of
the following risks actually occur, our business, financial condition, results
of operations and prospects for growth would likely suffer. As a result, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
WE HAVE A LIMITED OPERATING HISTORY, SIGNIFICANT HISTORICAL LOSSES AND WE MAY
NEVER BE PROFITABLE.
We expect to incur losses for the foreseeable future and we may never
achieve or sustain profitability. We were incorporated in 1995 and have only a
limited operating history. Since inception, we have incurred substantial costs
to develop and market our products, and have incurred net losses. As of March
31, 1999, we had an accumulated deficit of $60.3 million. We expect that our
operating expenses will increase substantially in the foreseeable future as we
continue to develop our products, increase our sales and marketing efforts and
expand our operations.
IF OUR PRODUCTS ARE NOT WIDELY ACCEPTED IN THE INTERNET COMMERCE MARKET, OUR
BUSINESS, SALES AND PROFITABILITY WILL SUFFER.
The market for our products is new and rapidly evolving. Consequently, the
demand for products in this market is uncertain. Our business, financial
condition, results of operations and prospects for growth will be materially
adversely affected if our products are not widely accepted in the Internet
commerce software market. The following factors highlight the uncertainty of
market acceptance of our products:
- the market is characterized by rapid technological changes and evolving
industry standards;
- there is intense competition in the Internet commerce software industry;
- products are relatively expensive and require a large capital commitment
by the client;
- the infrastructure necessary to support increased commerce on the
Internet may not develop;
- consumers and businesses may not adopt electronic commerce; and
- our clients may not be successful in using our products to conduct their
commercial operations online.
Our future growth and success depends on broader acceptance of the Internet
as a medium for commerce. The Internet may not become a viable commercial
marketplace because of consumer concerns regarding reliability, cost, ease of
use and quality of service. In addition, consumer concerns regarding the
security and privacy of Internet transactions could inhibit the acceptance of
the Internet as a commercial medium. We have incorporated into our Commerce
Exchange family of products encryption algorithms to protect sensitive data such
as customer passwords and credit card information. However, we can not assure
you that this technology will not be breached. If the security measures used in
Commerce Exchange are compromised, our business could suffer.
6
<PAGE> 13
THE IMPOSITION OF SALES AND OTHER TAXES IN RESPECT OF PRODUCTS SOLD BY OUR
CLIENTS OVER THE INTERNET COULD HAVE A NEGATIVE EFFECT ON ELECTRONIC COMMERCE
GENERALLY AND, AS A RESULT, ON DEMAND FOR OUR PRODUCTS.
Recent federal legislation limits the imposition of state and local taxes
on Internet-related sales. In 1998, Congress passed the Internet Tax Freedom
Act, which places a three-year moratorium on state and local taxes on (i)
Internet access, unless such tax was already imposed prior to October 1, 1998,
and (ii) discriminatory taxes on electronic commerce. There is a possibility
that Congress may not renew this legislation in 2001. If Congress chooses not to
renew this legislation, state and local governments would be free to impose
taxes on electronically purchased goods. The imposition of new sales or other
taxes could materially adversely affect the growth of electronic commerce
generally and, as a result, on the demand for our products.
The Company believes that, in accordance with current industry practice,
most companies that sell products over the Internet do not currently collect
sales or other taxes in respect of shipments of their products into states or
foreign countries in which they are not physically present. However, one or more
states or foreign countries may seek to impose sales or other tax collection
obligation on out-of-jurisdiction companies that engage in electronic commerce.
A successful assertion by one or more states or foreign countries that companies
engaged in electronic commerce should collect sales or other taxes on the sale
of their products over the Internet, even though not physically present in the
state or foreign country, could have an adverse effect on electronic commerce
generally, and, as a result, on demand for our products.
ALL OF OUR REVENUES ARE DERIVED FROM A SINGLE FAMILY OF PRODUCTS, AND OUR
BUSINESS, SALES AND PROFITABILITY WILL SUFFER IF OUR PRODUCT OFFERINGS ARE NOT
COMMERCIALLY SUCCESSFUL.
The Commerce Exchange family of products and related services have
accounted for substantially all of our revenues to date, and we expect these
products and related services to continue to account for most of our revenues
for the foreseeable future. If our current limited product offerings are not
commercially successful, our business, financial condition, results of
operations, and prospects for growth will be materially adversely affected. We
may not successfully develop or market any enhanced or new products. Moreover,
competition or technological change could adversely affect the pricing of or
demand for our products, which would have a material adverse effect on our
business, financial condition and results of operations. In addition, as of
March 31, 1999, a majority of our clients were in the implementation phase of
deploying our software. As a result, our products are currently being used by
only a limited number of clients to conduct electronic commerce. From time to
time, some of our clients experience difficulty implementing our software or the
software does not meet our clients' expectations, and they may chose not to
continue to use our software. As a result of these problems, our reputation may
be damaged, which could have a material adverse effect on our business.
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR SALES AND
PROFITABILITY.
There is intense competition in the Internet commerce software industry,
and we expect competition to intensify in the future. Our business, financial
condition, results of operations and prospects for growth will be materially
adversely affected if we are not able to compete successfully. We compete
against the in-house development efforts of companies engaging in Internet
commerce, as well as other software application vendors and developers. Our
current competitors include Art Technology Group, BroadVision, Inc.,
7
<PAGE> 14
CommerceOne, Inc., IBM, Intershop Communications, Inc., Microsoft Corporation,
Netscape Communications Corporation, Open Market Inc., Oracle Corporation and
Pandesic LLC. We expect that additional competitors will enter our market with
competing products as the size and visibility of the market opportunity
increases. Many of our present and potential competitors have greater financial,
technical, marketing and other resources than we have. This may place us at a
disadvantage in responding to the offerings of our competitors, technological
changes or changes in client requirements. Also, we may be at a competitive
disadvantage because many of our competitors have greater name recognition, more
extensive client bases and a broader range of product offerings.
IF OUR FINANCIAL RESULTS DO NOT MEET EXPECTATIONS AS A RESULT OF FLUCTUATIONS IN
OUR QUARTERLY OPERATING RESULTS, OUR STOCK PRICE IS LIKELY TO DECLINE.
Our quarterly operating results will generally depend on the volume and
timing of sales of our products, which are difficult to predict. It is likely
that in some future quarter or quarters our operating results will not meet the
expectations of analysts and investors. In that case, the price of our common
stock is likely to decline.
We expect to experience fluctuations in our quarterly operating results due
to many factors, including:
- the size and timing of significant client agreements, which typically
occur near the end of our fiscal quarter, but, if delayed, may not occur
until the next quarter;
- the length of the sales cycle for our products;
- fluctuations in demand for our products;
- the introduction of new products by us or our competitors;
- changes in prices by us or our competition; and
- the timing and amount of our expenditures.
We plan to increase our operating expenses to achieve revenue growth. If
our revenues do not increase as anticipated and our spending levels are not
reduced accordingly, a significant decline in our quarterly operating results
could occur. In addition, we believe, based on general software industry trends,
that sales of our products may be highest in the fourth quarter of the year and
lowest in the first quarter. As a result, period-to-period comparisons of our
results of operations may not be meaningful, and you should not rely on them as
an indication of future performance.
THE YEAR 2000 PROJECTS OF OUR TARGET CLIENTS MAY ADVERSELY AFFECT DEMAND FOR OUR
PRODUCTS IN 1999 AND 2000.
We believe that Year 2000 issues may affect purchasing patterns of our
clients and potential clients. Many companies are expending significant
resources to upgrade their current software systems to Year 2000 functionality.
These expenditures may reduce funds available to purchase software products and
related services such as those offered by us. In addition, Year 2000 issues
could cause a significant number of companies, including our clients, to
reevaluate their current software application solutions needs, and in connection
with such reevaluation, select other solutions. If, as a result, companies
determine not to purchase our software products and related services, our
business, results of operations, financial condition and prospects for growth
would be materially adversely affected.
8
<PAGE> 15
WE INCREASINGLY RELY ON SYSTEMS INTEGRATION COMPANIES TO SELL AND IMPLEMENT OUR
PRODUCTS, AND IF WE CANNOT ESTABLISH OR MAINTAIN RELATIONSHIPS WITH THESE
COMPANIES, OR IF THEY ARE NOT SUCCESSFUL IN THEIR EFFORTS, THE GROWTH OF OUR
BUSINESS WOULD SUFFER.
We increasingly depend on systems integration companies for sales and
implementation of our products. Our growth will depend, in part, on maintaining
and expanding our relationships with systems integration companies. We may not
be able to develop or maintain relationships with systems integration companies.
Moreover, if the systems integration companies with which we have a strategic
relationship are not successful in selling and implementing systems that include
our products, or if they adopt, or promote more vigorously, a competing product
or technology, the growth of our business would be materially adversely
affected.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE, OUR ENTERPRISE COMMERCE SOFTWARE
PRODUCTS MAY BECOME OBSOLETE, AND OUR LONG-TERM VIABILITY WOULD SUFFER.
The Internet commerce software industry is characterized by rapid
technological change, which can render products obsolete. Our success depends,
in part, on our ability to respond to technological change in a timely and
cost-effective manner. If we are not able to successfully respond to
technological change, our Commerce Exchange family of products may become
obsolete. This would threaten our long-term viability.
OUR PRODUCTS MAY CONTAIN DEFECTS, WHICH COULD RESULT IN REDUCED SALES, INCREASED
SERVICE AND WARRANTY COSTS AND LIABILITY TO OUR CLIENTS.
Our software products may contain errors that become apparent when the
products are introduced or when the volume of usage increases. Errors in our
products, implementation errors or other performance difficulties could result
in decreased sales of our products, increased service and warranty costs and
liability to our clients, which could have a material adverse effect on our
business, financial condition, results of operations and prospects for growth.
Although we carry errors and omissions insurance, it may not cover all product
liability claims made against us. Our risk of liability to clients is
particularly pronounced because of our belief that our products will be critical
to our clients' operations.
BECAUSE A SIGNIFICANT PORTION OF OUR REVENUES IS DERIVED FROM A LIMITED NUMBER
OF CLIENTS THAT WILL CHANGE FROM YEAR TO YEAR, OUR SALES WILL DECLINE IF WE
CANNOT ATTRACT SIGNIFICANT NEW CLIENTS.
We expect that our largest clients will change from year to year because
our revenues from any client are typically greatest when the client first
licenses our products. Moreover, because our products require a meaningful
capital commitment, a significant portion of our revenues in any period is
derived from a limited number of clients. Therefore, if we are not able to
generate revenues from significant new clients, our business, financial
condition, results of operations and prospects for growth would be materially
adversely affected. In 1996, software license and service revenues from
Scholastic Corporation accounted for approximately 31% of our total revenues and
from Cliggot Communications Inc. accounted for approximately 17% of total
revenues. In 1997, software license and service revenues from Toys "R" Us, Inc.
accounted for approximately 11% of total revenues and from Electronic Data
Systems Corporation accounted for approximately 10% of total revenues. In 1998,
software license and service revenues from Warnaco Inc. accounted for
approximately 14% of total revenues. In the quarter ended March 31, 1999,
software
9
<PAGE> 16
license and service revenues from Guess? Inc. accounted for approximately 27% of
total revenues and from Boo.com accounted for approximately 15% of total
revenues.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL SUFFER.
We have grown rapidly since we were incorporated in 1995. Many members of
our senior management have only recently joined us. Of the six employees listed
in the management section of this prospectus, four have worked for us for less
than two years. Our rapid growth has placed, and is expected to continue to
place, a significant strain on our management and operations. To manage our
growth, we must continue to enhance our operating and financial systems,
infrastructure and controls. In the past, we have experienced certain
inadequacies in our operating and financial systems, infrastructure and
controls. In prior years, we were not able to improve internal controls and
upgrade our personnel as needed to accommodate our growth. This resulted in
errors in application of our accounting policies which affected some information
contained in our financial statements for unaudited interim periods in our last
fiscal year. These errors were corrected following the hiring of experienced
personnel, consultation with our independent accountants and enhancement of
internal controls. Our growth will also depend on our ability to expand, train
and manage our employee base. In addition, we must expand our sales and
marketing organization, penetrate different markets and expand our capacity to
support a larger client base. If we do not manage our growth successfully, our
business, financial condition, results of operations and prospects for growth
would be adversely affected.
OUR PROPRIETARY RIGHTS MAY NOT BE FULLY PROTECTED, AND WE MAY BE SUBJECT TO
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BY OTHERS.
InterWorld(R) and Process-Centric(TM) are our registered trademarks and we
have applied for other trade and service marks. Our efforts to establish and
protect our proprietary rights, including Federal copyright and trademark
registrations, may be inadequate to prevent imitation of our products by others.
The laws of foreign countries in which our products are sold may offer less
protection to proprietary rights than the laws of the United States. Moreover,
others may claim violation of their proprietary rights by us. BroadVision, Inc.
and Open Market Inc., two of our competitors, have been issued U.S. patents on
certain aspects of their electronic commerce software products. In August 1998,
we received a letter from counsel to Open Market concerning the potential
applicability of the Open Market patents to our products. The letter further
stated that Open Market was prepared to meet with us to resolve issues
concerning the applicability of their patents and to discuss terms of an
appropriate license agreement. In early September 1998, we responded to the Open
Market inquiry, informing Open Market that based on our review of the Open
Market patents and the analysis and advice of our patent counsel, we believe
that the technology used in our products is sufficiently independent and does
not infringe on the patents awarded to Open Market. We have not received any
further inquiries or correspondence from Open Market since that time and have
had no inquiries or discussions with BroadVision with regard to patent matters.
Although we do not believe that we are infringing their patent rights, either of
those companies may claim that we are doing so. If a claim of patent
infringement by these or other companies was made against us,we would likely
incur significant expenses in defending against the claim, which could adversely
affect our financial condition and results of operations. In addition, if a
claim of infringement is made against us and we are not successful in defending
against the claim, we could be liable for substantial damages. We may also be
required to make royalty payments, which could be substantial, to the holder of
the patent rights. These events
10
<PAGE> 17
could have a material adverse effect our business, financial condition, results
of operations and prospects for growth.
IF OUR PLANNED INTERNATIONAL EXPANSION IS NOT SUCCESSFUL, OUR LONG-TERM GROWTH
COULD BE JEOPARDIZED.
International expansion is a component of our strategy. We may not be
successful in expanding our activities in international markets. Even if we are
successful in penetrating international markets, we will confront additional
technological challenges in keeping our international product offerings current
and conforming them to commercial standards in various countries. In addition,
there are risks in doing business in international markets, including:
- changes in laws and regulations;
- export controls on encryption technology and other export restrictions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability; and
- fluctuations in currency exchange rates.
Our success in expanding our international operations will be dependent, in
part, on our ability to anticipate and effectively manage these and other risks.
Our failure or inability to anticipate or manage these risks could have a
material adverse effect on our business, financial condition, results of
operations and prospects for growth.
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD-PARTY SYSTEMS ARE NOT YEAR 2000 COMPLIANT.
We have not yet devised a year 2000 contingency plan. Although we believe
that each of our critical systems is year 2000 compliant, we have not yet
determined whether all of the systems of our suppliers are year 2000 compliant.
In addition, we have not undertaken any investigation regarding the year 2000
readiness of our clients. Therefore, we do not know whether our clients'
existing business systems which they may attempt to integrate with our products
are year 2000 compliant. Accordingly, we are unable to predict the extent to
which the year 2000 issue will affect our suppliers or clients, or the extent to
which we would be vulnerable to their failure to remediate any year 2000 issues
on a timely basis. The failure of our internal systems or any material
third-party systems to be year 2000 compliant would have a material adverse
effect on our business, results of operations, financial condition and prospects
for growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
IF WE CANNOT OBTAIN ADDITIONAL FINANCING WHEN NEEDED, WE MAY BE UNABLE TO
RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We may need additional financing to support more rapid growth than
currently anticipated or to respond to competitive pressures or unanticipated
requirements. Additional financing, if needed, may not be available on
satisfactory terms or at all. If additional funds are not available on
acceptable terms, we may be unable to fund our growth, develop or enhance our
products and services, respond to competitive pressures or take advantage of
acquisition opportunities. Any additional equity financing may cause investors
to experience dilution in their ownership interest and the newly issued
securities
11
<PAGE> 18
may have rights superior to those of the common stock. Any debt financing may
result in limitations on our operations, including restrictions on our spending
or payment of dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
IF WE ARE UNABLE TO RETAIN OR REPLACE OUR KEY PERSONNEL, OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS FOR GROWTH COULD SUFFER.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our executive
management team. We do not carry key-person insurance on any member of our
executive management team. Since January 1998, four executive officers have
resigned from their positions with us. If one or more members of our management
team become unable or unwilling to continue in their present positions and if
additional key personnel cannot be hired as needed, our business, financial
condition, results of operations and prospects for growth could be materially
adversely affected.
BECAUSE OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR
COMMON STOCK, THEY WILL EXERCISE SIGNIFICANT CONTROL OVER US.
Following this offering, our executive officers and directors will
beneficially own approximately 30.5% of the outstanding common stock, or
approximately 30.0% if the underwriter exercises its over-allotment option in
full. Accordingly, if they act together, they will be able to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate actions such as
mergers and other business combination transactions. The interests of our
executive officers and directors could conflict with the interests of our other
stockholders. This concentration of ownership may also have the effect of
delaying or preventing a change in control over us unless it is supported by our
executive officers and directors.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC
MARKET FOLLOWING THIS OFFERING, THE MARKET PRICE OF OUR COMMON STOCK COULD
DECLINE.
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering, or the perception
that such sales could occur. These factors also could make it more difficult for
us to raise funds through future offerings of common stock.
There will be 26,348,482 shares of common stock outstanding immediately
after this offering. Of these shares, the 3,000,000 shares sold in this offering
will be freely transferable without restriction or further registration under
the Securities Act of 1933, except for any shares purchased by our affiliates
(as defined in Rule 144 under the Securities Act). The remaining 23,348,482
shares outstanding will be restricted securities (as defined in Rule 144). These
shares may be sold in the future without registration under the Securities Act
to the extent permitted under Rule 144 or an exemption under the Securities Act.
Holders of 9,189,999 shares of common stock outstanding immediately after this
offering will also have registration rights enabling them to cause us to
register their shares for sale under the Securities Act. After this offering, we
will have 5,941,517 shares of common stock reserved for issuance upon the
exercise of stock options, of which 4,569,734 shares are subject to currently
outstanding options. Following this offering, we intend to file a registration
statement on Form S-8 to register these shares.
12
<PAGE> 19
SINCE OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED, WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET FOR OUR COMMON STOCK WILL DEVELOP, OR WHETHER
YOU WILL BE ABLE TO SELL YOUR COMMON STOCK.
There has not been a public market for our common stock. We do not know the
extent to which investor interest in us will lead to the development of a
trading market or how liquid that market might be. The initial public offering
price for the shares of common stock has been determined through negotiations
between us and the underwriter of this offering and may not be indicative of
prices that will prevail in any trading market that develops. You may not be
able to resell your shares at or above the initial public offering price and you
may suffer a loss on your investment.
BECAUSE WE ARE CURRENTLY UNABLE TO SPECIFY THE SPECIFIC USES TO WHICH THE NET
PROCEEDS FROM THIS OFFERING WILL BE APPLIED, YOU WILL BE RELYING ON THE JUDGMENT
OF OUR MANAGEMENT REGARDING THE APPLICATION OF THE PROCEEDS.
We expect to use the net proceeds from this offering for working capital
and general corporate purposes, but we are unable to identify the specific uses
to which the net proceeds will be applied. Accordingly, our management will have
broad discretion with respect to the expenditure of the proceeds. Actual
expenditures for product development, sales and marketing, international
expansion and other purposes will depend on market and other conditions existing
in the future. You will be relying on the judgment of our management regarding
the application of the proceeds.
PURCHASERS OF SHARES IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, you will experience immediate
and substantial dilution in your investment.
13
<PAGE> 20
FORWARD-LOOKING STATEMENTS
Various statements made in this prospectus under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere in this
prospectus are "forward-looking statements." Forward-looking statements include,
without limitation, statements about the market opportunity for Internet
commerce software solutions, our strategy, new product development, competition,
expected expense levels, seasonality and the adequacy of our available cash
resources and other statements contained in this prospectus that are not
historical facts. When used in this prospectus, the words "anticipate,"
"believe," "estimate," "expect" and "may" and similar expressions are generally
intended to identify forward-looking statements, but are not the exclusive
expressions of forward-looking statements. Because forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including but not limited to:
- changes in general economic and business conditions;
- actions of competitors;
- our inability to recover our costs in sales of our products and services;
- the extent to which we are able to develop and market new and improved
products;
- product defects;
- changes in our business strategies; and
- the other factors discussed under "Risk Factors."
14
<PAGE> 21
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of shares in
this offering of approximately $40.9 million, assuming an initial public
offering price of $15.00 and after deducting underwriting discounts and
commissions and estimated expenses of $1.0 million payable by us. We estimate
that we will receive additional net proceeds of up to $6.3 million if the
underwriter exercises the option granted to it in connection with this offering
to purchase additional shares from us to cover over-allotments. We expect to use
the net proceeds for working capital and general corporate purposes, including
research and development (approximately $12.5 million), sales and marketing
(approximately $19.5 million), international expansion (approximately $4.0
million) and capital expenditures (approximately $2.0 million). The actual
amounts expended for these purposes may vary from our current expectations. We
may also use a portion of the net proceeds to fund possible acquisitions of
businesses and technologies that are complementary to ours. We currently have no
agreements, and are not engaged in any negotiations, with respect to any
acquisitions. Pending use of the net proceeds, we intend to invest the net
proceeds in short-term, investment-grade securities.
DIVIDEND POLICY
Historically, we have not paid cash dividends on our common stock. We
currently intend to retain all future earnings to fund the development and
growth of our business. Therefore, we do not currently anticipate paying any
cash dividends. Future decisions regarding cash dividends on the common stock
will be made by our board of directors and will depend on our results of
operations, financial position, capital requirements, general business
conditions, restrictions imposed by financing arrangements, if any, legal and
regulatory restrictions on the payment of dividends and other factors the board
of directors deems relevant.
15
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable
preferred stock into common stock, which will occur at the same time as
the closing of this offering; and
- on a pro forma as adjusted basis to reflect the sale by us of 3,000,000
shares of common stock in this offering, assuming an initial public
offering price of $15.00 per share and after deducting underwriting
discounts and commissions and estimated expenses payable by us. We will
have no preferred stock outstanding upon completion of this offering.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Mandatorily redeemable Series A convertible
preferred stock ($0.01 par value;
8,200,000 shares authorized, 7,539,999
issued and outstanding actual)............ $ 47,379 $ -- $ --
Mandatorily redeemable Series B convertible
preferred stock ($0.01 par value;
2,500,000 shares authorized, 1,650,000
issued and outstanding actual)............ 15,569 -- --
Stockholders' equity:
Preferred stock ($0.01 par value;
15,000,000 shares authorized pro forma
as adjusted)........................... -- -- --
Common stock ($0.01 par value, 35,000,000
shares authorized actual and pro forma
and 100,000,000 shares authorized pro
forma as adjusted; 14,011,886 issued
and outstanding actual; 23,201,885
shares issued and outstanding pro
forma; 26,201,885 shares issued and
outstanding pro forma as adjusted)..... 140 232 262
Additional paid-in capital.................. 8,661 71,517 112,337
Accumulated deficit......................... (60,346) (60,346) (60,346)
-------- -------- -------
Total stockholders' equity (deficit)... (51,545) 11,403 52,253
-------- -------- -------
Total capitalization................. $ 11,403 $ 11,403 $52,253
======== ======== =======
</TABLE>
16
<PAGE> 23
DILUTION
As of March 31, 1999, we had a pro forma net tangible book value of
approximately $0.49 per share. Pro forma net tangible book value per share
represents our net tangible assets, or total assets less liabilities and
intangible assets, divided by the total number of shares outstanding before this
offering after giving effect to the automatic conversion of all outstanding
shares of our mandatorily redeemable preferred stock into common stock upon the
closing of this offering. Without taking into account any changes in pro forma
net tangible book value after March 31, 1999, other than to give effect to this
offering assuming an initial public offering price of $15.00 per share and after
deducting underwriting discounts and commissions and estimated expenses payable
by us, the pro forma net tangible book value of the common stock as of March 31,
1999 would have been approximately $1.99 per share. The following table shows
the effect of this offering as if it had occurred at March 31, 1999 and
illustrates the immediate increase in net tangible book value of $1.50 per share
to existing stockholders and an immediate dilution of $13.01 per share to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 15.00
Pro forma net tangible book value per share as of March 31,
1999...................................................... $ 0.49
Increase in pro forma net tangible book value per share
attributable to this offering............................. 1.50
--------
Pro forma net tangible book value per share as of March 31,
1999 after giving effect to this offering................. 1.99
-------
Immediate dilution per share to new investors in this
offering.................................................. $ 13.01
=======
</TABLE>
The following table summarizes, as of March 31, 1999, on a pro forma basis,
the differences between the number of shares purchased from us, the total
consideration paid and the average price paid per share by our existing
stockholders and by new investors in this offering at an assumed initial public
offering price of $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 23,201,885 88.6% $ 65,773,093 59.4% $ 2.83
New investors.............. 3,000,000 11.4 45,000,000 40.6 $15.00
---------- ----- ------------ -----
Total................. 26,210,885 100.0% $110,773,093 100.0%
========== ===== ============ =====
</TABLE>
The calculation of pro forma net tangible book value per share and the
other computations above assume that no options or warrants outstanding as of
the date of this prospectus will be exercised. The following is a summary of
these additional shares of common stock:
- 6,088,114 shares of common stock reserved for issuance under our stock
option plan, of which options to purchase 4,716,331 were outstanding as
of March 31, 1999 at a weighted average exercise price of $5.18 per
share; and
- 534,070 shares of common stock reserved for issuance at March 31, 1999
under outstanding warrants at a weighted average exercise price of $6.98
per share.
17
<PAGE> 24
If our outstanding options and warrants were exercised, new investors in this
offering would suffer additional dilution.
This offering will benefit our existing stockholders by creating a public
market for our common stock. Upon consummation of this offering, the unrealized
appreciation in the value of the common stock held by existing stockholders will
be $282.4 million ($333.0 million assuming exercise of all outstanding options
and warrants), assuming an initial public offering price per share of $15.00.
18
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below as of December 31, 1997 and
1998 and for the years ended December 31, 1996, 1997 and 1998 have been derived
from our consolidated financial statements included in this prospectus, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
selected consolidated financial data below as of December 31, 1995 and for the
period from inception (March 28, 1995) through December 31, 1995 have been
derived from our audited consolidated financial statements that are not included
in this prospectus. The selected consolidated financial data below as of and for
the three months ended March 31, 1998 and 1999 have been derived from our
unaudited consolidated financial statements, which, in our opinion, include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of our financial position and results of operations. Historical
results are not necessarily indicative of results to be expected for any future
period. You should read the data below together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements included in this prospectus.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS
(MARCH 28, 1995) YEAR ENDED DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, ----------------------------- ------------------
1995 1996 1997 1998 1998 1999
---------------- ------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net:
Product licenses...................... $ 25 $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services.............................. 331 1,241 3,073 4,834 866 2,615
Other................................. 3 408 100 2 -- --
------ ------- -------- -------- -------- -------
Total revenues, net................ 359 2,428 8,056 14,590 2,412 7,001
------ ------- -------- -------- -------- -------
Cost of revenues:
Product licenses...................... 1 82 278 671 72 208
Services.............................. 130 1,735 6,744 6,052 1,132 2,756
Other................................. -- 322 107 -- -- --
------ ------- -------- -------- -------- -------
Total cost of revenues............. 131 2,139 7,129 6,723 1,204 2,964
------ ------- -------- -------- -------- -------
Gross profit............................ 228 289 927 7,867 1,208 4,037
Operating expenses:
Research and development.............. 234 2,362 6,863 9,558 1,964 3,637
Sales and marketing................... -- 2,435 8,487 11,969 2,064 4,968
General and administrative............ 258 2,730 6,405 6,356 1,425 1,213
Noncash employee
compensation....................... -- 71 752 1,615 377 1,121
------ ------- -------- -------- -------- -------
Total operating expenses........... 492 7,598 22,507 29,498 5,830 10,939
------ ------- -------- -------- -------- -------
Loss from operations.................... (264) (7,309) (21,580) (21,631) (4,622) (6,902)
Total other income (expense)............ -- 112 (95) (431) (22) (204)
Income taxes.......................... -- -- -- -- -- (45)
------ ------- -------- -------- -------- -------
Loss from continuing operations......... (264) (7,197) (21,675) (22,062) (4,644) (7,151)
Discontinued operations:
Expenses from discontinued
operations......................... -- -- (1,310) -- -- --
Provision for operating losses to date
of disposition..................... -- -- (627) -- -- --
====== ======= ======== ======== ======== =======
Net loss................................ $ (264) $(7,197) $(23,612) $(22,062) $ (4,644) $(7,151)
====== ======= ======== ======== ======== =======
Basic loss per share and diluted loss
per share............................. $(0.02) $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======== =======
Basic loss per share and diluted loss
per share from continuing
operations............................ $(0.02) $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
====== ======= ======== ======== ======== =======
</TABLE>
19
<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------- AS OF MARCH 31,
1995 1996 1997 1998 1999
----- ------ -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 50 $6,111 $ 6,081 $ 858 $ 7,103
Working capital (deficit).................. (286) 4,653 3,802 (635) 5,307
Total assets............................... 175 8,865 17,431 14,119 22,785
Mandatorily redeemable preferred
stock.................................... -- 13,431 37,319 47,334 62,948
Total stockholders' deficit................ (189) (7,119) (28,795) (46,216) (51,545)
</TABLE>
Please note the following in reviewing the data presented above:
- On March 30, 1998, we completed a spin-off distribution of a subsidiary,
UGO Networks, reducing our majority ownership of UGO Networks to a
minority interest of approximately 18%. Since March 30, 1998, our
minority interest in UGO Networks has decreased to approximately 8% due
to private equity financings by UGO Networks. UGO Networks is an online
entertainment information and game company that commenced operations in
1997. The spin-off was made in order to permit UGO Networks to build a
separate management team that would concentrate on creating an online
entertainment information and game company and to position UGO Networks
to seek private equity financing. UGO Networks has been presented as a
discontinued operation in our consolidated statement of operations for
the year ended December 31, 1997. See Note 13 of Notes to Consolidated
Financial Statements.
- In January 1999, we issued 1,650,000 shares of Series B mandatorily
redeemable preferred stock for an aggregate of $16.5 million in cash.
Upon the closing of this offering, all outstanding shares of our Series A
and Series B mandatorily redeemable preferred stock will automatically
convert into an aggregate of 9,189,999 shares of common stock. For the
year ended December 31, 1998, the pro forma basic and diluted loss per
share reflecting the effects of the conversion would have been $(0.96).
See Note 14 of Notes to Consolidated Financial Statements.
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We derive revenues primarily from licensing our Internet commerce software
products and providing related services and support to our clients. We
commercially introduced our first product in December 1995.
We generally price licenses of our platform and applications on a per
server or site basis. Standard per server license fees for the Windows NT
solutions are $150,000 and for Unix solutions are $250,000. The recommended
production configuration that supports redundancy, fault-tolerance and
distributed load balancing across multiple processors is generally available for
a license fee of approximately $300,000 to $500,000. Licenses for product
configurations that support additional servers and users are available.
Additional applications, tools, business adapters, professional services and
maintenance services are provided at an additional cost to the client. Site
licenses are also available. Site licenses typically require the client to pay
additional fees based on the client's achieving specified electronic commerce
revenues. Payment terms are generally net 30 days. However, from time to time in
order to induce clients to license our products, we have extended payment terms
to up to one year.
Revenue from client product licenses is recognized upon shipment to the
client under an executed software license agreement when no significant
obligations or contractual commitments remain and collection is probable. If
acceptance by the client is required, revenue is recognized upon client
acceptance. License revenue from resellers of our products is recognized upon
shipment by the reseller when collection is probable.
Revenue from services is recognized as the services are rendered. Revenue
from services requiring significant modification or customization of our
software products is recognized on a percentage-of-completion basis. Revenue
from maintenance and client support services is recognized ratably over the term
of the agreement for such services. Our license agreements typically require the
client to purchase one year of maintenance and client support services.
Currently, our cost of services revenues exceeds our services revenues. We
anticipate that services margins may improve in the future, but there can be no
assurance that such improvement will occur.
We have incurred significant research and development expenses to develop
our products. We charge all research and development costs incurred to establish
the technological feasibility of a product or product enhancement to research
and development expense as incurred. In addition, we have made substantial
investments in our infrastructure to support revenue growth. We intend to
increase our staffing in all functional areas as required to accommodate any
revenue growth.
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<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses................... 32.1% 60.7% 66.9% 64.1% 62.6%
Services........................... 51.1 38.1 33.1 35.9 37.4
Other.............................. 16.8 1.2 -- -- --
------ ------ ------ ------ ------
Total revenues, net............. 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Cost of revenues:
Product licenses................... 3.4 3.5 4.6 3.0 3.0
Services........................... 71.4 83.7 41.5 46.9 39.4
Other.............................. 13.3 1.3 -- -- --
------ ------ ------ ------ ------
Total cost of revenues.......... 88.1 88.5 46.1 49.9 42.4
------ ------ ------ ------ ------
Gross profit......................... 11.9 11.5 53.9 50.1 57.6
------ ------ ------ ------ ------
Operating expenses:
Research and development........... 97.3 85.2 65.5 81.4 52.0
Sales and marketing................ 100.3 105.4 82.0 85.6 71.0
General and administrative......... 112.4 79.5 43.6 59.1 17.2
Noncash employee compensation...... 2.9 9.3 11.1 15.6 16.0
------ ------ ------ ------ ------
Total operating expenses........ 312.9 279.4 202.2 241.7 156.2
------ ------ ------ ------ ------
Loss from operations................. (301.0) (267.9) (148.3) (191.6) (98.6)
Net loss............................. (296.4)% (293.1)% (151.2)% (192.5)% (102.1)%
====== ====== ====== ====== ======
</TABLE>
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Total Revenues, Net. Total revenues, net include fees from product
licenses and services. Our total revenues, net increased from $2.4 million in
1996 to $8.1 million in 1997 and to $14.6 million in 1998. These increases
resulted primarily from increased licenses of our software products at a higher
average fee per client and, to a lesser extent, from the provision of services
to a larger client base. We expect that our target clients' Year 2000 projects
may adversely affect demand for our products in 1999 and 2000.
Cost of Revenues. Cost of product license revenues consists of royalties
payable to third parties for software that is embedded in or bundled with our
products, the costs of product media, documentation and manufacturing costs.
Cost of services revenues consists primarily of costs related to employees and
consultants providing services and support. Total cost of revenues decreased
from $7.1 million in 1997 to $6.7 million in 1998. Total cost of revenues
increased from $2.1 million in 1996 to $7.1 million in 1997. In 1997,
particularly during the earlier part of the year, we hired outside consultants
to supplement our professional services organization and to provide services and
support to our expanding client base, and also hired additional employees.
During the course of 1998, we continued
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<PAGE> 29
to hire additional personnel, which reduced our reliance on outside consultants,
and instituted implementation methodologies that resulted in shorter
implementation cycles. The implementation methodologies involve providing our
customers with a checklist that sets forth the steps, timing and procedures to
more effectively enable them to implement our Commerce Exchange family of
products. These measures, combined with the introduction of enhanced versions of
Commerce Exchange, reduced our cost of revenues as a percentage of total
revenues. As a result, cost of revenues as a percentage of total revenues
decreased from 88.5% for 1997 to 46.1% for 1998.
Research and Development. Research and development expenses consist of
costs related to research and development personnel, including salaries and
related expenses and consulting fees, and costs related to facilities and
equipment used in research and development. Research and development expenses
increased 39.3%, from $6.9 million in 1997 to $9.6 million in 1998. Research and
development expenses increased from $2.4 million in 1996 to $6.9 million in
1997. These increases were principally due to the addition of personnel to
support the design and development of our products. We expect to continue to
incur significant research and development expenses in future periods.
Sales and Marketing. Sales and marketing expenses consist of salaries and
related expenses for sales and marketing personnel, sales commissions and other
incentive compensation, travel and entertainment expenses and the costs of
marketing programs, including trade shows, promotional materials and
advertising. Sales and marketing expenses increased 41%, from $8.5 million 1997
to $12.0 million in 1998. Sales and marketing expenses increased from $2.4
million in 1996 to $8.5 million in 1997. These increases were due primarily to
the expansion of our sales and marketing organization and expanded marketing
activities, including advertising designed to increase awareness of our brand.
We expect to continue to incur significant sales and marketing expenses in
future periods.
General and Administrative. General and administrative expenses consist of
salaries and related expenses for administrative, finance and human resources
personnel and related facilities and equipment costs. General and administrative
expenses increased from $2.7 million in 1996 to $6.4 million in 1997 and 1998.
This increase reflected the additional administrative infrastructure necessary
to manage and support our growth. In addition, general and administrative
expenses for 1998 included approximately $0.5 million relating to an aborted
initial public offering.
Noncash Employee Compensation. Noncash employee compensation consists of
noncash charges for stock options granted to employees at exercise prices deemed
below the fair market value of our common stock at the time of grant. The amount
of the charge is equal to the difference between the exercise price of the stock
option and the deemed fair market value of our common stock multiplied by the
number of options granted. The charge is amortized over the vesting period of
the options (typically, five years). We recorded noncash employee compensation
of $1.6 million in 1998, $0.8 million in 1997 and $0.1 million in 1996.
Total Other Income (Expense). Other income (expense) consists primarily of
interest income earned on cash and cash equivalents, net of cash and noncash
interest expense for leased equipment. Our total other income (expense) was $0.1
million in 1996, $(0.1) million in 1997 and $(0.4) million in 1998.
Income Taxes. We have incurred losses since inception which have generated
net operating loss carryforwards of approximately $39.2 million at December 31,
1998 and $43.3 million at March 31, 1999 for federal and state income tax
purposes. These
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<PAGE> 30
carryforwards are available to offset future taxable income and expire in 2011
through 2019 for federal income tax purposes. We also had research and
development tax credit carryforwards in the amount of $1.4 million at December
31, 1998, and $1.8 million at March 31, 1999 which expire in 2002 through 2019.
These losses and credits may be subject to significant limitations on
utilization in future years because certain ownership changes have occurred. We
have historically filed our corporate income tax returns utilizing a fiscal year
end of March 31, which we changed to December 31, effective December 31, 1998.
See Note 12 of Notes to Consolidated Financial Statements.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $21.8 million at December
31, 1998 and $24.5 million at March 31, 1999. Our operating plans anticipate
taxable income in future periods; however, such plans make significant
assumptions which cannot be assured, including market acceptance of our products
by clients. Therefore, in consideration of our accumulated losses and the
uncertainty of our ability to utilize this deferred tax benefit in the future,
we have recorded a valuation allowance in the amount of $21.8 million at
December 31, 1998 and $24.5 million at March 31, 1999 to offset the deferred tax
benefit amount.
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Total Revenues, Net. Total revenues, net for the quarter ended March 31,
1999 were $7.0 million, an increase of $4.6 million over total revenues, net for
the quarter ended March 31, 1998 of $2.4 million. This increase is attributable
to our licensing more software products at higher average fees, as well as our
providing services to a larger client base.
Cost of Revenues. Total cost of revenues increased from $1.2 million for
the quarter ended March 31, 1998 to $3.0 million for the quarter ended March 31,
1999, an increase of $1.8 million. Total cost of revenue as a percent of total
revenues decreased from 49.9% for the quarter ended March 31, 1998 to 42.4% for
the same period in 1999. This decrease is due primarily to increased
productivity of our services personnel.
Research and Development. Research and development expenses increased $1.6
million, or 80%, from $2.0 million in the first quarter of 1998 to $3.6 million
in the first quarter of 1999. This increase was due principally to the addition
of personnel to support the design and development of our products.
Sales and Marketing. Sales and marketing expenses increased from $2.1
million in the first quarter of 1998 to $5.0 million in the first quarter of
1999, an increase of $2.9 million. These increases were due primarily to the
expansion of our sales and marketing organizations, higher commissions generally
reflecting increased revenues and expanded marketing activities.
General and Administrative. General and administrative expenses decreased
from $1.4 million to $1.2 million for the three months ended March 31, 1998 and
1999, respectively. This decrease was due primarily to lower legal and royalty
expenses and reductions in provisions for bad debt.
Noncash Compensation. Noncash employee compensation increased from $0.4
million for the quarter ended March 31, 1998 to $1.1 million for the quarter
ended March 31, 1999, primarily due to the January 1999 grant of 1,604,567
options to employees at a discount to deemed fair market value. We estimate that
we will recognize approximately $10.9 million of noncash employee compensation
expense in future periods through January 2004, including approximately $2.1
million during the remainder of 1999.
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<PAGE> 31
During the first quarter of 1999, we also recognized $0.4 million of
non-cash compensation expense related to stock options granted to two
consultants at a discount to deemed fair market value. Of this amount,
approximately $0.2 million was reflected in cost of sales and approximately $0.2
million was reflected in general and administrative expense. Based on the
performance of one of these consultants as determined by our chief executive
officer, we could recognize up to approximately $0.5 million of additional non-
cash compensation expense in future periods related to options granted to the
consultant.
Total Other Income (Expense). Other income (expense) increased by
approximately $0.2 million. This increase is largely attributable to interest
expense on amounts outstanding under our secured loan agreement for a portion of
the quarter ended March 31, 1999.
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<PAGE> 32
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for each of the nine quarters in the period ended March 31,
1999. The quarterly data have been prepared on the same basis as the audited
financial statements appearing in this prospectus and, in our opinion, include
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation. The results of operations for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31 MARCH 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses.... $ 491 $ 758 $ 1,533 $ 2,101 $ 1,546 $ 844 $ 3,002 $ 4,362 $ 4,386
Services............ 583 603 917 970 866 950 1,361 1,657 2,615
Other............... 100 -- -- -- -- -- 1 1 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues,
net............ 1,174 1,361 2,450 3,071 2,412 1,794 4,364 6,020 7,001
------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses.... 43 59 80 96 72 117 122 360 208
Services............ 2,069 1,805 1,576 1,294 1,132 1,318 1,530 2,072 2,756
Other............... 107 -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues....... 2,219 1,864 1,656 1,390 1,204 1,435 1,652 2,432 2,964
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss)... (1,045) (503) 794 1,681 1,208 359 2,712 3,588 4,037
Operating expenses:
Research and
development....... 1,263 1,799 1,854 1,947 1,964 2,093 2,569 2,932 3,637
Sales and
marketing......... 1,729 2,441 2,297 2,020 2,064 2,582 3,199 4,124 4,968
General and
administrative.... 1,469 1,732 1,714 1,490 1,425 2,062 1,615 1,254 1,213
Noncash employee
compensation...... 25 26 581 120 377 488 375 375 1,121
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 4,486 5,998 6,446 5,577 5,830 7,225 7,758 8,685 10,939
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from
operations.......... (5,531) (6,501) (5,652) (3,896) (4,622) (6,866) (5,046) (5,097) (6,902)
Other income
(expense):
Interest income..... 43 47 31 97 63 139 48 15 92
Interest expense.... (32) (80) (96) (105) (85) (130) (98) (383) (296)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total other income
(expense)...... 11 (33) (65) (8) (22) 9 (50) (368) (204)
Income taxes........ -- -- -- -- -- -- -- -- (45)
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from continuing
operations.......... $(5,520) $(6,534) $(5,717) $(3,904) $(4,644) $(6,857) $(5,096) $(5,465) $(7,151)
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 33
Our quarterly operating results will generally depend on the volume and
timing of sales of our products, which are difficult to predict. We plan to
increase our operating expenses to achieve revenue growth. If our revenues do
not increase as anticipated and our spending levels are not reduced accordingly,
a significant decline in quarterly operating results could occur. We expect to
experience fluctuations in quarterly operating results due to many factors,
including:
- the size and timing of significant client agreements, which typically
occur near the end of our fiscal quarter, but, if delayed, may not occur
until the next quarter;
- the length of the sales cycle for our products;
- fluctuations in demand for our products;
- the introduction of new products by us or our competitors;
- changes in prices by us or our competition; and
- the timing and amount of expenditures by us.
In addition, we believe, based on general software industry trends, that sales
of our products will typically be highest in the fourth quarter of the year and
lowest in the first quarter. As a result, period-to-period comparisons of our
results of operations may not be meaningful, and should not be relied on as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of mandatorily redeemable preferred stock, which have raised approximately
$64.5 million. At March 31, 1999, we had cash and cash equivalents of $7.1
million and working capital of $5.3 million.
We have had significant negative cash flows from operating activities to
date. Net cash used in operating activities for fiscal years 1997 and 1998 and
the three months ended March 31, 1999 was $22.2, $16.6 and $4.6 million,
respectively. Net cash used in operating activities in each of these periods was
primarily the result of expenditures for product development, sales and
marketing and infrastructure as well as the provision of extended payment terms
to clients. For the year ended December 31, 1998, our net accounts receivable
increased $2.0 million, from $4.2 million to $6.2 million. This increase was
primarily attributable to the significant increase in sales, particularly
several large sales in December 1998. The $4.4 million decrease in working
capital during the year ended December 31, 1998 was largely attributable to the
$5.2 million decrease in cash and cash equivalents and a $2.3 million increase
in accounts payable and accrued expenses, only partially offset by the increase
in accounts receivable. The increase in cash and cash equivalents and working
capital at March 31, 1999 was largely the result of the January 1999 issuance of
1,650,000 share of Series B manditorily redeemable preferred stock for an
aggregate of $16.5 million in cash.
Net cash used in investing activities consists primarily of capital
expenditures for computer equipment, purchased software, office equipment,
furniture, fixtures and leasehold improvements. Capital expenditures for
property and equipment for 1998 aggregated $1.9 million, primarily for computer
equipment. As of December 31, 1998, we also had commitments under noncancelable
operating leases of $8.6 million and under noncancelable capital leases of $2.1
million.
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<PAGE> 34
Effective as of May 1998, we amended our secured loan agreement with
Comdisco, Inc., one of our stockholders that holds warrants to purchase our
common stock, under which our maximum borrowings were increased to $11.0
million. Outstanding amounts under the loan agreement accrue interest, which is
payable monthly, at a rate of 10% per annum and is secured by our accounts
receivable. We may borrow amounts under the loan agreement for a period of
twelve months subsequent to our initial borrowing under the loan agreement
(which occurred in October 1998) or until completion of this offering. The loan
principal is due and payable at the later of 15 months from the initial
borrowing or 21 months from the date of the agreement. Although we have borrowed
under the loan agreement in the past, as of the date of this prospectus, we have
no outstanding borrowings under the loan agreement. See "Certain Transactions."
During the year ended December 31, 1998, less than 10% of our revenues were
generated by our foreign sales offices. At December 31, 1998, less than 6% of
gross receivables were denominated in foreign currencies. We do not engage in
any hedging activities although we may consider such activities if increasing
amounts of receivables are denominated in foreign currency.
We believe that our available cash resources, including the net proceeds
from this offering, will be sufficient to meet our working capital requirements
for at least the next twelve months. However, we may need additional financing
to support more rapid growth or to respond to competitive pressures or
unanticipated requirements. Additional financing, if needed, may not be
available on satisfactory terms or at all.
DISCONTINUED OPERATIONS
On March 30, 1998, we completed a spin-off distribution of our subsidiary,
UGO Networks, reducing our majority ownership of UGO Networks to a minority
interest of approximately 18%. Since March 30, 1998, our minority interest in
UGO Networks has decreased to approximately 8% due to private equity financings
by UGO Networks. UGO Networks is an entertainment information and game company
that commenced operations in 1997. We have presented UGO Networks as a
discontinued operation in our consolidated statement of operations for the year
ended December 31, 1997. We have not guaranteed and are not contingently liable
for any obligations of UGO Networks. During 1997, UGO Networks had no revenues
and incurred net losses of $1.3 million. A provision of $627 for estimated
operating losses of UGO Networks through the disposal date was recorded at
December 31, 1997. The basic loss per share and diluted loss per share for the
year ended December 31, 1997 attributable to discontinuance of the operations of
UGO Networks was approximately $0.14 per share. See Note 13 of Notes to
Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar business activities. We are
exposed to the risk that the systems on which we are dependent to conduct our
operations are not year 2000 compliant.
State of Readiness. We assembled an internal task force in June 1998 to
evaluate the impact, if any, of year 2000 issues and implement appropriate steps
to ensure
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<PAGE> 35
year 2000 compliance. The task force commenced a review of our information
technology, or IT, systems and our non-IT systems to identify those systems that
could be materially affected by year 2000 issues. The review focused on the
following categories: (1) our products, (2) critical business applications that
have been developed internally or are provided by suppliers and used in our
internal business systems and (3) our non-critical business applications that
have been developed internally or are provided by suppliers and used in our
internal business systems. The review of the first two categories has been
completed. Based on this review, we do not believe that we have material
exposure to the year 2000 issue with respect to our products since our products
correctly define the year 2000. We have also contacted all of our suppliers to
assess their year 2000 readiness. Based on the responses to a Company prepared
questionnaire received from suppliers of critical externally provided business
applications, we do not believe that we have any material year 2000 exposure. We
believe that our critical internal business systems are either year 2000
compliant, or that the operations preformed by these systems could be performed
manually or mechanically if they fail electronically. We intend to complete our
assessment and the replacement or remediation of any non-critical business
applications by September 30, 1999.
Costs. Based on the current status of our year 2000 program, the total
cost of effecting year 2000 compliance is not expected to exceed $350,000, of
which $250,000 had been incurred through March 31, 1999. These costs were
expensed in the period incurred and were paid out of working capital. However,
we may incur significant costs if unanticipated year 2000 compliance problems
arise. These unanticipated costs, or our failure to correct any unanticipated
year 2000 problems in a timely manner, could have a material adverse effect on
our business, financial condition, results of operations and prospects for
growth.
Risks. While our products are year 2000 compliant, we have not undertaken
any investigation regarding the year 2000 readiness of any of our clients.
Accordingly, we do not know whether our clients' business systems which they may
attempt to integrate with our products are year 2000 compliant. If a client is
not able to operate its systems with our products as a result of year 2000
problems with its systems, we would be adversely affected. If a major supplier
or client fails to convert its systems on a timely basis or converts in a manner
that is incompatible with our systems, our business, financial condition,
results of operations and prospects for growth could be materially adversely
affected.
We believe that year 2000 issues may affect purchasing patterns of our
clients and prospective clients. Many companies are expending significant
resources to upgrade their current software systems to year 2000 functionality.
These expenditures may reduce funds available to purchase software products and
related services such as those offered by us. In addition, year 2000 issues
could cause a significant number of companies, including our clients, to
reevaluate their current software application solutions needs, and in connection
with such reevaluation, select other solutions. Any of the foregoing could have
a material adverse effect on our business, results of operations, financial
condition and prospects for growth.
In addition, there can be no assurance that governmental agencies, utility
companies, banks, Internet access companies, third-party service providers and
others outside our control will be year 2000 compliant. The failure by those
entities to be year 2000 compliant could result in a systemic failure beyond our
control, such as prolonged Internet, telecommunications or electrical failure,
which could decrease the use of the Internet.
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<PAGE> 36
Furthermore, retailers and other business-to-consumer users of our products may
be unwilling to continue to license our products if their customers are unable
to use their credit cards to make electronic purchases because of year 2000
problems affecting banks or other credit card vendors. Any of the foregoing
could have a material adverse effect on our business, results of operations,
financial condition and prospects for growth.
Contingency Plan. Although we are engaged in an ongoing year 2000
assessment, we have not developed a contingency plan to address the worst-case
scenario that might occur if technologies we are dependent upon are not year
2000 compliant. The completion of our assessment and the remaining responses to
be received from all suppliers will be taken into account in determining the
need for and nature and extent of any contingency plan. We intend to develop any
required contingency plan by September 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions. SOP 98-9 generally
requires revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative vendor specific objective
evidence of the elements. We adopted SOP 98-9 for software transactions entered
into in 1998. The revenue allocated to licensing of software is generally
recognized when a fixed and determinable fee has been contractually established,
the product has been shipped to the client and when collectibility is probable.
The revenue allocated to the postcontract client support portion of a contract
is consistent with fees charged when client support is sold separately on a
renewal basis, and is recognized ratably over the term of the support. Revenue
from professional services, such as custom development, installation and
integration support, is recognized as the services are rendered. The adoption of
SOP 98-9 did not have a material impact on our results of operations.
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<PAGE> 37
BUSINESS
OVERVIEW
We are a leading provider of Internet commerce software solutions that
enable manufacturers, distributors and retailers to conduct business over the
Internet. Our products, which we call "enterprise commerce" software, enable
companies to build their online businesses and integrate them with their
existing business practices and enterprise systems. Commerce Exchange is our
family of enterprise commerce software, consisting of our Commerce Exchange
platform, applications, tools and business adapters. Commerce Exchange enables
our clients to address their principal selling and support processes, including
sales, order management, fulfillment and customer service. Our solution is
designed to enable businesses to:
- increase revenues by extending their sales efforts to include an
Internet-based distribution channel;
- reduce operating expenses by streamlining and automating their selling
and support processes;
- enhance customer loyalty by offering a personalized, online buying
experience; and
- create online processes based on existing and evolving business practices
and integrate information from existing systems with their online
systems.
Our solution can be expanded to meet the demand of large organizations with
complex selling processes, and can handle a large number of simultaneous users,
high transaction rates and large datastores. It also can be fully integrated
into every phase of selling and support processes, from order entry to customer
service. Commerce Exchange enables an organization to integrate its online
business with its existing business systems, including manufacturing, financial,
distribution and customer systems, and business practices. The functionality and
the ease of implementing, maintaining and upgrading our products address what we
believe is a growing desire by businesses to maximize return on investment by
more efficiently using their information systems.
INDUSTRY BACKGROUND
Commerce conducted over the Internet has grown dramatically in recent
years. Forrester Research, Inc., an information technology research firm,
estimates that intercompany trade of hard goods over the Internet will grow from
approximately $43 billion in 1998 to approximately $1.3 trillion in 2003.
Businesses have embraced Internet commerce because it enables them to both
increase revenues and reduce operating expenses by:
- establishing a new distribution channel for products and services;
- enhancing customer relationships by offering increased convenience and
personalization; and
- automating sales, support and customer service processes.
Because of its convenience and widespread accessibility, the Internet
provides businesses greater access to both new and existing customers. On the
Internet, businesses are not limited by geography or store hours as they seek to
reach customers domestically
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and internationally. Many customers now demand the option of purchasing goods
and services online rather than through traditional means, such as stores and
catalogs. Customer demand for online services has compelled companies to respond
to both traditional competitors that have extended their sales efforts to the
Internet and new competitors that only offer products and services online.
Internet commerce also enables businesses to enhance and personalize their
client relationships. Customers can access businesses' Internet sites 24 hours
per day, seven days per week from any Internet-enabled computer in any location.
Businesses can learn more about their customers' preferences by tracking their
product research and purchasing decisions online and tailoring their offerings
to those preferences. The customer information gained can be used by businesses
to serve their customers better not only online, but also through traditional
distribution channels.
Businesses are also embracing Internet commerce because it enables them to
reduce operating expenses by automating many commerce functions. Sales, support
and customer service processes require fewer resources online than in
traditional distribution channels. Businesses can also expand and automate their
relationships with suppliers and fulfillment partners. Businesses can reduce
their facilities, personnel and inventory costs by using the Internet.
In order to extend their operations to the Internet, businesses must
implement reliable information technology solutions to run mission-critical
online business applications without which the enterprise would not be able to
operate an online business. These solutions must meet rigorous performance
requirements and typically operate 24 hours per day, seven days per week. They
must be easy to use, while accessing a wide and complex array of databases and
computing platforms. During the initial years of Internet commerce, businesses
typically addressed these requirements by either building a custom solution or
purchasing a low-end system with only basic Internet commerce functionality.
We believe that few businesses have developed custom Internet commerce
solutions on a timely and cost-effective basis. Internet technology and business
requirements are evolving so rapidly that it is difficult for internal
information technology staffs to keep pace. Custom solutions are very expensive
to develop, install and maintain. Low-end systems, while less expensive, often
cannot support high transaction volumes, address complex and changing business
requirements or operate in conjunction with other systems. For these reasons, we
believe that many of these solutions have failed to deliver the full benefits of
Internet commerce. This has led to market demand for enterprise commerce
solutions that provide:
- Complete functionality for automating sales, order management,
fulfillment and customer service;
- Scalability to manage increasing numbers of users, higher transaction
rates and larger databases as transaction volume increases;
- Flexibility to meet the varying and evolving needs of businesses and to
permit rapid and cost-effective implementation, maintenance and upgrades;
and
- Interoperability to work in conjunction with new Internet technologies
and with an organization's existing business systems.
[ARCHITECTURE GRAPHIC]
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[Description of architecture graphic]
The graphic depicts the Commerce Exchange family of products. It depicts the
Process Application Server as the platform and shows the tools, including
Workplace, Visual Process Builder and Business Analyzer. It shows applications,
including Order Management, Account Management, Product Merchandising, Custom
Applications, and Third Party Applications that sit on top of the Process
Application Server. The Process Application Server shows business adapters that
link it to a company's business systems (Payment, Tax and Shipping), including
enterprise resource planning (ERP), supply chain management (SCM), and
electronic data interchange (EDI). It also shows operating system adapters for
Windows NT, Solaris and HP/VX, Web adapters for Microsoft IIS and Netscape, and
database adapters for SQL Server and Oracle.
<PAGE> 40
OUR PRODUCTS AND SERVICES
Our Commerce Exchange family of products may be arranged in a variety of
ways to meet clients' specific requirements and includes:
- Process Application Server, which provides an open, flexible foundation
to operate a sophisticated Internet business;
- WebBroker, which enables an enterprise commerce system to support
increasing demand; and
- Commerce Exchange applications, including Product Merchandising, Order
Management and Account Management.
The Commerce Exchange family of products also includes tools and business
adapters. Our tools include development tools to add functions to the system,
administration tools to manage the system and reporting tools to measure the
results of the system. Our business adapters enable integration of the Commerce
Exchange solution with existing business systems within the organization,
including manufacturing, financial, distribution and customer systems, or across
the Internet with third parties.
We provide a range of services to enable clients to implement and use the
Commerce Exchange family of products. Our professional services include project
management, implementation and integration, education and training and client
support services. As of May 1, 1999, we had 72 employees dedicated to providing
professional services and client education.
THE COMMERCE EXCHANGE SOLUTION
The Commerce Exchange solution is based on Process-Centric(TM) computing.
Process-Centric computing is an approach that enables our clients to create
software functionality modeled on their existing business practices, while
providing the flexibility to implement new Internet business processes.
Process-Centric computing enables a client's online processes to take into
account characteristics of the client's selling environment and its customers'
preferences. This approach provides each user with a personalized buying
experience. By building on process components, Process-Centric computing also
enables businesses to quickly make changes to their systems to adapt to changing
business conditions and to reduce the long-term maintenance costs associated
with supporting highly customized applications.
Our solution is designed to provide businesses with enterprise commerce
application software that is functionally comprehensive, expandable to meet the
requirements of global operations and flexible enough to apply online processes
to existing and evolving business practices. Our solution operates in
conjunction with a wide variety of Internet technologies and existing legacy
systems. The functionality and the ease of implementing, maintaining and
upgrading our products address what we believe is a growing desire by businesses
to maximize return on investment by more effectively deploying their information
systems.
COMMERCE EXCHANGE PLATFORM
Process Application Server
Our Process Application Server is a software platform upon which clients
can build and deploy sophisticated enterprise commerce solutions. The platform
is designed to allow
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these solutions to integrate with a wide variety of hardware, operating systems,
databases, Web servers and other business applications. The Process Application
Server comes bundled with our Product Merchandising, Order Management and
Account Management applications.
Developed in the C++ and Java programming languages, the platform provides
open application programming interfaces to enable custom application components
to be developed to extend a client's enterprise commerce system. The platform
supports industry standard Web browsers, including Microsoft Explorer and
Netscape Navigator, and operates on multiple operating systems, including
Microsoft Windows NT, Sun Solaris-Unix and HP-UX. Data access is handled via
native drivers that support industry-standard databases, including Microsoft SQL
Server, Oracle and Sybase. Microsoft IIS, Netscape Enterprise and Apache Web
servers are supported. The architecture facilitates migration to other database
and server platforms as client demand or market conditions require.
The Process Application Server incorporates both generally accepted and
advanced Internet security standards, such as SSL and X.509. The security
components enable secure communication across the Internet among businesses,
customers, trading partners and the information systems they use to manage their
businesses. These secure trading environments can be established without
affecting a client's existing security scheme or firewall. Commerce Exchange
supports three main layers of security: object-level, file system and database
security.
WebBroker
Our WebBroker product can be used by clients to manage the workload of
their enterprise commerce system by intelligently distributing Internet requests
across multiple application servers. WebBroker also enables multimedia content
to be displayed quickly and efficiently. By maximizing server availability and
minimizing wait times, WebBroker provides a lower total cost of ownership and a
higher level of client service. WebBroker also increases fault tolerance and
reliability for Internet commerce sites by eliminating reliance on a single
server.
COMMERCE EXCHANGE APPLICATIONS
Our applications work in conjunction with our Process Application Server to
provide functionality for sales, order management, fulfillment and customer
service. The adaptable nature of our applications enable clients to deploy them
in their standard form or to easily customize or extend them to meet their
individual requirements.
Our Commerce Exchange applications include:
- Product Merchandising: Our Product Merchandising application enables a
client to create an interactive catalog that provides an online buying
and selling experience. The application enables personalized product
views, as well as dynamic product pricing, discounting and promotions. It
also supports advanced up-selling, cross-selling, product comparison and
product alternative features. Self-service functions include advanced
search capabilities, resulting in an experience directed at buyers'
specific needs. Selling organizations can personalize their offerings for
different buyers, products and locations. Easy-to-use administrative
interfaces facilitate managing the addition, modification and usage of
catalog product information.
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- Order Management: Our Order Management application is designed to
support the personalized processing of orders within Commerce Exchange,
including order entry and order processing functions. Order entry
involves the capture of information required to place an order. Order
processing involves payment, shipping, inventory and taxation processes
once an order has been entered. The Order Management application supports
multiple payment and shipping methods.
- Account Management: Our Account Management application provides user
management, account tracking and management and online customer
self-service capabilities. The application enables the client to identify
and administer the users of the system and to logically assign those
users to specific groups. This enables the system functionality to be
personalized to different users and groups. The account tracking and
management functionality enables managers to set credit limits and
control and monitor the status of accounts. The application also provides
online buyers with the ability to manage their customer profile online,
as well as review shipment status and order and payment history. The
easy-to-use graphical interfaces also enable customers to cancel orders
as well as generate returns.
TOOLS
We provide a number of software development, system administration and
reporting tools that enable clients with limited programming experience to
customize and manage our software and monitor and analyze activity on their
enterprise commerce system. In addition, experienced engineers can utilize our
tools to develop advanced, customized applications for enterprise commerce as
well as other markets based on our software.
- Workplace: Our Workplace is a secure point of access for all system
management functions, such as application management, process modeling
and reporting. It provides a browser-based, remotely accessible interface
whose capabilities are determined by the security clearance of the
particular user. Workplace allows for either a single point of control or
distributed administration for all installed Commerce Exchange
applications.
- Visual Process Builder: Our Visual Process Builder enables the graphical
modeling, development and deployment of online business processes without
the need for traditional programming languages. Visual Process Builder
includes a comprehensive library of standard application process
components that enable the customization of the base application. Visual
Process Builder enables the Commerce Exchange solution to be adapted to
changing business and technology conditions.
- Business Analyzer: Our Business Analyzer enables graphical analysis and
manipulation of large amounts of data, such as products sold, total
sales, shipping analysis, site traffic, purchasing results and order
fulfillment. Clients can customize and easily build a wide variety of
reports to analyze captured data. Additionally, Business Analyzer can be
easily deployed over a corporate intranet, extranet or the Internet with
links to relational databases and existing data warehouses.
BUSINESS ADAPTERS
Our Business Adapters are designed to facilitate the seamless integration
of external business functions, allowing them to be managed within the Commerce
Exchange process
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framework. This technology allows existing enterprise resource planning, supply
chain management, client asset management and fulfillment business functions to
be extended to the Internet. Our Business Adapters are available for products in
the following areas:
- enterprise resource planning;
- supply chain management;
- customer asset management;
- sales tax calculation;
- shipping and fulfillment;
- payment processing;
- digital product clearinghouse;
- messaging interfaces;
- electronic data interchange, or EDI, translators; and
- zip codes.
SERVICES
Professional services include consulting and system integration services
that are associated with the planning, installation and customization of our
products. We have developed an implementation methodology that is designed to
facilitate the rapid and cost-effective implementation of our products. Our
implementation methodology is based on the following phases:
- sales cycle analysis;
- project planning and management;
- technology analysis and preparation;
- business design;
- site design;
- site development;
- site testing;
- conversion; and
- post-implementation review.
Technical education and training services for our clients and certified
systems integration partners are available both on-site and off-site and cover
the implementation, management, utilization and customization of our products.
Product training workshops are designed to give clients and partners the
knowledge that they need to configure, support and administer their Internet
commerce systems. Product training can also be customized to meet a client's
specific business needs.
Our client support is available up to 24 hours a day, seven days a week.
Technical support services include online support via the Internet, toll-free
telephone technical support and direct support from a client satisfaction team.
We have developed client service programs, including one-on-one workshops and
client satisfaction teams consisting of a sales representative, a technical
account manager and, in many cases, an executive sponsor. Client satisfaction is
tracked on an account-by-account basis and reported to our
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executive management team. To maximize client satisfaction, we have created a
client support and satisfaction division. The division's mission is to provide a
high level of client support and service, account management and advisory
services.
THE INTERWORLD ADVANTAGE
The advantages of our solution are:
- Comprehensive Functionality -- Our solution provides a comprehensive set
of applications for efficiently managing selling processes online,
including sales, order management, fulfillment and customer service.
Consumers and business buyers are provided with personalized buying
experiences. Selling organizations are provided with a workplace capable
of remotely administering on-line storefronts, user accounts, products,
prices and content.
- State-of-the-Art Technology Foundation -- Our technology is specifically
designed to support the deployment of mission-critical online business
applications without which the enterprise would not be able to operate an
online business. Our solution scales to meet the demands of large
organizations that have complex transactions, high numbers of
simultaneous users, high transaction rates and large databases. Our
solution can accommodate a client's increasing business volumes. The
Commerce Exchange software architecture is designed to operate on many
different computing platforms and to provide a reliable, secure and
flexible environment.
- Process-Centric(TM) Computing Approach -- The flexibility of our
Process-Centric(TM) computing approach allows the Commerce Exchange
solution to adapt to dynamically changing business and technology
conditions. This approach enables a client to create online processes
based on existing and evolving business practices and to integrate
information from existing systems with their online system.
Process-Centric computing facilitates the deployment of enterprise
commerce systems.
- Interoperability -- Our products are designed to work in conjunction with
new Internet technologies and with an organization's existing business
systems and third-party technologies.
SALES AND MARKETING
We market our products and services primarily through our direct sales
organization. As of May 1, 1999, our sales force consisted of 57 employees
located in nine domestic offices (Atlanta, Georgia; Bellevue, Washington;
Boston, Massachusetts; Chicago, Illinois; Dallas, Texas; Los Angeles,
California; New York, New York; Vienna, Virginia; and San Francisco, California)
and three international offices (London, Sydney and Tokyo). We intend to
continue to add sales personnel worldwide. We supplement our direct sales
efforts with strategic marketing alliances, including relationships with Active
Software, Inc., Agency.com, Inc., Cambridge Technology Partners, Inc., Cisco
Systems, Inc., Electronic Data Systems Corporation, Fort Point Partners, Inc.,
KPMG LLP, Sun MicroSystems, Inc., Net Perceptions, Inc., Trans Cosmos USA, Inc.,
USWeb Corporation and Whittman-Hart, Ltd. The contractual arrangements provide
for the partner to receive training from us and then market or provide sales
leads for our products through their direct sales force. We also have technology
and distribution partnerships with CyberSource Corporation, Federal Express
Corporation, Hewlett-Packard Company and Cisco Systems, Inc. The
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contractual arrangements provide for the joint development of compatible
products or extensions of our products, and provide for joint marketing and
sales effects.
We deploy sales teams consisting of both sales and technical professionals
to create proposals, presentations and demonstrations that address the
requirements of the client. The decision makers within our prospective clients
are typically their executive management teams. Currently, the sales cycle for
our products typically ranges from two to 12 months.
Our marketing programs are targeted at sales, marketing and information
technology executives within large, multi-national organizations. Marketing
activities include branding, such as advertising and public relations campaigns;
lead generation and management; direct mail campaigns; field and channel
marketing, including joint marketing with strategic partners; product marketing;
and development of technology alliances.
CLIENTS
We believe that those organizations that are most likely to use our
products sell a large number of products, through diverse distribution channels
with a large number of trading partners. Accordingly, we market our products and
services to large domestic and international manufacturers, distributors,
retailers and direct marketers. As of May 1, 1999, we had over 70 clients.
Set forth below is a representative list of our clients:
American Eagle Outfitters, Inc.
AT&T
Authentic Fitness Corporation
BP Australia Ltd.
Boo.com
Brooks Brothers, Inc.
Electronic Data Systems Corporation
Every CD, Inc.
Guess?, Inc.
GTE Communication Systems Corporation
Havas Interactive, Inc.
(formerly Cendant Corporation)
Insight Enterprises, Inc.
J&R Electronics, Inc.
Mattel, Inc.
Micro Warehouse, Inc.
Multiple Zones International, Inc.
NIKE, Inc.
Nippon Telegram and
Telephone Corp.
Oki Data America, Inc.
PETsMART.com, Inc.
ProTeam.com, Inc.
Seagate Technology, Inc.
Techwave, Inc.
The North Face, Inc.
Warnaco Inc.
COMPETITION
There is intense competition in the Internet commerce software industry. We
expect competition to intensify in the future. We compete against the in-house
development efforts of companies engaging in Internet commerce, as well as other
software application vendors and developers. Our current competitors include Art
Technology Group, BroadVision, Inc., CommerceOne, Inc., IBM, Intershop
Communications, Inc., Microsoft Corporation, Netscape Communications
Corporation, Open Market Inc., Oracle Corporation and Pandesic LLC. We expect
other companies to enter our market. We compete principally on the basis of
product performance, client service and price. Our market is still evolving, and
we may not be able to compete successfully with current or future
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competitors, and competitive pressures faced by us may have a material adverse
effect on our business, financial condition and results of operations. See "Risk
Factors -- We face intense competition, which could adversely affect our sales
and profitability."
PRODUCT DEVELOPMENT
We have both strategic and tactical development groups. The strategic
development group focuses on developing application functionality for sales,
support and client service processes, as well as enhancing the platform and
tools. The tactical development group develops products and features in
connection with specific client implementations. To the extent that we believe
that these products have broader application, they are incorporated into the
Commerce Exchange family of products. As of May 1, 1999, our development
organization was comprised of approximately 90 developers, development managers,
quality assurance personnel and testing engineers. Our expenses for research and
development were $2.4 million, $6.9 million and $9.6 million in 1996, 1997 and
1998, respectively.
We employ a collaborative product planning and development process. The
planning process involves gathering product requirements from our sales and
marketing organizations, as well as from clients and strategic partners. Clients
and partners have input into future product direction and functionality.
We follow a rigorous quality assurance and testing process. This process is
designed to identify software defects through the entire development cycle.
Several test types are employed and defect reports and metrics are tracked to
facilitate resolution, including system testing and performance benchmarking.
PROPRIETARY RIGHTS
We rely on intellectual property laws, employee and third-party
non-disclosure agreements and other methods to protect our proprietary rights.
We currently have one patent application pending in the United States relating
to our product architecture and technology. While we believe that the pending
patent application relates to a patentable invention, the pending or any future
patent applications may not be granted, and any patent relied upon by us in the
future may be challenged, invalidated or circumvented. Moreover, the rights
granted under any patent issued to us or under licensing agreements may not
provide competitive advantages to us. We believe that, due to the rapid pace of
technological innovation for Internet commerce solutions, our ability to
establish and maintain a position of technology leadership in the industry is
dependent more on the skills of our development personnel than upon the legal
protections afforded our existing technology.
Our agreements with employees, consultants and others who participate in
the development of our software may be breached, and we may not have adequate
remedies for any breach. In addition, our trade secrets may otherwise become
known to or independently developed by competitors. Furthermore, our efforts to
protect our proprietary technology may fail to prevent the development and
design by others of products or technology similar to or competitive with those
developed by us.
The computer software market is characterized by frequent and substantial
intellectual property litigation. Intellectual property litigation is complex
and expensive, and the outcome of such litigation is difficult to predict.
BroadVision, Inc. and Open Market Inc., two of our competitors, have been issued
U.S. patents on certain aspects of their electronic
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commerce products. In August 1998, we received a letter from counsel to Open
Market concerning the potential applicability of the Open Market patents to our
products. The letter further stated that Open Market was prepared to meet with
us to resolve issues concerning the applicability of their patents and to
discuss terms of an appropriate license agreement. In early September 1998, we
responded to the Open Market inquiry, informing Open Market that based on our
review of the Open Market patents and the analysis and advice of our patent
counsel, we believe that the technology used in our products is sufficiently
independent and does not infringe on the patents awarded to Open Market. We have
not received any further inquiries or correspondence from Open Market since that
time and have had no inquiries or discussions with BroadVision with regard to
patent matters. Although we do not believe that we are infringing their patent
rights, either of those companies may claim that we are doing so. If a claim of
patent infringement by these or other companies was made against us, we would
likely incur significant expenses in defending against the claim, which could
adversely affect our financial condition and results of operations. In addition,
if a claim of infringement is made against us and we are not successful in
defending against the claim, we could be liable for substantial damages. We may
also be required to make royalty payments, which could be substantial, to the
holder of the patent rights. These events could have a material adverse effect
on our business, financial condition, results of operations and prospects for
growth.
Our success will depend in part on our continued ability to obtain and use
licensed technology that is important to the performance of our products. An
inability to continue to procure or use such technology would likely have a
material adverse effect on us. In general, license terms range from 1 to 3 years
and, unless terminated upon notice by one of the parties, generally renew for
additional one year periods.
EMPLOYEES
As of May 1, 1999, we had a total of 274 employees. Of the total employees,
91 were in development and product management, 75 in sales and marketing, 74 in
worldwide services and 34 in administration. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
PROPERTIES
Our principal offices are located in New York, New York and consist of
approximately 48,000 square feet of leased office space. In June 1999, we leased
an additional 50,000 square feet in our existing facility. As a result, our
annual rental costs for our principal offices has increased by $1.1 million to
an aggregate of approximately $2.1 million. The lease for the New York offices
expires in April 2015. With the additional space, we believe that our existing
facilities are adequate to meet our needs for the foreseeable future. We expect
to sublease a substantial portion of the additional space until we require the
space for our operations. We also rent office space in various cities in the
United States and in other countries for sales and field service and support
activities.
LITIGATION
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael J. Donahue........................ 36 Chairman
Alan J. Andreini.......................... 52 President and Chief Executive
Officer, Director
Peter Schwartz............................ 55 Chief Financial Officer
Daniel Turano............................. 50 Vice President, Worldwide Field
Operations
Stephen Law............................... 45 Vice President, Engineering
Amy Aguilar-Brown......................... 33 Vice President, Legal Affairs and
Secretary
Kenneth G. Langone........................ 63 Director
Joseph C. Robinson........................ 35 Director
Yves Sisteron............................. 44 Director
Jack Slevin............................... 62 Director
Russell West.............................. 55 Director
</TABLE>
Michael J. Donahue. Mr. Donahue co-founded InterWorld in March 1995 and
serves as our Chairman. He served as Co-Chairman and Chief Technology Officer of
InterWorld from April 1997 until June 1998. He also served as President of
InterWorld from March 1995 until April 1997. Prior to founding InterWorld, from
1992 to 1995, Mr. Donahue was the sole proprietor of Donahue & Associates, Inc.,
an information technology consulting firm specializing in strategic planning and
systems reengineering.
Alan J. Andreini. Mr. Andreini joined InterWorld in April 1997 and serves
as our President and Chief Executive Officer and as a director. He served as
President and Chief Operating Officer of InterWorld from April 1997 to June
1998, at which time he became Chief Executive Officer. Prior to joining
InterWorld, Mr. Andreini was Executive Vice President and a member of the Office
of the President of Comdisco, Inc. Mr. Andreini joined Comdisco in 1978, and was
named Senior Vice President in 1986 and Executive Vice President in 1994.
Peter Schwartz. Mr. Schwartz joined InterWorld in October 1998 and serves
as our Chief Financial Officer. Since July 1983 and prior to joining InterWorld,
Mr. Schwartz served in various financial positions with Computer Associates
International, Inc., most recently as Chief Financial Officer from April 1987 to
June 1998. From June 1977 to June 1983, Mr. Schwartz served in various financial
positions with Xerox Corporation. Mr. Schwartz also currently serves as a
director of General Semiconductor, Inc.
Daniel Turano. Mr. Turano joined InterWorld in October 1997 and serves as
our Vice President, Worldwide Field Operations. Prior to joining InterWorld, Mr.
Turano was Vice President, North American Field Operations for Scopus
Technology, Inc. from
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January 1997 to October 1997. From September 1995 to December 1996, he served as
Senior Vice President of Worldwide Field Operations for Siebel Systems, Inc.
From September 1991 to September 1995, Mr. Turano served in various senior sales
capacities at Oracle Corporation, including Group Vice President of Eastern U.S.
Sales.
Stephen Law. Mr. Law joined InterWorld in May 1998 as our Vice President,
Engineering. Prior to joining InterWorld, Mr. Law was the Chief Technology
Officer of Global Financial Services at Perot Systems Corporation from February
1997 to May 1998. Prior to joining Perot Systems, Mr. Law was the Vice President
of Global Derivatives Systems Development at Citibank Corporation from December
1992 to February 1997.
Amy Aguilar-Brown. Ms. Aguilar-Brown joined InterWorld in September 1997
as Vice President, Legal Affairs. Ms. Aguilar-Brown was also appointed Secretary
of InterWorld in May 1998. Prior to joining InterWorld, Ms. Aguilar-Brown served
as Director of Field Operations and Legal Affairs for Sybase, Inc. from April
1994 to September 1997. From January 1992 to April 1994, she served as Director
of Operations for MicroDecisionware, Inc., which was acquired by Sybase, Inc.
Kenneth G. Langone. Mr. Langone has been a director of InterWorld since
1996. Mr. Langone has been Chairman and President of Invemed Associates LLC,
which he founded, since 1974. He is a director of The Home Depot, Inc., General
Electric Company, Unifi, Inc., DBT Online, Inc. and Tricon Global Restaurants,
Inc.
Joseph C. Robinson. Mr. Robinson has been a director of InterWorld since
1995. Mr. Robinson co-founded InterWorld in March 1995 and served as its
Executive Vice President until May 1998. Since October 1998, Mr. Robinson has
served as the Chairman of UGO Networks, Inc. Prior to joining InterWorld, from
1989 to 1995, Mr. Robinson was employed by Douglas, Elliman, Gibbons and Ives, a
real estate brokerage firm.
Yves Sisteron. Mr. Sisteron has been a director of InterWorld since 1996.
Mr. Sisteron has been a Principal of Global Retail Partners, L.P., an investment
fund, since January 1996 and Manager of U.S. Investments at Carrefour S.A. since
1993. Mr. Sisteron serves as a director of P.F. Chang's China Bistro, Inc. and
Zany Brainy, Inc.
Jack Slevin. Mr. Slevin has been a director of InterWorld since 1997. From
June 1995 until his retirement in January 1999, Mr. Slevin was the Chairman and
Chief Executive Officer of Comdisco, Inc. From October 1994 to June 1995, Mr.
Slevin was Chief Operating Officer at Comdisco, Inc. and from January 1993 to
October 1994, he was Executive Vice President of North American Sales at
Comdisco, Inc. He became a member of the Office of the President when it was
created in 1992 and was a member of Comdisco's board of directors from 1979
until January 1999. Mr. Slevin is also currently a director of U.S. West, Inc.
and Telehub Network Services Corporation.
Russell West. Mr. West has been a director of InterWorld since 1996. Mr.
West has been President of OneNetPlus.com, a provider of Internet technology
solutions, since May 1999. He was an Executive Vice President and Chief
Technology Officer for Comdisco, Inc., where he was employed from 1977 to May
1999.
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified. All of our
directors serve on the board of directors pursuant to an agreement that will
terminate upon the closing of this offering.
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COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established an audit committee and a
compensation committee. The board of directors does not have a nominating
committee. The selection of nominees to the board of directors will be made by
the entire board of directors.
The audit committee is comprised of Messrs. Langone and Slevin. The audit
committee is responsible for reviewing with management our financial controls
and accounting and reporting activities. The audit committee reviews the
qualifications of our independent auditors, makes recommendations to the board
of directors regarding the selection of independent auditors, reviews the scope,
fees and results of any audit and reviews non-audit services and related fees.
The compensation committee is comprised of Messrs. Sisteron and Slevin. The
compensation committee is responsible for the administration of all salary and
incentive compensation plans for our officers and key employees, including
bonuses. The compensation committee also administers our stock option and
employee stock purchase plans.
DIRECTOR COMPENSATION
Directors do not receive any cash remuneration for serving as directors.
All directors are eligible to participate in our stock option plan. Each of
Messrs. Langone, Sisteron, Slevin and West were granted options to purchase
40,000 shares of common stock at an exercise price of $2.00 per share upon their
appointment to the board of directors. These options vest as to 20% on the first
anniversary of the date of grant and 5% on the first day following each
completed quarter thereafter. See "-- Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Slevin, a member of the compensation committee, was Chairman and Chief
Executive Officer of Comdisco, Inc., until his retirement in January 1999.
Comdisco, Inc. has in the past provided equity and debt financing to InterWorld.
See "Certain Transactions -- Issuances of Capital Stock," " -- Issuances of
Warrants," and " -- Leases and Licenses with Comdisco, Inc.; Secured Loan from
Comdisco, Inc."
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid to our current Chief Executive Officer, the four other most
highly compensated executive officers, our former Chief Executive Officer and
our former Vice President, Marketing (collectively, the "Named Executive
Officers") for services rendered in all capacities to us in 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------- SECURITIES
OTHER UNDERLYING ALL
ANNUAL OPTIONS/ OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION SAR(#) COMPENSATION
- ----------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Donahue............ 1998 $240,000 -- -- -- --
Chairman 1997 240,000 -- -- -- --
Alan J. Andreini(1)........... 1998 $226,667 -- -- -- --
President and Chief 1997 146,666 -- -- 892,849(2) $28,715(3)
Executive Officer
Daniel Turano(4).............. 1998 $150,000 $ 63,723 -- -- --
Vice President, 1997 30,000 100,000 -- 195,000(5) --
Worldwide Field Operations
Stephen Law(6)................ 1998 $ 98,542 $ 38,819 -- 175,000(7) --
Vice President, 1997 -- -- -- -- --
Engineering
Amy Aguilar-Brown(8).......... 1998 $145,000 $ 10,000 -- 15,000(9) --
Vice President, Legal 1997 39,750 7,500 -- 20,000(10) --
Affairs and Secretary
Robert L. Zangrillo(11)....... 1998 $184,800 -- $103,857(12) -- --
Former Chief 1997 240,000 -- 36,000(13) -- --
Executive Officer
Susan Fairty(14).............. 1998 $150,000 $ 75,000 -- -- --
Former Vice 1997 23,333 11,667 -- 175,000(15) --
President, Marketing
</TABLE>
- -------------------------
(1) Mr. Andreini joined InterWorld in April 1997.
(2) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Options to purchase 267,885 shares of common stock
granted to Mr. Andreini vested on May 1, 1997, and he exercised options to
purchase 250,000 shares in March 1998. The remaining options held by Mr.
Andreini vest (a) as to 178,570 shares of common stock, upon the
consummation of this offering, and (b) as to 446,424 shares of common
stock, in 16 equal quarterly installments commencing June 30, 1998. The
options granted to Mr. Andreini expire on July 28, 2004.
(3) Represents relocation expense reimbursement.
44
<PAGE> 52
(4) Mr. Turano joined InterWorld in October 1997.
(5) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Mr. Turano's options vest (a) as to 45,000 shares, on
August 15, 1998 and (b) as to the remaining 150,000 shares, 20% on November
1, 1998 and 5% on the first day following each completed quarter
thereafter. The options granted to Mr. Turano expire on November 1, 2004.
(6) Mr. Law joined InterWorld in May 1998.
(7) Options were granted pursuant to our stock option plan at an exercise price
of $4.25 per share. Mr. Law's options vest (a) as to 25,000 shares, on May
11, 1998 and (b) as to the remaining 150,000 shares, 40,000 shares vest
during his first year of employment, and 30,000 shares vest during each of
his second, third, fourth and fifth years of employment. The options
granted to Mr. Law expire on May 11, 2005.
(8) Ms. Aguilar-Brown joined InterWorld in September 1997.
(9) Options were granted pursuant to our stock option plan at an exercise price
of $4.25 per share and vest as to 20% on January 1, 1999 and as to 5% on
the first day following each completed quarter thereafter. Such options
expire on January 1, 2005.
(10) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share and vest as to 20% on September 15, 1998 and as to 5% on
the first day following each completed quarter thereafter. Such options
expire on September 15, 2004.
(11) Mr. Zangrillo resigned in June 1998.
(12) Includes $75,000 in loan principal forgiveness and $10,857 in interest
forgiveness (see "Certain Transactions -- Loans") and $18,000 paid to a
corporation controlled by Mr. Zangrillo for rent in connection with a home
office.
(13) Represents amounts paid to a corporation controlled by Mr. Zangrillo for
rent in connection with a home office.
(14) Ms. Fairty joined InterWorld in November 1997 and resigned in February
1999.
(15) Options were granted pursuant to our stock option plan at an exercise price
of $2.00 per share. Ms. Fairty's options vested (a) as to 25,000 shares, on
November 3, 1997 and (b) as to 30,000 shares, on November 3, 1998. Ms.
Fairty exercised options to purchase 55,000 shares in March 1999 and the
remaining options terminated in connection with her resignation.
45
<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1998 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR
OPTIONS EMPLOYEES IN BASE GRANT
GRANTED FISCAL PRICE EXPIRATION DATE
NAME (#)(1) YEAR ($/SH) DATE VALUE(2)
- ---- ---------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Michael J. Donahue........... -- -- -- -- --
Alan J. Andreini............. -- -- -- -- --
Daniel Turano................ -- -- -- -- --
Stephen Law (3).............. 175,000 15.0% 4.25 5/11/05 $943,300
Amy Aguilar-Brown(4)......... 15,000 1.3% 4.25 1/01/05 $ 80,900
Robert L. Zangrillo.......... -- -- -- -- --
Susan Fairty................. -- -- -- -- --
</TABLE>
- -------------------------
(1) All options were granted pursuant to our stock option plan.
(2) Grant date value was determined on the date of grant using the Black-Scholes
option-pricing model based on the following assumptions: volatility -- 75%;
expected life -- five years; risk-free interest rate -- 5.55%; and no
dividend yield.
(3) The options held by Mr. Law vest (a) as to 25,000 shares, on May 11, 1998
and (b) as to the remaining 150,000 shares, 40,000 shares vest during his
first year of employment, and 30,000 shares vest during each of his second,
third, fourth and fifth years of employment.
(4) The options held by Ms. Aguilar-Brown vest as to 20% on January 1, 1999 and
as to 5% on the first day following each completed quarter thereafter.
In February 1999, we granted options to purchase 200,000 shares of our
common stock to Peter Schwartz and options to purchase 22,500 shares of our
common stock to Amy Aguilar-Brown, in both cases for an exercise price of $10.00
per share. With respect to these options, Mr. Schwartz has options to purchase
100,000 shares that are currently vested and Ms. Aguilar-Brown has options to
purchase 5,000 shares that are currently vested. The remaining options vest as
to 20% on the first anniversary of the date of grant and 5% on the first day
following each completed quarter thereafter.
46
<PAGE> 54
FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the number and
value of the outstanding options held by the Named Executive Officers at
December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END(#): OPTIONS AT FISCAL YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- ---- ------------------------------ ------------------------------
<S> <C> <C>
Michael J. Donahue......... 0/0 0/0
Alan J. Andreini........... 101,560/541,289 1,320,280/7,036,757
Daniel Turano.............. 75,000/120,000 975,000/1,560,000
Stephen Law................ 48,333/126,667 519,580/1,361,670
Amy Aguilar-Brown.......... 5,000/30,000 65,000/356,250
Robert L. Zangrillo........ 0/0 0/0
Susan Fairty............... 55,000/0 715,000/0
</TABLE>
- -------------------------
(1) Based on an assumed initial public offering price per share of the common
stock of $15.00.
STOCK PLANS
Stock Option Plan. We have adopted the amended and restated 1996 stock
option plan. The stock option plan permits the grant of (1) options to purchase
shares of common stock intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code and (2) options that do not so qualify,
or non-qualified options. No award may be granted under the stock option plan
after 2006. The stock option plan is administered by the compensation committee.
Under the stock option plan, 6,600,000 shares of common stock have been
reserved for issuance, subject to adjustment for stock splits, stock dividends,
recapitalizations, reclassifications and similar events. If an option granted
under the stock option plan expires unexercised or is terminated or cancelled
for any reason, the shares of common stock previously reserved for issuance upon
exercise of the option will be available for future option grants under the
stock option plan.
Options may be granted to persons who are, at the time of grant, employees,
officers or directors of or consultants to us, except that incentive stock
options may only be granted to individuals who are our employees.
Options granted under the stock option plan must be exercised within no
more than seven years of the grant date, except that an incentive stock option
granted to a person owning more than 10% of the total combined voting power of
all classes of our stock must be exercised within no more that five years of the
grant date. No options may be assigned or transferred by the optionee other than
by will or the laws of descent or distribution. Each option may be exercised
only by the optionee during his or her lifetime.
The exercise price for each option granted will be determined by the
compensation committee at the time of grant. Options may not be granted at an
exercise price less than the fair market value per share of common stock. For
incentive stock options granted to a
47
<PAGE> 55
ten percent stockholder, the exercise price shall not be less than 110% of the
fair market value per share of common stock.
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the compensation committee. Options granted under
the stock option plan typically vest 20% on the first anniversary of the date of
grant and 5% each quarter thereafter.
As of March 31, 1999, an aggregate of 4,716,331 options were outstanding
under the stock option plan at a weighted average exercise price of $5.18 per
share, options to purchase 511,886 shares had been exercised and an aggregate of
1,381,783 shares were available for future options grants. Each director who is
not our employee receives non-qualified options to purchase 40,000 shares of
common stock when such director is elected to the board.
Employee Stock Purchase Plan. We have adopted, effective upon the date of
this prospectus, an employee stock purchase plan. Under the employee stock
purchase plan, eligible employees will be provided an opportunity to purchase
shares of common stock generally through regular payroll deductions. The
employee stock purchase plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code. The total number
of shares of common stock that are authorized for issuance under the employee
stock purchase plan is 1,000,000. All of our full-time employees will be
eligible to participate in the employee stock purchase plan, subject to certain
limited exceptions. Employees will be given an opportunity to purchase shares of
common stock during consecutive six-month periods, and the right to purchase
shares will expire on the last day of the sixth-month period. Employees electing
to participate for any semi-annual period will authorize payroll deductions at a
stated whole percentage ranging from 2% to 10% of the employee's compensation.
The purchase price for shares offered under the employee stock purchase plan
each year will be equal to a percentage designated by the compensation committee
(not less than 85%) of the lower of the fair market value of the common stock at
the commencement or termination of the six-month period as evidenced by the
initial public offering price per share in the case of the commencement of the
six-month period beginning on the date of this prospectus or, in all other
cases, by the closing price of the common stock on such date as reported on the
Nasdaq National Market. The employee stock purchase plan will expire on the
tenth anniversary of the date of this prospectus, unless sooner terminated by
the board of directors. Our board of directors may amend, suspend or terminate
the employee stock purchase plan at any time and from time to time, subject to
certain limitations. The employee stock purchase plan will be administered by
the compensation committee.
401(k) PLAN
We have a defined contribution savings plan, or a 401(k) Plan, which
qualifies under Section 401(k) of the Code. Participants may contribute up to
15% of their gross wages, not to exceed, in any given year, a limitation set by
Internal Revenue Service regulations. Our 401(k) Plan provides for discretionary
contributions to be made by us as determined by our board of directors. We have
not made any discretionary contributions to our 401(k) Plan.
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<PAGE> 56
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation and bylaws provide that the liability of
our directors for monetary damages will be limited to the fullest extent
permissible under Delaware law. This limitation of liability does not affect the
availability of injunctive relief or other equitable remedies.
Our bylaws provide that we will indemnify our directors and officers to the
fullest extent permissible under Delaware law. These indemnification provisions
require us to indemnify such persons against certain liabilities and expenses to
which they may become subject by reason of their service as a director or
officer to us or any of our affiliated enterprises. In addition, prior to the
consummation of this offering, we will enter into indemnification agreements
with each of our directors providing indemnification to the fullest extent
permitted by applicable law and also setting forth certain procedures, including
the advancement of expenses, that apply in the event of a claim for
indemnification.
49
<PAGE> 57
CERTAIN TRANSACTIONS
ISSUANCES OF CAPITAL STOCK
In March 1996, in connection with a round of private equity financing, we
issued 7,500 shares of common stock to Yves Sisteron, one of our directors,
250,000 shares of common stock to Wight Investment Partners, a partnership in
which Robert Zangrillo, one of our principal stockholders, has a pecuniary
interest and 500,000 shares of common stock to Comdisco, Inc., a company of
which Jack Slevin, one of our directors, served as Chairman and Chief Executive
Officer and Alan J. Andreini, our President and Chief Executive Officer, also
served as a director, for a purchase price of $2.00 per share.
In July 1996, in connection with a round of private equity financing, we
issued 156,382 shares of common stock to Kenneth Langone, one of our directors
and Chairman and President of Invemed Associates LLC, an aggregate of 49,661
shares of common stock to certain stockholders of the corporate parent of, and
officers and employees of, Invemed Associates LLC, an aggregate of 422,651
shares of common stock to Global Retail Partners, L.P. and its affiliates, an
investment partnership of which Mr. Sisteron is a Principal and an aggregate of
158,494 shares of common stock to George Soros, one of our principal
stockholders, for himself and for certain trusts for the benefit of his
children, for a purchase price of $4.732 per share.
In December 1996, in connection with a round of private equity financing,
we issued 40,000 shares of common stock to Mr. Andreini, an aggregate of 32,000
shares of common stock to Global Retail Partners, L.P. and its affiliates,
40,000 shares of common stock to Mr. Langone and an aggregate of 681,600 shares
of common stock to Mr. Soros, for himself and for certain trusts for the benefit
of his children, for a purchase price of $6.25 per share.
In May 1997, in connection with a round of private equity financing, we
issued 33,333 shares of common stock to Mr. Andreini, 81,500 shares of common
stock to Mr. Langone, 33,333 shares of common stock to Mr. Slevin, 501,333
shares of common stock to Mr. Soros, 133,333 shares of common stock to Comdisco,
Inc. and an aggregate of 18,500 shares of common stock to certain stockholders
of the corporate parent of, and officers and employees of, Invemed Associates
LLC, for a purchase price of $7.50 per share.
In November 1997, in connection with a round of private equity financing,
we issued 29,412 shares of common stock to Comdisco, Inc. and 428,000 shares of
common stock to Mr. Soros for a purchase price of $8.50 per share.
In March 1998, in connection with a round of private equity financing, we
issued 1,000 shares of common stock to Invemed Fund, L.P., a fund affiliated
with Invemed Associates LLC.
INVESTMENT BANKING FEES
In January 1999, in connection with a round of private equity financing of
$16,500,000, Invemed Associates LLC received approximately $405,000 as
compensation for investment banking services provided to us.
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<PAGE> 58
ISSUANCES OF WARRANTS
In connection with a round of private equity financing, in March 1996 we
issued warrants to Comdisco, Inc. to purchase 103,420 shares of common stock at
an exercise price of $2.00 per share.
In connection with an equipment lease financing, in March 1996, we issued
warrants to Comdisco, Inc. to purchase 37,500 shares of common stock at an
exercise price of $2.00 per share.
In connection with a letter of credit in support of a facility deposit, in
January 1997, we issued warrants to purchase 25,260 shares of common stock at an
exercise price of $6.25 per share to Comdisco, Inc.
In February 1997, in connection with an equipment lease financing, we
issued warrants to purchase 39,200 shares of common stock at an exercise price
of $6.25 per share to Comdisco, Inc.
In April 1997, we issued warrants to purchase an aggregate of 75,000 shares
of common stock at an exercise price of $7.50 per share, of which warrants to
purchase 73,657 shares were issued to Global Retail Partners, L.P. and its
affiliates as consideration for certain financial advisory services. Mr.
Sisteron, one of our directors, is a principal of Global Retail Partners, L.P.
In connection with two rounds of private equity financing, in November 1997
and March 1998, we issued warrants to purchase an aggregate of 110,294 and
39,864 shares of common stock, respectively, at an exercise price of $9.775 per
share to certain stockholders of the corporate parent of, and officers of,
Invemed Associates LLC, including warrants to purchase 103,129 shares of common
stock to Mr. Langone, in consideration for assistance provided by Invemed
Associates LLC in connection with the financings.
In connection with a loan and security agreement effective as of May 1998,
we issued a warrant to purchase up to 103,532 shares of common stock at an
exercise price of $9.775 per share to Comdisco, Inc. as described below under
"-- Leases and Licenses with Comdisco, Inc.; Secured Loan from Comdisco, Inc."
LOANS
In May 1996, we made loans, representing advances against salaries and
wages, to Messrs. Donahue, Robinson and Zangrillo in the principal amounts of
$72,118.66, $22,296.23 and $98,169.64, respectively, bearing interest at a rate
of 6% per annum. The principal and interest on the loans to Messrs. Donahue and
Robinson will be forgiven in equal annual installments starting in 1999, except
that if either of them voluntarily terminates his employment or service as a
director prior to May 2001, his loan, including interest, will become due and
payable in May 2001. In May 1998, Mr. Zangrillo repaid $23,169.64 of the
principal amount of his loan, reducing the principal amount thereof to $75,000.
The balance of Mr. Zangrillo's loan was forgiven and expensed in June 1998.
LEASES AND LICENSES WITH COMDISCO, INC.; SECURED LOAN FROM COMDISCO, INC.
During 1997, we completed a sale-leaseback transaction with Comdisco, Inc.,
selling computer equipment, office equipment and furniture and fixtures having a
fair market value of approximately $878,000, net of accumulated depreciation,
for approximately
51
<PAGE> 59
$819,000, realizing a loss of approximately $59,000. The lease has been
accounted for as a capital lease. During 1997, we acquired computer equipment,
office equipment and furniture and fixtures pursuant to capital lease agreements
with Comdisco. The leases had an aggregate initial principal amount of
approximately $3,181,000. In connection with the leases, in March 1996 and
February 1997, we issued warrants to purchase 37,500 and 39,200 shares of common
stock at exercise prices of $2.00 and $6.25 per share, respectively, to
Comdisco, Inc.
During 1996 and 1997, we recognized product license and service revenues
from Comdisco, Inc. of approximately $156,000 and $12,000, respectively.
Effective as of May 1998, we entered into a secured loan agreement with
Comdisco, Inc. under which we may borrow up to $11.0 million. The loan accrues
interest, which is payable monthly, at a rate of 10% per annum and is secured by
our accounts receivable. We may borrow amounts under the line for a period of
twelve months subsequent to our initial borrowing under the loan agreement
(which occurred in October 1998) or until completion of this offering. The loan
principal is due and payable at the later of 15 months from the draw down date
of any advance or 21 months from the date of the date of the agreement. In
connection with the loan agreement, Comdisco, Inc. was issued a warrant to
purchase up to 103,532 shares of common stock at an exercise price of $9.775 per
share. Although we have borrowed under the loan agreement in the past, as of the
date of this prospectus, we have no outstanding borrowings under the loan
agreement.
RECENT SALES OF SECURITIES BY CERTAIN PRINCIPAL STOCKHOLDERS
In January 1998, Mr. Zangrillo sold an aggregate of 1,000,000 shares of
common stock to certain of our stockholders for an aggregate purchase price of
$6,000,000, or $6.00 per share, including an aggregate of 921,168 shares sold to
George Soros, for himself and for certain trusts for the benefit of his
children.
In February 1998, Mr. Donahue sold 33,000 shares of common stock to Mr.
Andreini for an aggregate purchase price of $198,000, or $6.00 per share.
In March 1998, Mr. Donahue sold an aggregate of 214,285 shares of common
stock to certain of our stockholders for an aggregate purchase price of
$1,500,000, or approximately $7.00 per share, including 39,322 shares to Mr.
Langone, 142,250 shares of common stock to Invemed Fund, L.P. and an aggregate
of 14,285 shares to an officer and an employee of Invemed Associates LLC.
In March 1998, Mr. Robinson sold an aggregate of 214,286 shares of common
stock to certain of our stockholders for an aggregate purchase price of
$1,500,000, or approximately $7.00 per share, including 39,322 shares to Mr.
Langone, 142,250 shares of common stock to Invemed Fund, L.P. and an aggregate
of 14,286 shares to an officer and an employee of Invemed Associates LLC.
In March 1998, Mr. Zangrillo sold 37,500 shares of common stock, Mr.
Donahue sold 175,571 shares of common stock and Mr. Robinson sold 71,429 shares
of common stock for an aggregate purchase price of $1,991,500, or $7.00 per
share, to one of our stockholders.
In March 1998, Mr. Donahue and Mr. Zangrillo each sold 37,294 shares of
common stock for an aggregate purchase price of $633,998, or $8.50 per share, to
one of our stockholders.
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<PAGE> 60
In November 1998, Mr. Donahue sold 56,250 shares of common stock for an
aggregate purchase price of $450,000, or $8.00 per share, to one of our
stockholders.
In November 1998, Mr. Andreini purchased 10,000 shares of common stock for
an aggregate purchase price of $80,000, or $8.00 per share, from one of our
stockholders.
In January 1999, Mr. Zangrillo sold 612,706 shares of common stock for an
aggregate purchase price of $9.2 million, or $15 per share, subject to
adjustment based on the initial public offering price of the common stock, to
one of our stockholders.
In February 1999, Mr. Donahue and Mr. Robinson sold 333,333 shares of
common stock each for an aggregate purchase price of $10.0 million, or $15 per
share. With respect to 258,333 of these shares for Mr. Donahue and 108,333 of
these shares for Mr. Robinson, if we consummate this offering on or before
August 30, 1999, the purchase price will be adjusted to equal the initial public
offering price. If we do not consummate this offering by August 30, 1999, the
purchase price will be reduced to $12 per share. With respect to 75,000 of these
shares for Mr. Donahue and 225,000 of these shares for Mr. Robinson, if we
consummate this offering on or before August 30, 1999, the purchase price will
be adjusted to equal the initial public offering price. If we do not consummate
this offering by August 30, 1999, the price will remain at $15 per share.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of July 1, 1999 and as adjusted to
reflect the sale by us of shares in this offering with respect to:
- each stockholder known by us to be the beneficial owner of more than 5%
of our common stock;
- each of the Named Executive Officers;
- each of our directors; and
- all executive officers and directors as a group.
The ownership percentages set forth in the table are based on 23,348,482
shares of common stock outstanding as of July 1, 1999 and 26,348,482 shares upon
consummation of this offering, together with applicable options and/or warrants
for each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities where applicable. Shares of common
stock subject to options that are presently exercisable or exercisable within 60
days of July 1, 1999 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage of any other person.
Except as otherwise noted, the persons or entities named in the table have
sole voting and investment power with respect to all the shares of common stock
beneficially owned by them, subject to community property laws where applicable.
Except as otherwise indicated, the address of each beneficial owner of more than
5% of our common stock is c/o InterWorld Corporation, 395 Hudson Street, 6th
Floor, New York, New York 10014.
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<PAGE> 62
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNERSHIP COMMON STOCK
------------------------------------------- OUTSTANDING
COMMON STOCK -------------------
COMMON STOCK UNDERLYING BEFORE AFTER
NAME OF BENEFICIAL OWNER OUTSTANDING OPTIONS/WARRANTS TOTAL OFFERING OFFERING
- ------------------------ ------------ ---------------- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Michael J. Donahue(1)........... 4,909,433 0/0 4,909,433 21.0% 18.6%
Alan J. Andreini................ 366,333 308,031/0 674,364 2.9 2.5
Peter Schwartz.................. 0 100,000/0 100,000 * *
Daniel Turano................... 90,000 7,500/0 97,500 * *
Stephen Law..................... 72,500 5,000/0 77,500 * *
Amy Aguilar-Brown............... 0 18,500/0 18,500 * *
Robert L. Zangrillo(2)
P.O. Box CC
Aspen, CO 81612............... 4,280,000 0/0 4,280,000 18.3 16.2
Susan Fairty.................... 45,000 0/0 45,000 * *
Kenneth G. Langone(3)........... 642,026 22,000/103,129 767,155 3.3 2.9
Joseph C. Robinson(4)........... 1,477,952 0/0 1,477,952 6.3 5.6
Yves Sisteron(5)................ 445,763 26,000/73,657 545,420 2.3 2.1
Jack Slevin..................... 33,333 18,000/0 51,333 * *
Russell West.................... 0 26,000/0 26,000 * *
George Soros(6)
888 Seventh Avenue
Suite 3300
New York, NY 10106............ 2,690,595 0/0 2,690,595 11.5 10.2
Laurence S. Zimmerman
156 West 56th Street
Suite 2001
New York, NY 10019............ 1,198,206 0/0 1,198,206 5.1 4.6
All executive officers and
directors as a group (11
persons)...................... 8,037,340 531,031/176,786 8,745,157 36.4 32.3
</TABLE>
- -------------------------
* Less than one percent.
(1) Includes 20,000 shares owned by Mr. Donahue's wife.
(2) Includes 4,000,000 shares owned of record by Strategic Global Partners,
LLC, an entity wholly owned and controlled by Mr. Zangrillo, 10,000 shares
owned by Mr. Zangrillo's wife, 10,000 shares held in trust for the benefit
of Mr. Zangrillo's child and 250,000 shares owned by Wight Investment
Partners, a partnership in which Mr. Zangrillo has a pecuniary interest.
(3) Includes 285,500 shares owned by Invemed Fund, L.P., a limited partnership
of which Invemed Associates LLC is the General Partner. Mr. Langone is the
President, Chief Executive Officer and Chairman of the Board of Invemed
Associates LLC.
(4) Includes 30,000 shares held in trust for the benefit of Mr. Robinson's
child and 3,000 shares held in a trust of which Mr. Robinson is the
trustee.
(5) Includes 438,263 shares of common stock and warrants to purchase 73,657
shares of common stock owned by Global Retail Partners, L.P. and its
affiliates, as to which Mr. Sisteron disclaims beneficial ownership. Mr.
Sisteron is a Principal of Global Retail Partners, L.P.
(6) Includes 352,330 shares held in five trusts for the benefit of members of
Mr. Soros' family.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will
consist of 115,000,000 shares, consisting of 100,000,000 shares of common stock,
par value $0.01 per share, and 15,000,000 shares of preferred stock, par value
$0.01 per share. As of March 31, 1999, we had issued and outstanding
- 23,201,885 shares of common stock,
- options to purchase 4,716,331 shares of common stock at a weighted
average exercise price of $5.18 per share, and
- warrants to purchase 534,070 shares of common stock at a weighted
average exercise price of $6.98 per share.
Information in this prospectus gives effect to the automatic conversion of all
outstanding shares of our Series A and Series B mandatorily redeemable preferred
stock into common stock upon the consummation of this offering.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by stockholders. The holders of common stock are not
entitled to cumulative voting rights. Subject to the rights of any preferred
stock, the holders of the common stock are entitled to such dividends as may be
declared by the board of directors out of funds legally available for the
payment of dividends. In the event of a voluntary or involuntary liquidation,
dissolution or winding up, the holders of shares of common stock would be
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights and payment of any distributions owing to
holders of shares of preferred stock then outstanding, if any. Holders of the
shares of common stock have no preemptive rights. There are no redemption or
sinking fund provisions applicable to the shares of common stock. The
outstanding shares of common stock are, and the shares of common stock offered
by us in this offering will be, duly authorized, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes the issuance of preferred stock
with such designations, rights and preferences as may be determined from time to
time by the board of directors. Accordingly, our board of directors is
empowered, without stockholder approval, to issue preferred stock with
dividends, liquidation, voting or other rights that could adversely affect the
voting power or other rights of the holders of common stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of preventing a change in control. Following this offering, no shares of
preferred stock will be issued or outstanding and we have no present plans to
issue any shares of preferred stock.
REGISTRATION RIGHTS
The holders of 9,189,999 shares of common stock outstanding immediately
after this offering are entitled to certain rights with respect to the
registration of shares under the Securities Act. Under the terms of the
agreement between us and the holders of these shares, if we propose to register
any of our securities under the Securities Act after this offering, either for
our own account or for the account of other security holders exercising
56
<PAGE> 64
registration rights, these holders are entitled to notice of the registration
and are entitled to include shares in the registration. The stockholders
benefiting from these rights may also require us to file a registration
statement under the Securities Act at our expense with respect to their shares
of common stock on up to four occasions after the 180th day following the date
of this prospectus, and we are required to use our best efforts to effect such
registrations. All of these rights are subject to various conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares included in any registration.
WARRANTS
We have issued warrants to purchase 534,070 shares of common stock at a
weighted average exercise price of $6.98 per share, which are presently
exercisable. See "Certain Transactions." All warrants will expire after a period
of ten years from issuance or five years from the effective date of this
offering, whichever is later.
CERTAIN PROVISIONS OF DELAWARE LAW
Section 203 of the Delaware General Corporation Law prohibits, with certain
exceptions, a Delaware corporation from engaging in any of a broad range of
business combinations, such as mergers, consolidations and sales of assets, with
an "interested stockholder" for a period of three years from the date that such
person became an interested stockholder. This makes a takeover of a company more
difficult and may have the effect of diminishing the possibility of certain
types of "front-end loaded" acquisitions of a company or other unsolicited
attempts to acquire a company. This may further have the effect of preventing
changes in the board of directors of a company, and it is possible that these
provisions of Delaware law could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
LISTING
We have applied to have the common stock approved for quotation on the
Nasdaq Stock Market's National Market under the trading symbol "INTW."
TRANSFER AGENT
The transfer agent for our common stock is Chase Mellon Shareholder
Services.
57
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock.
Upon consummation of this offering, we will have outstanding 26,348,482
shares of common stock. Of these shares, the 3,000,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless they are purchased by our affiliates as that
term is defined in Rule 144 under the Securities Act (which sales would be
subject to certain restrictions under Rule 144). The remaining 23,348,482
outstanding shares of common stock will be restricted securities, as that term
is defined in Rule 144, and may be sold only if registered or pursuant to an
exemption from registration such as are available by compliance with the
conditions of Rule 144 under the Securities Act. Holders of 9,189,999 shares of
common stock will also have registration rights enabling them to cause us to
register their shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." In connection with this offering, we, our
executive officers and directors and all of our stockholders, who will hold a
total of 23,348,482 shares of common stock outstanding after this offering, have
agreed that, subject to exceptions relating to transfers that will not occur in
market transactions, we and they will not sell, offer or contract to sell any
shares of common stock without the prior written consent of Invemed Associates
LLC for a period of 180 days after the date of this prospectus. See
"Underwriting." We are not aware of any officers, directors or stockholders who
intend to ask Invemed Associates LLC for a waiver of these restrictions during
the 180-day period. After giving effect to the lock-up agreements, most of the
restricted securities will be eligible for sale under Rule 144 beginning 180
days after the date of this prospectus. The foregoing discussion does not give
effect to the exercise of stock options that may occur.
After the completion of this offering, we intend to file Registration
Statements on Form S-8 under the Securities Act to register 5,941,517 shares of
common stock reserved for issuance under our stock option plan and 1,000,000
shares of common stock reserved for issuance under our employee stock purchase
plan.
58
<PAGE> 66
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the
underwriter, Invemed Associates LLC, 3,000,000 shares of common stock:
The underwriting agreement provides that the underwriter is obligated to
purchase all the shares of common stock in this offering, if any are purchased,
other than those covered by the over-allotment option described below.
We have granted to the underwriter a 30-day option to purchase on a pro
rata basis up to 450,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover over-allotments of common stock.
The underwriter proposes to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriter and selling group members may allow a discount of $ per share on
sales to certain other brokers/dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the underwriter.
The following table summarizes the compensation we will pay:
<TABLE>
<CAPTION>
TOTAL
---------------------------
WITHOUT OVER- WITH OVER-
PER SHARE ALLOTMENT ALLOTMENT
--------- ------------- ----------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by us.............................. $ $ $
</TABLE>
We estimate that our out-of-pocket expenses for this offering will be
approximately $1.0 million.
The underwriter has informed us that it does not expect discretionary sales
to exceed 5% of the shares of common stock being offered by this prospectus.
We, as well as our directors, executive officers and all of our
stockholders, who will hold a total of 23,348,482 shares of common stock
outstanding after this offering, have agreed that, for a period of 180 days
after the date of this prospectus, we and they will not without the prior
written consent of Invemed Associates LLC:
(1) offer, sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, or, in our case, file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to, any shares of
common stock or securities or other rights convertible into or exchangeable or
exercisable for any shares of common stock, or publicly disclose the intention
to make any such offer, sale, contract to sell, pledge, disposition or, in our
case, filing, or
(2) enter into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of such shares of common
stock.
59
<PAGE> 67
Notwithstanding these restrictions:
(1) we may
- issue common stock in connection with the conversion or exchange of
convertible or exchangeable securities or the exercise of warrants or
options, in each case outstanding on the date of this prospectus,
- grant employee stock options or rights to purchase common stock under
the stock option plan or the employee stock purchase plan, and
- issue common stock in connection with the exercise of options and
rights granted under our stock option plan or employee stock purchase
plan; and
(2) an individual may
- make bona fide gifts to or for the benefit, directly or indirectly,
of members of such individual's family for estate planning purposes,
so long as the gifts are made other than on any securities exchange
or in the over-the-counter market and the donee agrees to terms
substantially similar to the foregoing for the underwriter's and our
benefit.
The underwriter has reserved for sale, at the initial public offering
price, up to 275,000 shares of common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in this offering. The number of shares available for sale to the
general public in this offering will be reduced to the extent such persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriter to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriter against certain liabilities
under the Securities Act, or to contribute to payments which the underwriter may
be required to make in respect thereof.
Application has been made to list the shares of common stock on The Nasdaq
Stock Market's National Market.
From time to time Invemed Associates LLC has provided assistance to us in
connection with certain of our private equity financings, for which Invemed
Associates LLC, officers of Invemed Associates LLC and stockholders of its
parent received compensation. In addition, as of July 1, 1999, officers and
employees of Invemed Associates LLC and stockholders of its parent beneficially
owned an aggregate of 738,758 shares of common stock and warrants to purchase an
aggregate of 150,158 shares of common stock. Kenneth G. Langone, a director and
stockholder of InterWorld, is Chairman of the Board, Chief Executive Officer and
President of Invemed Associates LLC and is the principal stockholder of Invemed
Associates LLC's parent. See "Certain Transactions" and "Principal
Stockholders."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price has been determined by negotiations
between us and the underwriter. The principal factors considered in determining
the public offering price include:
- the information set forth in this prospectus and otherwise available to
the underwriter;
60
<PAGE> 68
- the history of, and the prospects for, us and the industry in which we
compete;
- an assessment of our management;
- the prospects for, and timing of, our future earnings;
- the present state of our development and our current financial condition;
- the recent market prices of, and the demand for, publicly-traded common
stock of companies similar to us; and
- market conditions for initial public offerings.
The underwriter may engage in over-allotment, stabilizing transactions,
covering transactions and penalty bids in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves sales in excess of this
offering size, which creates a short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover short positions. Penalty bids permit the underwriter to reclaim a
selling concession from a selling group member when the common stock originally
sold by such selling group member is purchased in a covering transaction to
cover short positions. Stabilizing transactions, covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by O'Sullivan Graev & Karabell, LLP, New York, New York. The
O'Sullivan Graev & Karabell Profit Sharing Plan owns 22,500 shares of common
stock, and Robert Seber, a member of the firm, owns 5,000 shares of common
stock. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated financial statements of InterWorld Corporation as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998 included in this prospectus have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
61
<PAGE> 69
CHANGE IN INDEPENDENT ACCOUNTANTS
In November 1996, we retained KPMG LLP as our independent accountants. In
July 1997, KPMG LLP resigned as our independent accountants because we entered
into a strategic partnership agreement with KPMG LLP. No audits were conducted
by KPMG LLP on our financial statements, and no reports were issued. There were
no disagreements between us and KPMG LLP on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure
during the period from their retention in November 1996 through their
resignation in July 1997.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission. This prospectus, which forms a part of the Registration
Statement, does not contain all of the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. Upon completion of this offering, we
will be required to file annual quarterly and other information with the
Commission. You may review a copy of the Registration Statement and any other
documents filed with the Securities and Exchange Commission at the Securities
and Exchange Commission's public reference room in Washington, D.C., and at the
Securities and Exchange Commission's regional offices in Chicago, Illinois and
New York, New York. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our Securities and Exchange Commission filings and the Registration
Statement can also be reviewed by accessing the Securities and Commission's
Internet site at http://www.sec.gov.
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<PAGE> 70
INTERWORLD CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (unaudited)............................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997, and 1998 and for the
three months ended March 31, 1999 (unaudited)............. F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 (unaudited) and 1999 (unaudited)..... F-9
Notes to Consolidated Financial Statements.................. F-11
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of InterWorld Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
InterWorld Corporation and its subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred substantial
operating losses, expects to incur substantial additional losses and expects
that its cash and working capital requirements will continue to increase as the
Company's operations continue to expand. These and other factors, as discussed
in Note 2, raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
New York, New York
March 3, 1999
F-2
<PAGE> 72
INTERWORLD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS
DECEMBER 31, EQUITY
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- ------- ----------- ------------
(UNAUDITED)
(UNAUDITED) (NOTE 16)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 6,081 $ 858 $ 7,103
Accounts receivable -- net (Note 3)..... 4,162 6,153 6,759
Prepayments and other current assets.... 78 497 1,418
Deferred offering costs................. -- -- 60
------- ------- -------
Total current assets............... 10,321 7,508 15,340
------- ------- -------
Property and equipment, net (Note 4)...... 6,648 6,070 6,932
Other assets (Note 8)..................... 462 541 513
------- ------- -------
Total assets............................ $17,431 $14,119 $22,785
======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses
(Note 5)............................. $ 3,447 $ 5,791 $ 5,593
Capital lease obligations to related
party-current (Note 14).............. 1,258 1,328 1,328
Deferred revenue and customer
deposits............................. 490 1,024 3,052
Deposits on preferred stock
subscriptions........................ 225 -- --
Net liabilities of discontinued
operations........................... 1,099 -- --
------- ------- -------
Total current liabilities.......... 6,519 8,143 9,973
------- ------- -------
Notes payable to related party (Note
10)..................................... -- 3,229 --
Capital lease obligations to related
party-long term (Note 14)............... 1,861 599 278
Deferred rent............................. 527 1,030 1,131
------- ------- -------
Total liabilities.................. 8,907 13,001 11,382
------- ------- -------
</TABLE>
F-3
<PAGE> 73
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS
DECEMBER 31, EQUITY
------------------ MARCH 31, MARCH 31,
1997 1998 1999 1999
------- ------- ----------- ------------
(UNAUDITED)
(UNAUDITED) (NOTE 16)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Commitments (Note 14)
Mandatorily redeemable Series A
Convertible Preferred Stock ($0.01 par
value; 8,200,000 shares authorized,
6,351,767 issued and outstanding at
December 31, 1997 and 7,539,999 issued
and outstanding at December 31, 1998 and
March 31, 1999, none issued and
outstanding pro forma) (Liquidating
preference of $37,997 at December 31,
1997 and $48,097 at December 31, 1998
and March 31, 1999) (Note 7)............ 37,319 47,334 47,379
Mandatorily redeemable Series B
Convertible Preferred Stock ($0.01 par
value; 2,500,000 shares authorized, none
issued and outstanding at December 31,
1997 and 1998, 1,650,000 issued and
outstanding, at March 31, 1999. None
issued and outstanding pro forma)
(Liquidating preference of $16,500 at
March 31, 1999) (Note 15)............... -- -- 15,569
Stockholders' deficit (Note 9):
Common stock ($0.01 par value, 35,000,000
shares authorized, 13,505,650,
13,869,786 and 14,011,886 shares issued
and outstanding at December 31, 1997 and
1998 and March 31, 1999, respectively,
23,201,885 issued and outstanding pro
forma).................................. 135 139 140 232
Additional paid-in capital................ 2,203 6,840 8,661 71,517
Accumulated deficit....................... (31,133) (53,195) (60,346) (60,346)
------- ------- ------- --------
Total stockholders' equity
(deficit)....................... (28,795) (46,216) (51,545) $ 11,403
------- ------- ------- ========
Total liabilities, mandatorily
redeemable convertible preferred
stock and stockholders' equity
(deficit)....................... $17,431 $14,119 $22,785
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues, net:
Product licenses (Note 8)....... $ 779 $ 4,883 $ 9,754 $ 1,546 $ 4,386
Services (Note 8)............... 1,241 3,073 4,834 866 2,615
Other........................... 408 100 2 -- --
------- -------- -------- ------- -------
Total revenues, net (Note
11)........................ 2,428 8,056 14,590 2,412 7,001
------- -------- -------- ------- -------
Cost of revenues:
Product licenses................ 82 278 671 72 208
Services........................ 1,735 6,744 6,052 1,132 2,756
Other........................... 322 107 -- -- --
------- -------- -------- ------- -------
Total cost of revenues....... 2,139 7,129 6,723 1,204 2,964
------- -------- -------- ------- -------
Gross profit................. 289 927 7,867 1,208 4,037
------- -------- -------- ------- -------
Operating expenses:
Research and development........ 2,362 6,863 9,558 1,964 3,637
Sales and marketing............. 2,435 8,487 11,969 2,064 4,968
General and administrative...... 2,730 6,405 6,356 1,425 1,213
Noncash employee compensation... 71 752 1,615 377 1,121
------- -------- -------- ------- -------
Total operating expenses..... 7,598 22,507 29,498 5,830 10,939
------- -------- -------- ------- -------
Loss from operations......... (7,309) (21,580) (21,631) (4,622) (6,902)
------- -------- -------- ------- -------
Other income (expense):
Interest income................. 112 218 265 63 92
Interest expense................ -- (313) (696) (85) (296)
------- -------- -------- ------- -------
Total other income
(expense).................. 112 (95) (431) (22) (204)
------- -------- -------- ------- -------
Loss before income taxes.......... (7,197) (21,675) (22,062) (4,644) (7,106)
Income taxes...................... -- -- -- -- (45)
------- -------- -------- ------- -------
Loss from continuing operations... (7,197) (21,675) (22,062) (4,644) (7,151)
------- -------- -------- ------- -------
</TABLE>
F-5
<PAGE> 75
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Discontinued operations (Notes 8
and 13):
Expenses from discontinued
operations of UGO Networks,
Inc.......................... -- (1,310) -- -- --
Provision for operating losses
to date of disposition....... -- (627) -- -- --
------- -------- -------- ------- -------
Net loss..................... $(7,197) $(23,612) $(22,062) $(4,644) $(7,151)
======= ======== ======== ======= =======
Basic loss per share and diluted
loss per share (Notes 6 and
7).............................. $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
======= ======== ======== ======= =======
Basic loss per share and diluted
loss per share from continuing
operations (Notes 6 and 7)...... $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.... 13,500,000 $135 -- $ (324) $ (189)
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
convertible preferred stock... -- -- $ 135 -- 135
Issuance of Series A preferred
stock warrants in connection
with equipment leases......... -- -- 49 -- 49
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (16) -- (16)
Compensatory stock options
issued to employees and
consultants................... -- -- 99 -- 99
Net loss........................ -- -- -- (7,197) (7,197)
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1996.... 13,500,000 135 267 (7,521) (7,119)
Issuance of Series A preferred
stock warrants in connection
with equipment lease.......... -- -- 161 -- 161
Issuance of Series A preferred
stock warrants in connection
with security agreement....... -- -- 104 -- 104
Issuance of Series A preferred
stock warrants for consulting
services...................... -- -- 371 -- 371
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
preferred stock............... -- -- 587 -- 587
Issuance of common stock upon
exercise of stock options..... 5,650 -- 7 -- 7
Compensatory stock options
issued to employees and
consultants................... -- -- 788 -- 788
Expenses related to issuance of
Series A preferred stock...... -- -- (54) -- (54)
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (28) -- (28)
Net loss........................ -- -- -- (23,612) (23,612)
---------- ---- ------ -------- --------
</TABLE>
F-7
<PAGE> 77
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.... 13,505,650 $135 $2,203 $(31,133) $(28,795)
Issuance of common stock upon
exercise of stock options..... 364,136 4 684 -- 688
Compensatory stock options
issued to employees and
consultants................... -- -- 1,662 -- 1,662
Issuance of Series A preferred
stock warrants in connection
with sale of Series A
preferred stock............... -- -- 252 -- 252
Issuance of Series A preferred
stock warrants in connection
with loan agreement........... -- -- 1,023 -- 1,023
Expenses related to issuance of
Series A preferred stock...... -- -- (20) -- (20)
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (167) -- (167)
Distribution of net liabilities
of UGO Networks, Inc.......... -- -- 1,203 -- 1,203
Net loss........................ -- -- -- (22,062) (22,062)
---------- ---- ------ -------- --------
BALANCE AT DECEMBER 31, 1998.... 13,869,786 $139 $6,840 $(53,195) $(46,216)
Issuance of common stock upon
exercise of stock options..... 142,100 1 405 -- 406
Compensatory stock options
issued to employees and
consultants................... -- -- 1,531 -- 1,531
Accretion of mandatorily
redeemable convertible
preferred stock to redemption
value......................... -- -- (115) -- (115)
Net loss........................ -- -- -- (7,151) (7,151)
---------- ---- ------ -------- --------
BALANCE AT MARCH 31, 1999
(UNAUDITED)................... 14,011,886 $140 $8,661 $(60,346) $(51,545)
========== ==== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 78
INTERWORLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(7,197) $(23,612) $(22,062) $(4,644) $(7,151)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for operating
losses-discontinued operations......... -- 627 -- -- --
Depreciation and amortization............. 282 1,393 2,505 558 707
Noncash consulting expense................ 28 407 47 47 410
Noncash employee compensation............. 71 752 1,615 377 1,121
Noncash interest expense.................. -- 157 338 17 262
Changes in discontinued operations........ -- (561) (175) (50) --
Changes in assets and liabilities:
Accounts receivable....................... (768) (3,394) (1,866) 390 (606)
Prepaid expenses and other current
assets................................. (298) 249 (419) (151) (397)
Deferred offering costs................... -- -- -- -- (60)
Accounts payable and accrued expenses..... 1,657 1,790 2,300 580 (1,199)
Deferred revenue and customer deposits.... 581 (406) 534 (170) 2,028
Other assets and liabilities.............. (280) (182) 70 22 28
Deferred rent............................. -- 527 558 176 101
------- -------- -------- ------- -------
NET CASH USED IN OPERATING
ACTIVITIES........................... (5,924) (22,253) (16,555) (2,848) (4,756)
------- -------- -------- ------- -------
Cash flows from investing activities:
Capital expenditures...................... (1,516) (3,530) (1,927) (282) (1,584)
Capital expenditures of UGO Networks,
Inc.................................... -- (117) -- -- --
------- -------- -------- ------- -------
NET CASH USED IN INVESTING
ACTIVITIES........................... (1,516) (3,647) (1,927) (282) (1,584)
------- -------- -------- ------- -------
</TABLE>
F-9
<PAGE> 79
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes by UGO
Networks, Inc.......................... -- 1,150 -- -- --
Principal payments on capital lease
obligations............................ -- (724) (1,284) (424) (321)
Proceeds from sale and leaseback of
equipment to related party............. -- 819 -- -- --
Net proceeds from issuance of Series A
preferred stock........................ 13,550 24,393 10,080 10,080 --
Proceeds from issuance of Series B
preferred stock........................ -- -- -- -- 16,500
Deposits on preferred stock
subscriptions.......................... -- 225 (225) (225) --
Proceeds from exercise of common stock
options................................ -- 7 688 570 406
Proceeds from notes payable to related
party.................................. -- -- 4,000 -- --
Payments of notes payable to related
party.................................. -- -- -- -- (4,000)
Notes payable to stockholders............. (49) -- -- -- --
------- -------- -------- ------- -------
NET CASH PROVIDED BY FINANCING
ACTIVITIES........................... 13,501 25,870 13,259 10,001 12,585
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 6,061 (30) (5,223) 6,871 6,245
Cash and cash equivalents, beginning of
period.................................... 50 6,111 6,081 6,081 858
------- -------- -------- ------- -------
Cash and cash equivalents, end of period.... $ 6,111 $ 6,081 $ 858 $12,952 $ 7,103
======= ======== ======== ======= =======
Cash paid for:
Interest.................................. $ -- $ 154 $ 357 $ 68 $ 34
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 80
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO MARCH 31, 1999 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS
ORGANIZATION
InterWorld Corporation ("InterWorld") was incorporated in March 1995 under
the laws of the State of Delaware. The consolidated financial statements of
InterWorld include the accounts of InterWorld and its wholly owned subsidiaries,
InterWorld Technology Ventures Pty, Ltd., an Australian corporation incorporated
in November 1996, InterWorld Technology Ventures, Ltd., a Canadian corporation
incorporated in November 1996, and InterWorld U.K. Ltd., a United Kingdom
corporation incorporated in May 1998. In April 1997, InterWorld formed UGO
Networks, Inc., ("UGO," formerly ActionWorld, Inc.) under the laws of the State
of Delaware. Until March 30, 1998 InterWorld was the majority owner of UGO, and
UGO is included in the consolidated financial statements of InterWorld at
December 31, 1997. On March 30, 1998, InterWorld completed a spin-off
distribution of UGO (Note 13).
BUSINESS
InterWorld is a leading provider of Internet commerce software solutions
that enable manufacturers, distributors and retailers to conduct business over
the Internet. InterWorld's products, called "enterprise commerce" software,
enable companies to build their online businesses and integrate them with their
existing business practices and enterprise systems. InterWorld derives its
revenues from its family of enterprise commerce software consisting of its
Commerce Exchange platform, applications, tools and business adapters.
2. LIQUIDITY
InterWorld has incurred significant operating losses since inception. At
December 31, 1998 and March 31, 1999, InterWorld had an accumulated deficit of
$53,195 and $60,346, respectively, and working capital (deficit) of ($635) and
$5,307, respectively. Such losses have resulted principally from product
development costs, sales and marketing costs and general and administrative
costs associated with InterWorld developing its products and expanding its level
of operations. In order to fund these efforts, InterWorld completed private
placements of its mandatorily redeemable Series A Convertible Preferred Stock
("Series A Preferred") during 1996, 1997 and 1998 (Note 7). InterWorld utilized
the net proceeds from these issuances to fund operations and for working capital
requirements. The Company also completed a private placement of its mandatorily
redeemable Series B Convertible Preferred Stock ("Series B Preferred") in
January 1999 providing gross proceeds of approximately $16,500 (Note 15).
Effective as of May 1998, InterWorld's secured loan agreement with a holder of
Series A Preferred was amended to increase to $11,000 the maximum borrowings
that could be made by InterWorld to fund its future cash requirements (Note 10).
The accompanying consolidated financial statements have been prepared
assuming InterWorld will continue as a going concern. InterWorld's net losses
and negative cash
F-11
<PAGE> 81
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows from operations and expected additional losses raise substantial doubt
about its present ability to continue as a going concern. InterWorld's ability
to continue as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations as they come due.
Management is also actively pursuing other financing options which include
securing additional equity financing through an initial public offering. If for
any reason the initial public offering is delayed or postponed, InterWorld
intends to seek additional private equity financing. Management believes that
sufficient funding will be available to meet its planned business objectives for
a reasonable period of time; however, there can be no assurance that InterWorld
will be successful in its efforts to raise additional capital. The consolidated
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of the recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
InterWorld and its wholly owned and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in consolidation.
Assets and liabilities of InterWorld's foreign subsidiaries are translated
to U.S. dollars based on exchange rates at the end of the respective reporting
period. Income and expense items are translated at average exchange rates during
the period. Transaction gains and losses are included in the determination of
operating expenses. Cumulative translation adjustments are insignificant at
December 31, 1998 and March 31, 1999.
ACCOUNTING 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.
CASH EQUIVALENTS
Cash equivalents, which are stated at cost, consist of short-term, highly
liquid investments, with original maturities of less than three months when
purchased. Interest is accrued as earned.
ACCOUNTS RECEIVABLE -- NET
Accounts receivable are stated net of allowance for doubtful accounts of
$622, $1,217 and $1,194 at December 31, 1997 and 1998 and March 31, 1999,
respectively.
F-12
<PAGE> 82
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUIPMENT
Equipment is stated at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Computer equipment and software... 3 years
Leasehold improvements............ Shorter of lease term or estimated
useful life
Furniture and fixtures............ 5 years
Office equipment.................. 3 years
</TABLE>
REVENUE RECOGNITION
Effective January 1, 1997 InterWorld adopted AICPA Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on
when and in what amounts revenue should be recognized for licensing, selling,
leasing, or otherwise marketing computer software. The adoption of SOP 97-2 did
not have a material impact on InterWorld's results of operations for the year
ended December 31, 1997.
During 1998, InterWorld also adopted SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" ("SOP
98-9"). SOP 98-9 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative vendor specific objective evidence of the elements. The adoption of SOP
98-9 did not have a material impact on InterWorld's results of operations for
the year ended December 31, 1998.
PRODUCT LICENSES
Revenue from the licensing of InterWorld's software products is recognized
upon delivery to the customer, pursuant to an executed software licensing
agreement when no significant vendor obligations exist, the fee is fixed or
determinable and collection is probable. If acceptance by the customer is
required, revenue is recognized upon customer acceptance. Amounts received from
customers in advance of product shipment are classified as deposits from
customers. InterWorld enters into reseller arrangements for its products that
typically provide for license fees payable to InterWorld based on a percentage
of the InterWorld's list price. License revenues from InterWorld's reseller
arrangements are recognized when the fee is fixed or determinable upon delivery
by the reseller when collection is probable.
SERVICES REVENUE
Revenue from professional services, such as custom development,
installation and integration support, is recognized as the services are
rendered. Contracts for professional services requiring significant production,
modification or customization to InterWorld's software products are recognized
on a percentage of completion basis.
F-13
<PAGE> 83
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue from maintenance and customer support services, such as telephone
support and product enhancements is recognized ratably over the period of the
agreement under which the services are provided, typically one year.
Deferred revenue consists principally of billings in advance for services
not yet provided.
ADVERTISING COSTS
Advertising costs included in sales and marketing expenses are expensed as
incurred and approximated $204, $455, $470 and $29 for the years ended December
31, 1996, 1997 and 1998 and for the three months ended March 31, 1999,
respectively.
RESEARCH AND DEVELOPMENT
InterWorld charges all costs incurred to establish the technological
feasibility of a product or product enhancement to research and development
expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of accounts receivable, accounts payable, accrued
expenses and notes payable approximates their fair values due to the relatively
short maturity of these instruments.
INTERIM FINANCIAL DATA
The unaudited financial data at March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been prepared by management and include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the results of operations and cash flows. The results of operations for
the three months ended March 31, 1999 are not necessarily indicative of the
operating results to be expected for the entire year ending December 31, 1999.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities. Deferred
tax assets and liabilities reflect the tax rates expected to be in effect for
the years in which the differences are expected to reverse. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax asset will not be realized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments
F-14
<PAGE> 84
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
embedded in other contracts and for hedging activities. SFAS 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. At March 31, 1999, InterWorld did not own any derivative
instruments and had not engaged in any hedging activities during the three
months ended March 31, 1999. InterWorld does not expect to purchase derivative
instruments or enter into hedging activities in the foreseeable future.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 1997,
1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Computer equipment and software................... $4,196 $5,967 $6,483
Office equipment.................................. 1,330 1,447 1,481
Leasehold improvements............................ 1,967 1,974 2,529
Furniture and fixtures............................ 835 867 1,325
------ ------ ------
8,328 10,255 11,818
Less: Accumulated depreciation and amortization... (1,680) (4,185) (4,886)
------ ------ ------
Property and equipment, net....................... $6,648 $6,070 $6,932
====== ====== ======
</TABLE>
Computer equipment and software, office equipment, and furniture and
fixtures include approximately $2,024, $1,149 and $827, respectively, of fixed
assets acquired under capital leases at December 31, 1997, 1998 and March 31,
1999. Accumulated depreciation related to these assets approximated $1,536,
$2,108 and $2,413 for the years ended December 31, 1997 and 1998 and for the
three months ended March 31, 1999, respectively.
F-15
<PAGE> 85
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following at
December 31, 1997, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Trade accounts payable............................ $ 607 $3,047 $2,650
Accrued commissions............................... 509 264 434
Accrued incentive compensation.................... 856 615 575
Accrued professional fees......................... 160 674 28
Accrued financing fees............................ -- -- 900
Other accrued expenses............................ 1,315 1,191 1,005
------ ------ ------
$3,447 $5,791 $5,592
====== ====== ======
</TABLE>
6. LOSS PER COMMON SHARE
Effective December 31, 1997, InterWorld adopted SFAS No. 128, "Earnings per
Share" ("SFAS 128") which requires presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS") by all entities
that have publicly traded common stock or potential common stock (options,
warrants, convertible securities or contingent stock arrangements). SFAS 128
also requires presentation of earnings per share by an entity that has made a
filing or is in the process of filing with a regulatory agency in preparation
for the sale of those securities in a public market. Basic EPS is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period. The computation
of Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an antidilutive effect on earnings.
All prior periods presented have been restated for the adoption of SFAS
128.
F-16
<PAGE> 86
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The computations of basic loss per share and diluted loss per share for the
years ended December 31, 1996, 1997 and 1998 and for the three months ended
March 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss............. $ (7,197) $ (23,612) $ (22,062) $ (4,644) $ (7,151)
----------- ----------- ----------- ----------- -----------
Loss from continuing
operations......... (7,197) (21,675) (22,062) (4,644) (7,151)
----------- ----------- ----------- ----------- -----------
Weighted average
shares outstanding
used for basic loss
and diluted loss
per share.......... 13,500,000 13,500,709 13,771,371 13,507,149 13,867,442
Basic loss and
diluted loss per
share.............. $ (0.53) $ (1.75) $ (1.60) $ (0.34) $ (0.52)
=========== =========== =========== =========== ===========
Basic loss and
diluted loss per
share from
continuing
operations......... $ (0.53) $ (1.61) $ (1.60) $ (0.34) $ (0.52)
=========== =========== =========== =========== ===========
</TABLE>
At December 31, 1998, outstanding options to purchase 3,428,155 shares of
common stock, with exercise prices ranging from $1.25 to $8.50 per share, and at
March 31, 1999 options to purchase 4,706,331 shares of common stock with
exercise prices ranging from $1.25 to $10.00, have been excluded from the
computation of diluted loss per share as they are antidilutive. Outstanding
warrants to purchase 534,070 shares of common stock with exercise prices ranging
from $2.00 to $9.775 per share were also antidilutive and excluded from the
computation of diluted loss per share at both December 31, 1998 and March 31,
1999. Common shares issuable upon conversion of Series A Preferred and Series B
Preferred have also been excluded from the computation of diluted loss per share
at December 31, 1998 and March 31, 1999 as they are antidilutive.
In January 1999, InterWorld completed the sale and issuance of 1,650,000
shares of Series B Preferred which are convertible into common stock (Note 15).
InterWorld also granted options to purchase 1,604,567 shares of common stock
(Note 15) in February 1999.
F-17
<PAGE> 87
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK AND CONVERTIBLE PREFERRED STOCK
COMMON AND PREFERRED STOCK SPLITS
Effective March 5, 1996, InterWorld implemented a 5,400-for-1 stock split,
effected in the form of a stock dividend, applicable to all issued and
outstanding shares of InterWorld's common stock.
On July 12, 1996, InterWorld implemented a 2.5-for-1 stock split applicable
to all issued and outstanding shares of InterWorld's common and preferred stock
(without changing the par value thereof).
All common and preferred shares and related per share data reflected in the
accompanying financial statements and notes thereto have been presented as if
the stock splits had occurred on January 1, 1996.
MANDATORILY REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
At December 31, 1998, InterWorld had authorized the issuance of 8,200,000
shares of preferred stock, $.01 par value. Such preferred shares have been
designated as Series A Preferred. The holders of Series A Preferred are entitled
to (i) share in dividends on a pro-rata basis with common stockholders on an
as-converted basis; (ii) a liquidation preference equal to the sum of the price
paid per share and all declared and unpaid dividends (the "Preference Amount");
(iii) demand redemption of the Preference Amount in the event of a merger where
the shareholders of InterWorld do not control the surviving entity or a sale of
all or substantially all of InterWorld's assets; (iv) mandatory redemption of
the Preference Amount in cash at any date on or after March 2003 by a majority
vote of the Series A preferred holders; (v) vote on all matters on an as
converted basis; and (vi) convert to common stock at the Preference Amount
multiplied by the shares to be converted divided by the conversion price (the
"Conversion Price") per share. The initial Conversion Price is equal to the
issuance price per share of Series A Preferred, and is subject to adjustment in
the event shares of common stock are issued without consideration or for
consideration per share less than the conversion price.
F-18
<PAGE> 88
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, InterWorld had sold and issued in six private
placements an aggregate of 7,539,999 shares of Series A Preferred. A summary of
the issuances are as follows:
<TABLE>
<CAPTION>
CARRYING VALUE
ISSUANCE DECEMBER 31,
PRICE GROSS ----------------- REDEMPTION
DATE SHARES PER SHARE PROCEEDS 1997 1998 VALUE
- ---- --------- --------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
March 1996............. 1,287,500 $2.00 $ 2,575 $ 2,475 $ 2,494 $ 2,575
July 1996.............. 1,056,631 4.732 5,000 5,000 5,000 5,000
December 1996.......... 956,000 6.25 5,975 5,975 5,975 5,975
January-June 1997...... 164,000 6.25 1,025 1,025 1,025 1,025
August 1997............ 1,122,931 7.50 8,422 8,422 8,422 8,422
September 1997......... 1,764,705 8.50 15,000 14,422 14,532 15,000
March 1998............. 1,188,232 8.50 10,100 -- 9,886 10,100
--------- ------- ------- ------- -------
Total........ 7,539,999 $48,097 $37,319 $47,334 $48,097
========= ======= ======= ======= =======
</TABLE>
The Series A Preferred shares are subject to automatic conversion upon
consummation of an underwritten public offering of InterWorld's common stock
providing aggregate proceeds, net of underwriting discounts and commissions, of
greater than $10,000.
In connection with the March 1996 Series A Preferred issuance, InterWorld
issued warrants to an investor to purchase 103,420 shares of Series A Preferred,
at an exercise price of $2.00 per share. The fair value of the warrants in the
amount of $135 has been recorded to additional paid-in capital. The warrants may
be exercised at any time and expire ten years from issuance or five years from
the effective date of InterWorld's initial public offering, whichever is later.
In connection with the September 1997 Series A Preferred issuance,
InterWorld issued warrants to purchase an aggregate of 110,294 shares of its
Series A Preferred, at an exercise price of $9.775 per share, as a placement
fee. The fair value of the warrants in the amount of $587 has been recorded to
additional paid-in-capital.
InterWorld incurred cash expenses of $54 and $20 during 1997 and 1998,
respectively, in connection with the Series A Preferred issuances.
In November 1997, InterWorld had authorized the issuance of 1,188,235
shares of Series A Preferred at $8.50 per share. As of December 31, 1997,
InterWorld had received deposits in the amount of $225 for subscriptions to
purchase 26,471 shares.
During 1997, InterWorld issued warrants to purchase 75,000 shares of Series
A Preferred at $7.50 per share to a financial advisor. The fair value of the
warrants in the amount of $371 was expensed during 1997.
In March 1998, in connection with the sale and issuance of Series A
Preferred, InterWorld issued warrants to purchase an aggregate of 39,864 shares
of its Series A
F-19
<PAGE> 89
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred at an exercise price of $9.775 per share as a placement fee. The fair
value of the warrants in the amount of $252 has been recorded to
paid-in-capital.
The excess of the redemption value over the carrying value of Series A
Preferred is being recorded by periodic charges to stockholders' equity through
March 2003, the earliest date at which the Series A Preferred holders may
require redemption of their shares.
8. TRANSACTIONS WITH RELATED PARTIES
During 1996 and 1997, InterWorld recognized product license and service
revenues from sales to a holder of Series A preferred of $156 and $12,
respectively.
In May 1996, InterWorld made loans in the aggregate amount of $193, bearing
interest at a rate of 6% per annum, to its three co-founders. The principal and
interest on the loans to two of the founders, in the aggregate amount of $114,
will be forgiven in equal installments starting in 1999, except that if either
of them voluntarily terminates his employment or service as a director prior to
May 2001, his loan including interest will become due and payable in May 2001.
In May 1998 the third founder repaid $23 of the principal amount of his loan,
reducing the principal amount of the loan to $75. The balance of such loan was
forgiven and expensed in June 1998. Interest income from such loans amounted to
$7, $12 and $9 in 1996, 1997 and 1998, respectively. At December 31, 1997 and
1998, other assets included $211 and $114, respectively, in amounts due from co-
founders.
During 1998, InterWorld recognized product license and service revenue from
sales to UGO of $474. All sales to UGO were for product licenses and services
provided subsequent to UGO's spin-off on March 30, 1998 (Note 13).
9. STOCK OPTION, DEFINED CONTRIBUTION AND PROFIT SHARING PLANS
STOCK OPTION PLANS
In March 1996, InterWorld implemented its 1996 Stock Option Plan (the
"Plan") whereby incentive and nonqualified options to purchase shares of
InterWorld's stock may be granted to directors and employees of InterWorld and
its subsidiaries. In June 1998, the Board of Directors approved amendments to
the Plan whereby the aggregate number of shares of common stock for which
options may be granted under the Plan was increased to 6,600,000. The exercise
and vesting periods and the exercise price for options granted under the Plan
are determined by the Board of Directors or a Committee of the Board of
Directors. The Plan stipulates that no option may be exercisable after seven
years from the date of grant. The fair market value of InterWorld's common stock
is determined by the Board of Directors. Options granted under the Plan
generally vest over a period of five years, 20% on the first anniversary of the
date of grant and 5% each quarter thereafter.
F-20
<PAGE> 90
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize activity regarding stock options for the
years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of
year............... -- 1,269,750 $1.25 2,904,737 $1.71
Options granted...... 1,271,750 $1.25 1,821,749 $2.00 875,068 $4.25
Options granted...... -- -- 291,050 $8.50
Options exercised.... -- (5,650) $1.25 (364,136) $1.89
Options forfeited.... (2,000) $1.25 (181,112) $1.38 (278,564) $2.39
--------- --------- ---------
Options outstanding,
end of year........ 1,269,750 $1.25 2,904,737 $1.71 3,428,155 $2.86
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT WEIGHTED AVERAGE
DECEMBER 31, 1998 REMAINING CONTRACTUAL LIFE
---------------------- --------------------------
<S> <C> <C>
At $1.25.......................... 902,750 5.0
At $2.00.......................... 1,455,579 5.6
At $4.25.......................... 781,576 6.2
At $8.50.......................... 288,250 6.5
</TABLE>
InterWorld applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its Plan and other stock-based compensation issued to employees. During the
years ended December 31, 1996, 1997, and 1998, InterWorld has recognized
compensation expense for options granted to employees of $71, $752 and $ 1,615,
respectively. InterWorld estimates that it will recognize compensation expense
in an aggregate amount of $4,385 in future years as options vest for grants made
during 1996, 1997 and 1998. (See Note 15 for compensation expense for Options
granted in 1999).
During 1996, 1997 and 1998, InterWorld issued 20,000, 15,000 and 8,706
options, respectively, to third party consultants in exchange for services.
InterWorld has recognized non-cash expense of $28 in 1996, $36 in 1997 and $47
in 1998 based on the fair value of such options at the date of grant.
Had compensation cost for option grants to employees been determined based
upon the fair value at the date of grant for awards under the Plan consistent
with the methodology prescribed under SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), InterWorld's net loss and loss per share for the
years ended December 31, 1996, 1997 and 1998 would have increased by
approximately $115, or $0.01 per share, $677 or $0.05, and $1,568 or $0.11 per
share, respectively.
F-21
<PAGE> 91
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values of options granted to employees during the years ended
December 31, 1996, 1997 and 1998 have been determined on the date of the
respective grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Dividend yield.................................... None None None
Weighted average risk-free interest rate on date
of grant........................................ 6.21% 5.90% 5.11%
Forfeitures....................................... None None None
Expected life..................................... 5 years 5 years 5 years
Volatility........................................ 75% 75% 85%
</TABLE>
DEFINED CONTRIBUTION PLAN
InterWorld has a defined contribution savings plan (the "Plan"), which
qualifies under Section 401(k) of the Internal Revenue Code. Participants may
contribute up to 15% of their gross wages not to exceed, in any given year, a
limitation set by Internal Revenue Service regulations. The Plan provides for
discretionary contributions to be made by InterWorld as determined by its Board
of Directors. InterWorld has not made any contributions to the Plan.
10. SECURED LOAN AGREEMENT
Effective as of May 1998, InterWorld's secured loan agreement with a holder
of Series A Preferred was amended to increase to $11,000 the maximum borrowings
that could be made by InterWorld. The loan accrues interest, which is payable
monthly, at a rate of 10% per annum and is secured by the accounts receivable of
InterWorld. InterWorld may borrow amounts under the loan agreement for a period
of twelve months subsequent to its initial borrowing under the loan agreement or
until completion of an initial public offering by InterWorld. The loan principal
is due and payable the later of 15 months from the initial borrowing or 21
months from the date of the agreement. The initial borrowing under the loan
agreement occurred on October 26, 1998.
At December 31, 1998, InterWorld had $4,000 in outstanding borrowings under
the loan agreement. Interest expense recognized on the loan in 1998 amounted to
$60.
The amount of $3,229 presented as notes payable to stockholders on the
balance sheet at December 31, 1998 is net of unamortized debt discount.
The lender was issued a warrant to purchase 51,766 shares of Series A
Preferred at an exercise price of $9.775 per share upon execution of the loan
agreement. The lender was also issued a warrant to purchase an additional 51,766
shares of Series A Preferred at a price of $9.775 per share upon InterWorld's
initial borrowing under the loan agreement in October, 1998.
The aggregate fair value of the warrants in the amount of $1,023 has been
recorded as debt discount on the loan obligation and is being amortized to
interest expense over a period of twelve months.
F-22
<PAGE> 92
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONCENTRATIONS OF RISK AND CUSTOMER INFORMATION
Financial instruments which potentially subject InterWorld to
concentrations of credit risk are primarily cash, accounts receivable, accounts
payable, and notes payable. InterWorld generally does not require collateral and
the majority of its trade receivables are unsecured. InterWorld sells its
products to a wide range of commercial enterprises. InterWorld had no
significant foreign revenue in any of the periods presented.
For the year ended December 31, 1996, two customers accounted for 31% and
17% of net revenues. For the year ended December 31, 1997, two different
customers accounted for 11% and 10% of net revenues. For the year ended December
31, 1998, another customer accounted for 14% of net revenues. For the three
months ended March 31, 1999, two customers accounted for 27% and 15% of net
revenues.
For the years ended December 31, 1996, 1997 and 1998 and for the three
months ended March 31, 1999, InterWorld's foreign sales were not material.
12. INCOME TAXES
InterWorld has incurred losses since inception which have generated net
operating loss carryforwards of approximately $39,210 and $43,316 at December
31, 1998 and March 31, 1999, respectively, for federal and state income tax
purposes. These carryforwards are available to offset future taxable income and
expire in 2011 through 2019. At December 31, 1998 and March 31, 1999, InterWorld
also had research and development tax credit carryforwards in the amount of
$1,437 and $1,800, respectively, which expire in 2002 through 2019.
Section 382 of the Internal Revenue Code of 1986, as amended (the "IRC"),
places a limitation on the utilization of federal net operating loss
carryforwards upon the occurrence of an ownership change. In general, a change
in ownership occurs when a greater than 50 percent change in ownership takes
place over a three year testing period. The annual utilization of net operating
loss carryforwards generated prior to such change is limited, in any one year,
to a percentage of the entity's fair value at the time of the change in
ownership. As a result of certain equity transactions consummated by InterWorld,
a change in ownership, as defined by Section 382 of the IRC, has occurred during
the three months ended March 31, 1999.
The net operating loss carryforwards and temporary differences between
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a net deferred tax benefit of $21,842 and $24,507 at
December 31, 1998 and March 31, 1999, respectively. InterWorld's operating plans
anticipate taxable income in future periods; however, such plans make
significant assumptions which cannot be reasonably assured, including market
acceptance of InterWorld's products and services by customers. Therefore, in
consideration of InterWorld's accumulated losses and the uncertainty of its
ability to utilize this deferred tax benefit in the future, InterWorld has
recorded a valuation allowance in the amount of $21,842 and $24,507 at December
31, 1998 and March 31, 1999, respectively, to offset the deferred tax benefit
amount.
F-23
<PAGE> 93
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the noncurrent deferred tax asset at December 31,
1997 and 1998 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss............................ $10,690 $17,250 $ 19,059
Net operating loss of discontinued operations... 616 -- --
Provision for losses of discontinued
operations to date of disposition.......... 295 -- --
Foreign operating loss carryforward........... 792 1,781 2,251
Accruals, reserves and other.................. 1,273 1,061 1,049
Research and development credits.............. 481 1,437 1,801
Depreciation.................................. -- 101 135
Nonqualified stock options and warrants....... 204 212 212
------- ------- --------
Total deferred tax assets.................. 14,351 21,842 24,507
------- ------- --------
Deferred tax liabilities:
Depreciation.................................. (77) -- --
------- ------- --------
Total deferred tax liabilities............. (77) -- --
------- ------- --------
Net deferred tax asset.......................... 14,274 21,842 24,507
------- ------- --------
Less: valuation allowance....................... (14,274) (21,842) (24,507)
------- ------- --------
Deferred tax asset, net......................... $ -- $ -- $ --
======= ======= ========
</TABLE>
F-24
<PAGE> 94
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. income tax rate to income (loss)
before taxes as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
-------------------- MARCH 31,
1996 1997 1998 1999
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Federal income tax statutory rate.......... (35)% (35)% (35)% (35)%
State income taxes, net of federal tax
benefit.................................. (12) (12) (9) (9)
Excess foreign tax benefits................ -- -- 4 --
Incentive stock options.................... -- 1 3 5
Other nondeductible items.................. -- -- 3 2
Increase in valuation allowance............ 47 46 34 37
--- --- --- --------
Income tax rate as recorded................ -- -- -- --
=== === === ========
</TABLE>
13. DISCONTINUED OPERATIONS
On March 30, 1998, InterWorld completed a spin-off distribution of its
subsidiary UGO, reducing its majority ownership to a minority interest of
approximately 18%. Since March 30, 1998, InterWorld's minority interest in UGO
has decreased to approximately 10% as a result of private equity financings by
UGO. Common shares of UGO were distributed to the InterWorld's common and
preferred stockholders of record as of March 30, 1998 on the basis of 0.18 a
common share of UGO for each common and preferred share (on an as converted
basis) of InterWorld. UGO is an online retailer of game and entertainment
software.
InterWorld has presented UGO as a discontinued operation in the
Consolidated Statement of Operations for the year ended December 31, 1997. A
provision of $627 for estimated operating losses through the disposal date was
recorded at December 31, 1997. The costs of disposal were not expected to be
significant.
A summary of the net liabilities distributed is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 30, 1998
----------------- --------------
<S> <C> <C>
Cash........................................... $ 596 $ 96
Equipment, net................................. 92 315
Other current assets........................... 20 53
Notes payable.................................. (1,150) (1,400)
Accounts payable and accrued expenses.......... (30) (113)
------- -------
$ (472) $(1,049)
======= =======
</TABLE>
F-25
<PAGE> 95
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
InterWorld has not guaranteed and is not contingently liable for any
obligations of UGO. InterWorld carries its investment in UGO at cost and it has
no continuing significant involvement in the operations of UGO.
During 1997, UGO had no revenues and incurred net losses of $1,310. The
basic loss per share and diluted loss per share for the year ended December 31,
1997 attributable to discontinuance of the operations of UGO was approximately
$0.14 per share.
14. COMMITMENTS
Leases
InterWorld has entered into noncancelable operating leases primarily for
office space, furniture and office equipment with initial or remaining terms of
six months or more. Total rent expense amounted to $365, $1,349 and $1,283 for
the years ended December 31, 1996, 1997 and 1998, respectively.
During 1997, InterWorld completed a sale-leaseback transaction with a
holder of Series A Preferred, selling computer equipment, office equipment, and
furniture and fixtures of $878, net of accumulated depreciation, for $819, and
realizing a loss of $59. The lease has been accounted for as a capital lease.
During 1997 InterWorld acquired computer equipment, office equipment, and
furniture and fixtures pursuant to capital lease agreements with the Series A
Preferred holder. The leases had an aggregate initial principal amount of
$3,181. In connection with the leases InterWorld issued the lessor in March 1996
and February 1997 warrants to purchase 37,500, and 39,200 shares of Series A
Preferred, at exercise prices of $2.00 and $6.25 per share, respectively. The
aggregate fair value of the warrants in the amount of $210 has been recorded as
debt discount on the related capital lease obligation and is being amortized to
interest expense over the term of the lease. During 1997 and 1998, InterWorld
recognized interest expense of $52 and $70 related to the warrants.
F-26
<PAGE> 96
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments by year under operating and capital leases
with initial or remaining terms of one year or more consisted of the following
at December 31, 1998:
<TABLE>
<CAPTION>
YEAR OPERATING CAPITAL
- ---- --------- -------
<S> <C> <C>
1999........................................................ $1,006 $1,505
2000........................................................ 1,138 627
2001........................................................ 930 --
2002........................................................ 852 --
2003........................................................ 825 --
2004 and thereafter......................................... 3,836 --
------ ------
Total minimum lease payments........................... $8,587 2,132
------ ------
Less: Amounts representing interest........................ (118)
------
Present value of future minimum lease payments.............. 2,014
Less: Current maturities................................... 1,398
------
CAPITAL LEASE OBLIGATIONS-LONG TERM.................... $ 616
======
</TABLE>
A Series A Preferred stockholder in January 1997 issued an irrevocable
letter of credit with a term of one year, in the amount of $1,579 as security
for performance under an office space lease. As consideration for the issuance,
InterWorld issued the Series A Preferred stockholder warrants to purchase 25,260
shares of Series A Preferred, at an exercise price of $6.25. The fair value of
such warrants, in the amount of $104, was recorded as interest expense during
1997.
15. SUBSEQUENT EVENTS (UNAUDITED)
In January 1999, InterWorld completed the sale and issuance of 1,650,000
shares of Series B Preferred at $10.00 per share, providing gross proceeds of
$16,500 and net proceeds, after deducting placement fees and other expenses paid
by InterWorld, of $15,510. Except with respect to potential adjustments to the
conversion price, InterWorld's Series B Preferred shares provide the same rights
and preferences as those of prior Series A Preferred issuances.
In January 1999, InterWorld utilized a portion of net proceeds from the
issuance of the Series B Preferred to repay $4,000 under its secured loan
agreement (Note 10).
In February 1999, InterWorld granted to employees and consultants options
to purchase 1,604,567 shares of common stock, all at an exercise price of $10.00
per share of which the granting of options to purchase 115,000 common shares are
contingent upon the commencement of employment. InterWorld estimates it will
recognize approximately $8,556 of compensation expense over the vesting period
of these options.
F-27
<PAGE> 97
INTERWORLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1999, InterWorld entered into an agreement to lease additional
office space at its current location. As a result, annual rental costs have
increased by approximately $1.1 million. The lease expires in April 2015.
16. INITIAL PUBLIC OFFERING AND PRO FORMA PRESENTATION (UNAUDITED)
In May 1999, the Board of Directors of InterWorld authorized management to
pursue an underwritten sale of shares of InterWorld's common stock in an initial
public offering (the "IPO") pursuant to the Securities Act of 1933.
In June 1998, the Board of Directors authorized an increase in the number
of authorized shares of InterWorld's common stock from 27,000,000 shares to
100,000,000 shares. In addition, the Board of Directors also approved the
authorization of an additional 15,000,000 shares of preferred stock, $.01 par
value.
Upon completion of the IPO, InterWorld will adopt an employee stock
purchase plan. Under the plan, eligible employees will be provided an
opportunity to purchase shares of InterWorld's common stock through regular
payroll deductions. The total number of shares of common stock that are
authorized for issuance under the plan is 1,000,000. Employees will be given an
opportunity to purchase shares of common stock during consecutive six-month
periods, and the right to purchase shares will expire on the last day of the
six-month period. The purchase price for shares offered under the Plan each year
will be equal to a percentage designated by the compensation committee of the
Board of Directors (not less than 85%) of the lower of the fair market value of
InterWorld's common stock at the commencement or termination of the six-month
period. The plan will expire on the tenth anniversary of the effective date of
the plan.
Upon the closing of the IPO, all outstanding shares of Series A Preferred
and Series B Preferred will automatically convert into an aggregate of 9,189,999
shares of common stock. The pro forma effects of this conversion have been
reflected in unaudited pro forma stockholder's equity at March 31, 1999.
For the periods ended December 31, 1998 and March 31, 1999, the pro forma
basic and diluted loss per share from continuing operations reflecting the
effects of the conversion of Series A Preferred and Series B Preferred would
have been ($1.05) and ($0.31), respectively. Pro forma basic and diluted loss
per share for the periods ended December 31, 1998 and March 31, 1999 would have
been ($1.05)and ($0.31), respectively. The pro forma weighted average shares
outstanding at December 31, 1998 and March 31, 1999 would have been 21,031,403
and 22,746,329, respectively.
Also upon completion of the IPO, 178,570 previously unvested options to
purchase 178,570 shares of common stock will automatically vest. InterWorld will
recognize approximately $229 of noncash compensation expense upon the vesting of
such options.
F-28
<PAGE> 98
[INTERWORLD LOGO]
<PAGE> 99
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 15,346
National Association of Securities Dealers, Inc. filing
fee....................................................... 5,652
Nasdaq National Market listing fee.......................... 95,000
Accountants' fees and expenses.............................. 300,000
Legal fees and expenses..................................... 300,000
Blue Sky fees and expenses.................................. 10,000
Transfer Agent's fees and expenses.......................... 5,000
Printing and engraving expenses............................. 200,000
Miscellaneous............................................... 69,002
-----------
Total Expenses.............................................. $ 1,000,000
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law and our certificate of incorporation
and bylaws limit the monetary liability of directors to us and to our
stockholders and provide for indemnification of our officers and directors for
liabilities and expenses that they may incur in such capacities. In general,
officers and directors are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of us, and with respect to any criminal action or proceeding, actions
that the indemnitee had no reasonable cause to believe were unlawful. We also
have indemnification agreements with directors and officers that provide for the
maximum indemnification allowed by law. Reference is made to our certificate of
incorporation, bylaws and form of Indemnification Agreement for Officers and
Directors filed as Exhibits 3.1, 3.2 and 10.3 hereto, respectively.
We have an insurance policy which insures our directors and officers
against certain liabilities which might be incurred in connection with the
performance of their duties.
The underwriting agreement filed as Exhibit 1.1 hereto contains certain
provisions pursuant to which certain of our officers, directors and controlling
persons may be entitled to be indemnified by the underwriters named therein.
II-1
<PAGE> 100
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, we have issued the securities set forth below
which were not registered under the Securities Act of 1933. All share
information and exercise prices reflect a 2.5 for 1 stock split effected July
12, 1996:
1. On March 1, 1996, we issued two warrants to purchase an aggregate of
140,920 shares of preferred stock to an accredited investor with an
exercise price of $2.00 per share.
2. Pursuant to a Subscription Agreement dated March 7, 1996, we sold an
aggregate of 1,287,500 shares of Series A preferred stock to 23 accredited
investors, including one director and one investment fund of which a former
officer of ours has a pecuniary interest, for a per share purchase price of
$2.00 and an aggregate purchase price of $2,575,000.
3. Pursuant to a Subscription Agreement dated July 12, 1996, we sold an
aggregate of 1,056,631 shares of Series A preferred stock to 26 accredited
investors, including one director and two investment funds of which a
director of ours is a principal, for a per share purchase price of $4.732
and an aggregate purchase price of $5,000,000.
4. Pursuant to a Subscription Agreement dated December 12, 1996, we sold an
aggregate of 1,120,000 shares of Series A preferred stock to 41 accredited
investors, including one director, one officer, two investment funds of
which a director of ours is a principal and two former officers, for a per
share purchase price of $6.25 and an aggregate purchase price of
$7,000,000.
5. On December 18, 1996, we granted options to purchase an aggregate of
1,271,750 shares of common stock to certain employees including two former
officers with an exercise price of $1.25 per share.
6. On January 9, 1997, we issued a warrant to purchase 25,260 shares of
preferred stock to an accredited investor with an exercise price of $6.25
per share.
7. On February 4, 1997, we issued a warrant to purchase 39,200 shares of
preferred stock to an accredited investor with an exercise price of $6.25
per share.
8. On April 22, 1997, we issued four warrants to purchase an aggregate of
75,000 shares of preferred stock to certain accredited investors including
three investment funds of which a director of our is a principal, with an
exercise price of $7.50 per share.
9. On July 28, 1997, we granted options to purchase an aggregate of 1,821,749
shares of common stock to certain employees including three officers, three
former officers and four directors of ours at an exercise price of $2.00
per share.
10. Pursuant to a Subscription Agreement dated August 4, 1997, we sold an
aggregate of 1,122,931 shares of Series A preferred stock to 23 accredited
investors, including two directors and one officer, for a per share
purchase price of $7.50 and an aggregate purchase price of $8,422,000.
11. Pursuant to a Subscription Agreement dated September 19, 1997, we sold an
aggregate of 1,764,705 shares of Series A preferred stock to 24 accredited
investors for a per share purchase price of $8.50 and an aggregate purchase
price of $15,000,000.
II-2
<PAGE> 101
12. In November 1997, we issued 1,500 shares of common stock to an employee
pursuant to an option exercise for an aggregate purchase price of $1,875.
13. On November 26, 1997, we issued four warrants to purchase an aggregate of
110,294 shares of preferred stock to accredited investors including one
director with an exercise price of $9.775 per share.
14. In December 1997, we issued an aggregate of 4,150 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $5,187.50.
15. In February 1998, we issued an aggregate of 2,250 shares of common stock to
two employees pursuant to an option exercise for an aggregate purchase
price of $2,812.50.
16. On February 20, 1998, we granted options to purchase an aggregate of
875,068 shares of common stock to certain employees of ours, including two
officers with an exercise price of $4.25 per share.
17. In March 1998, we issued an aggregate of 321,920 shares of common stock to
31 employees, including one officer and one consultant pursuant to option
exercises for an aggregate purchase price of $603,827.50.
18. Pursuant to a Subscription Agreement dated March 27, 1998, we sold an
aggregate of 1,188,232 shares of Series A preferred stock to 18 accredited
investors including an investment fund in which a director is a principal
for a per share purchase price of $8.50 and an aggregate purchase price of
$10,100,000.
19. On March 27, 1998, we issued four warrants to purchase an aggregate of
39,864 shares of preferred stock to accredited investors including one
director with an exercise price of $9.775 per share.
20. In April 1998, we issued 1,325 shares of common stock to three employees
pursuant to an option exercise for an aggregate purchase price of
$1,656.25.
21. In May 1998, we issued an aggregate of 3,425 shares of common stock to four
employees pursuant to option exercises for an aggregate purchase price of
$4,581.25.
22. On June 9, 1998, we issued 16,716 shares of common stock to five employees
and one consultant pursuant to an option exercise for an aggregate purchase
price of $49,383.00.
23. On June 12, 1998, we granted options to purchase an aggregate of 291,050
shares of common stock to certain employees of ours including one former
officer with an exercise price of $8.50 per share.
24. In July 1998, we issued an aggregate of 1,300 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $1,850.
25. In August 1998, we issued an aggregate of 1,250 shares of common stock to
two employees pursuant to option exercises for an aggregate purchase price
of $2,312.50.
26. In September 1998, we issued an aggregate of 8,850 shares of common stock
to four employees pursuant to option exercises for an aggregate purchase
price of $11,062.50.
27. In October we issued 200 shares of common stock to an employee pursuant to
an option exercise for an aggregate purchase price of $250.
II-3
<PAGE> 102
28. On October 7, 1998 we issued a warrant to purchase up to 103,532 shares of
Series A preferred stock to one stockholder with an exercise price of
$9.775 per share.
29. In November 1998, we issued an aggregate of 2,500 shares of common stock to
four employees pursuant to an option exercise for an aggregate purchase
price of $3,612.50.
30. In December 1998, we issued an aggregate of 4,400 shares of common stock to
three employees pursuant to option exercises for an aggregate purchase
price of $6,437.50.
31. Pursuant to a Subscription Agreement dated January 12, 1999, we issued an
aggregate of 1,650,000 shares of Series B preferred stock to five
accredited investors for a purchase price of $10.00 per share, or an
aggregate purchase price of $16,500,000.
32. In January 1999, we issued an aggregate of 26,425 shares of common stock to
eight employees pursuant to option exercises for an aggregate purchase
price of $49,831.25.
33. In February 1999, we issued an aggregate of 28,775 shares of common stock
to seven employees, including one officer, pursuant to option exercises for
an aggregate purchase price of $113,537.50.
34. On February 2, 1999, we granted options to purchase an aggregate of
1,604,567 shares of common stock to certain employees of ours, including
two officers with an exercise price of $10 per share.
35. In March 1999, we issued an aggregate of 86,900 shares of common stock to
five employees, including one officer and one former officer, pursuant to
option exercises for an aggregate purchase price of $242,895.
36. In April 1999, we issued an aggregate of 20,790 shares of common stock to
three employees, including one officer, pursuant to option exercises for an
aggregate purchase price of $87,603.75.
37. In May 1999, we issued an aggregate of 23,561 shares of common stock to
twelve employees including a former officer pursuant to option exercises
for an aggregate purchase price of $52,864.25.
38. In June 1999, we issued an aggregate of 102,246 shares of common stock to
seven employees, including two officers pursuant to option exercises for an
aggregate purchase price of $242,383.
The sales and issuances of the shares of common stock and options and
warrants to purchase common stock discussed above were made by us in reliance
upon the exemptions from registration provided under Section 4(2) of the
Securities Act of 1933 or Section 3(b) and Rule 701 promulgated thereunder. The
offers and sales were made to either accredited investors as defined in Rule
501(a) under the Securities Act or the persons referred to in Rule 701(c) under
the Securities Act pursuant to a written compensatory benefit plan (or a written
compensation contract) established by the Registrant; with respect for offers
and sales pursuant to Section 4(2), no general solicitation was made by either
the Registrant or any person acting in its behalf; the securities sold are
subject to transfer restrictions, and the certificates for the shares contained
an appropriate legend stating such securities have not been registered under the
Securities Act and may not be offered or sold absent registration or pursuant to
an exemption therefrom.
II-4
<PAGE> 103
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1A* Restated Certificate of Incorporation of the Registrant
3.1B* Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed upon pricing of this offering
3.1C* Form of Amended and Restated Certificate of Incorporation of
Registrant to be filed in connection with the closing of
this offering
3.2 Bylaws of the Registrant
5.1** Opinion of O'Sullivan Graev & Karabell, LLP, Counsel to the
Registrant, as to the legality of the shares being
registered
10.1 Amended and Restated 1996 Stock Option Plan
10.2 Employee Stock Purchase Plan
10.3* Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers
10.4 Lease dated as of January 12, 1997 between the Registrant as
Tenant and New York City District Council of Carpenters
Pension Fund, as Landlord.
10.5 Amended and Restated Loan and Security Agreement dated as of
October 7, 1998, between the Registrant and Comdisco, Inc.
10.6* First Amendment to Lease, dated as of July 1, 1999, between
Registrant, as Tenant, and New York City District Council
of Carpenters Pension Fund, as Landlord
10.7* Registration Rights Agreement
16.1* Letter from KPMG LLP regarding change in accountants
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of O'Sullivan Graev & Karabell, LLP (to be included
in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule for the year ended December 31, 1998
27.2 Financial Data Schedule for the three month period ended
March 31, 1999
</TABLE>
- -------------------------
* Filed herewith.
** To be filed by amendment.
II-5
<PAGE> 104
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
INTERWORLD CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Year ended December 31,
1996................... $ -- $ 269 $-- $ -- $ 269
Year ended December 31,
1997................... 269 353 -- -- 622
Year ended December 31,
1998................... 622 1,438 -- (843) 1,217
Three months ended March
31, 1999............... 1,217 -- -- (23) 1,194
Valuation
Reserve -- Deferred Tax
Assets
Year ended December 31,
1996.................... $ 136 $ 3,365 $-- $ -- $ 3,501
Year ended December 31,
1997................... 3,501 10,773 -- -- 14,274
Year ended December 31,
1998................... 14,274 7,568 -- -- 21,842
Three months ended March
31, 1999............... 21,842 2,665 -- -- 24,507
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director,
II-6
<PAGE> 105
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.
(c) The Registrant hereby undertakes that:
(i) 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 the 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 the Registration Statement as of the time it was declared
effective.
(ii) For purposes 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 this offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-7
<PAGE> 106
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York on this 16th day of July, 1999.
INTERWORLD CORPORATION
By: /s/ MICHAEL J. DONAHUE
-----------------------------------
Michael J. Donahue
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on this 16th day of July, 1999
by the persons and in the capacities indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President and Chief Executive
- --------------------------------------------------- Officer (principal executive
Alan J. Andreini officer) and Director
* Chief Financial Officer (principal
- --------------------------------------------------- financial and accounting officer)
Peter Schwartz
* Chairman
- ---------------------------------------------------
Michael J. Donahue
* Director
- ---------------------------------------------------
Kenneth G. Langone
* Director
- ---------------------------------------------------
Joseph C. Robinson
* Director
- ---------------------------------------------------
Yves Sisteron
* Director
- ---------------------------------------------------
Jack Slevin
* Director
- ---------------------------------------------------
Russell West
*By: /s/ MICHAEL J. DONAHUE
---------------------------------------------
Michael J. Donahue
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1A* Restated Certificate of Incorporation of the Registrant
3.1B* Amended and Restated Certificate of Incorporation of
Registrant to be filed upon pricing of the offering
3.1C* Amended and Restated Certificate of Incorporation of
Registrant to be filed in connection with closing of this
offering
3.2 Bylaws of the Registrant
5.1** Opinion of O'Sullivan Graev & Karabell, LLP, Counsel to the
Registrant, as to the legality of the shares being
registered
10.1 Amended and Restated 1996 Stock Option Plan
10.2 Employee Stock Purchase Plan
10.3* Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers
10.4 Lease dated as of January 12, 1997 between the Registrant as
Tenant and New York City District Council of Carpenters
Pension Fund, as Landlord.
10.5 Amended and Restated Loan and Security Agreement dated as of
October 7, 1998, between the Registrant and Comdisco, Inc.
10.6* First Amendment to Lease dated as of July 1, 1999 between
Registrant, as Tenant, and New York City District Council
of Carpenters Pension Fund, as Landlord
10.7* Registration Rights Agreement
16.1* Letter from KPMG LLP regarding change in accountants
21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2** Consent of O'Sullivan Graev & Karabell, LLP (to be included
in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule for the year ended December 31, 1998
27.2 Financial Data Schedule for the three month period ended
March 31, 1999
</TABLE>
- -------------------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
Exhibit 1.1
3,000,000 Shares
INTERWORLD CORPORATION
Common Stock
($.01 par value)
UNDERWRITING AGREEMENT
__________, 1999
INVEMED ASSOCIATES, LLC
375 Park Avenue
New York, N.Y. 10152
Dear Sirs:
1. Introductory. InterWorld Corporation, a Delaware corporation
("Company"), proposes to issue and sell 3,000,000 shares (the "Firm Securities")
of its authorized and unissued Common Stock, $.01 par value ("Common Stock") to
Invemed Associates, LLC (the "Underwriter"). The Company also proposes to issue
and sell to the Underwriter, at the option of the Underwriter, an aggregate of
not more than 450,000 additional shares (the "Optional Securities") of its
Common Stock, as set forth below. The Firm Securities and the Optional
Securities are herein collectively called the "Offered Securities". The Company
hereby agrees with the Underwriter as follows:
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (No. 333-79879) relating to the Offered
Securities, including a form of prospectus, has been filed with the
Securities and Exchange Commission ("Commission") and either (A) has
been declared effective under the Securities Act of 1933 ("Act") and
is not proposed to be amended or (B) is proposed to be amended by
amendment or post-effective amendment. If such registration
statement (the "initial registration statement") has been declared
effective, either (A) an additional registration statement (the
"additional registration statement") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered
Securities all have been duly registered under the Act pursuant to
the initial registration statement and, if applicable, the
additional registration statement or (B) such additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing
pursuant to such Rule and upon such filing the Offered Securities
will all have been duly registered under the Act pursuant to the
initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement
has been filed and the Company does not propose to amend it, and if
any post-effective amendment to either such registration statement
has been filed with the Commission prior to the execution and
delivery of this Agreement, the most recent amendment (if any) to
each such registration statement has been declared effective by the
Commission or has become effective upon filing pursuant to Rule
462(c) ("Rule 462(c)") under the Act or, in the case of the
additional registration statement, Rule 462(b). For purposes of this
Agreement, "Effective Time" with respect to the
<PAGE> 2
initial registration statement or, if filed prior to the execution
and delivery of this Agreement, the additional registration
statement means (A) if the Company has advised the Underwriter that
it does not propose to amend such registration statement, the date
and time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the
execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c), or (B) if the Company has advised the Underwriter that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such
registration statement, as amended by such amendment or
post-effective amendment, as the case may be, is declared effective
by the Commission. If an additional registration statement has not
been filed prior to the execution and delivery of this Agreement but
the Company has advised the Underwriter that it proposes to file
one, "Effective Time" with respect to such additional registration
statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement
or the additional registration statement (if any) means the date of
the Effective Time thereof. The initial registration statement, as
amended at its Effective Time including all information contained in
the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time
of the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and
including all information (if any) deemed to be a part of the
additional registration statement as of its Effective Time pursuant
to Rule 430A(b), is hereinafter referred to as the "Additional
Registration Statement". The Initial Registration Statement and the
Additional Registration Statement are hereinafter referred to
collectively as the "Registration Statements" and individually as a
"Registration Statement". The form of prospectus relating to the
Offered Securities, as first filed with the Commission pursuant to
and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or
(if no such filing is required) as included in a Registration
Statement is hereinafter referred to as the "Prospectus". No
document has been or will be prepared or distributed in reliance on
Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements
of the Act and the rules and regulations of the Commission ("Rules
and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, (B) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed or will
conform, in all respects to the requirements of the Act and the
Rules and Regulations and did not include, or will not include, any
untrue statement of a material fact and did not omit, or will not
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and,
if the Effective Time of the Additional Registration Statement is
prior to the execution and delivery of this Agreement, the
Additional Registration Statement each conforms, and at the time of
filing of the Prospectus pursuant to Rule 424(b) or (if no such
filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and
Regulations, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will
omit, to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. If the
Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective
Date of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all respects to the
requirements of the Act and the Rules and
-2-
<PAGE> 3
Regulations, neither of such documents will include any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no Additional Registration Statement has
been or will be filed. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company
by the Underwriter specifically for use therein, it being understood
and agreed that the only such information is that described as such
in Section 7(c) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own or
lease its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its
business requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the
condition (financial or other), businesses, properties or results of
operations of the Company and its subsidiaries taken as a whole
("Matereial Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated and is
an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority
(corporate and other) to own or lease its properties and conduct its
business as described in the Prospectus; and each subsidiary of the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the Company and its subsidiaries
taken as a whole; all of the issued and outstanding capital stock of
each subsidiary of the Company has been duly authorized and validly
issued and is fully paid and nonassessable and is owned by the
Company, directly or through subsidiaries; and the capital stock of
each subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and defects.
(e) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued, and are fully paid and
nonassessable and conform to the description thereof contained in
the Prospectus; and the stockholders of the Company have no
preemptive rights with respect to the Common Stock.
(f) The Offered Securities have been duly authorized, and when
issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and non-assessable, and will conform to
the description thereof contained in the Prospectus.
(g) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person that
would give rise to a valid claim against the Company or the
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(h) Except for the Registration Rights Agreement dated March 7,
1996, as amended, between the Company and the holders of Series A
Preferred Stock, there are no contracts, agreements or
understandings between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the
Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act. No person has any registration rights with
respect to the registration statement covering the Offered
Securities.
-3-
<PAGE> 4
(i) The Common Stock have been approved for quotation subject to
notice of issuance on the Nasdaq National Market.
(j) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the
sale of the Offered Securities, except such as have been obtained
and made under the Act and such as may be required under state
securities laws.
(k) The execution, delivery and performance of this Agreement, and
the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions
of, or constitute a default under, (i) the charter or by-laws of the
Company or any such subsidiary of the Company, (ii) any agreement or
instrument to which the Company or any such subsidiary is a party or
by which the Company or any such subsidiary is bound or to which any
of the properties of the Company or any such subsidiary is subject,
except for any such breaches or defaults which, individually or in
the aggregate, would not have a Material Adverse Effect, or (iii)
any statute, any rule, regulation or order of any governmental
agency or body or any court, domestic or foreign, having
jurisdiction over the Company or any subsidiary of the Company or
any of their properties.
(l) This Agreement has been duly authorized, executed and delivered
by the Company.
(m) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them, in each case free
from liens, encumbrances and defects that would materially affect
the value thereof or materially interfere with the use made or to be
made thereof by them; and except as disclosed in the Prospectus, the
Company and its subsidiaries hold any leased real or personal
property under valid and enforceable leases with no exceptions that
would materially interfere with the use made or to be made thereof
by them, except as enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rising generally or by
general equitable principles.
(n) The Company and its subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies
or bodies necessary to conduct the business now operated by them and
have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or
permit that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(o) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent
that could reasonably be expected to have a Material Adverse Effect.
(p) The Company and its subsidiaries own, license, possess or can
acquire on reasonable terms, adequate trademarks, trade names and
other rights to inventions, know-how, patents, copyrights,
confidential information and other intellectual property
(collectively, "intellectual property rights") necessary to conduct
the business now operated by them, or presently employed by them,
and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a Material
Adverse Effect.
(q) Except as disclosed in the Prospectus, neither the Company nor
any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or
any court, domestic or foreign, relating to the use, disposal or
release of hazardous or
-4-
<PAGE> 5
toxic substances or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances
(collectively, "environmental laws"), owns or operates any real
property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to
any claim relating to environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not
aware of any pending investigation which might lead to such a claim.
(r) Except as disclosed in the Prospectus, there are no pending
actions, suits or proceedings against or affecting the Company, any
of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse
Effect, or would materially and adversely affect the ability of the
Company to perform its obligations under this Agreement, or which
are otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are threatened
or to the Company's knowledge, contemplated.
(s) The financial statements included in each Registration Statement
and the Prospectus present fairly the financial position of the
Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown,
and such financial statements have been prepared in conformity with
the generally accepted accounting principles in the United States
applied on a consistent basis, and the schedules included in each
Registration Statement present fairly the information required to be
stated therein.
(t) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there
has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations
of the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(u) The Company is not and, after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.
(v) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes, and
the Company agrees to comply with such Section if prior to the
completion of the distribution of the Offered Securities it
commences doing such business.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriter, and the Underwriter agrees to purchase from the Company, at a
purchase price of $______________ per share, the Firm Securities.
The Company will deliver the Firm Securities to you, against payment of
the purchase price in Federal (same day) funds by official bank check or checks
or wire transfer to an account at a bank acceptable to the Underwriter drawn to
the order of the Company at the office of Morgan, Lewis & Bockius LLP, 101 Park
Avenue, New York, NY 10178, at 10:00 A.M., New York time, on_______________ ,
1999, or at such other time not later than seven full business days thereafter
as the Underwriter and the Company determine, such time being herein referred to
as the "First Closing Date." The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as the Underwriter requests and will be made available for checking
and packaging at the above office of Morgan, Lewis & Bockius LLP at least 24
hours prior to
-5-
<PAGE> 6
the First Closing Date. If the Underwriter so elects, delivery of Firm
Securities may be made by credit through full fast transfer to the accounts at
the Depository Trust Company designated by the Underwriter.
In addition, upon written notice from the Underwriter given to the Company
from time to time not more than 30 days subsequent to the date of the
Prospectus, the Underwriter may purchase all or less than all of the Optional
Securities at the purchase price per share to be paid for the Firm Securities.
The Company agrees to sell to the Underwriter the number of shares of Optional
Securities specified in such notice and the Underwriter agrees to purchase such
Optional Securities. Such Optional Securities shall be purchased from the
Company by the Underwriter only for the purpose of covering over-allotments made
in connection with the sale of the Firm Securities. No Optional Securities shall
be sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by the Underwriter to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by the
Underwriter but shall be not less than two full business days nor later than
five full business days after written notice of election to purchase Optional
Securities is given. The Company will deliver the Optional Securities being
purchased on each Optional Closing Date to the Underwriter, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to the Underwriter
drawn to the order of the Company at the above office of Morgan, Lewis & Bockius
LLP, 101 Park Avenue, New York, NY 10178. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in such denominations and registered in such names as the Underwriter
requests upon reasonable notice prior to such Optional Closing Date and will be
made available for checking and packaging at the above office of Morgan, Lewis &
Bockius LLP at a reasonable time in advance of such Optional Closing Date. If
the Underwriter so elects, delivery of Optional Securities may be made by credit
through full fast transfer to the account at the Depository Trust Company
designated by the Underwriter.
4. Offering by Underwriter. It is understood that the Underwriter proposes
to offer the Offered Securities for sale to the public as set forth in the
Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
Underwriter that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company
will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented
to by the Underwriter, subparagraph (4)) of Rule 424(b) not later
than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth
business day after the Effective Date of the Initial Registration
Statement. The Company will advise the Underwriter promptly of any
such filing pursuant to Rule 424(b). If the Effective Time of the
Initial Registration Statement is prior to the execution and
delivery of this Agreement and an additional registration statement
is necessary to register a portion of the Offered Securities under
the Act but the Effective Time thereof has not occurred as of such
execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance
with Rule 462(b) on or prior to 10:00 P.M., New York time, on the
date of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to the Underwriter, or will
make such filing at such later date as shall have been consented to
by the Underwriter.
(b) The Company will advise the Underwriter promptly of any proposal
to amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if
any) or the Prospectus and will not effect such amendment or
supplementation without the Underwriter's consent; and
-6-
<PAGE> 7
the Company will also advise the Underwriter promptly of the
effectiveness of each Registration Statement (if its Effective Time
is subsequent to the execution and delivery of this Agreement) and
of any amendment or supplementation of a Registration Statement or
the Prospectus and of the institution by the Commission of any stop
order proceedings in respect of a Registration Statement and will
use its best efforts to prevent the issuance of any such stop order
and to obtain as soon as possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection
with sales by the Underwriter or dealer, any event occurs as a
result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or
if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify the Underwriter of
such event and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct
such statement or omission or an amendment which will effect such
compliance. Neither the Underwriter's consent to, nor delivery of,
any such amendment or supplement shall constitute a waiver of any of
the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
security holders an earnings statement covering a period of at least
12 months beginning after the Effective Date of the Initial
Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions
of Section 11(a) of the Act. For the purpose of the preceding
sentence, "Availability Date" means the 45th day after the end of
the fourth fiscal quarter following the fiscal quarter that includes
such Effective Date, except that, if such fourth fiscal quarter is
the last quarter of the Company's fiscal year, "Availability Date"
means the 90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (two of which will be signed and will include
all exhibits), each related preliminary prospectus, and, so long as
a prospectus relating to the Offered Securities is required to be
delivered under the Act in connection with sales by the Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as the Underwriter
requests. The Prospectus shall be so furnished on or prior to 3:00
P.M., New York time, on the business day following the later of the
execution and delivery of this Agreement or the Effective Time of
the Initial Registration Statement. All other such documents shall
be so furnished as soon as available. The Company will pay the
expenses of printing and distributing to the Underwriter all such
documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as the
Underwriter designates and to continue such qualifications in effect
so long as required for the distribution of the Offered Securities.
(g) During the period 5 years hereafter, the Company will furnish to
the Underwriter, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and
the Company will furnish to the Underwriter (i) as soon as
available, a copy of each report and any definitive proxy statement
of the Company filed with the Commission under the Securities
Exchange Act of 1934 or mailed to stockholders, and (ii) from time
to time, such other information concerning the Company as the
Underwriter may reasonably request.
(h) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement
under the Act relating
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<PAGE> 8
to, any additional shares of its Common Stock or securities or other
rights convertible into or exchangeable or exercisable for any
shares of its Common Stock, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without
the prior written consent of the Underwriter, except issuances of
Common Stock pursuant to the conversion or exchange of convertible
or exchangeable securities or the exercise of warrants in each case
outstanding on the date hereof, grants of employee stock options
pursuant to the terms of the Company's Amended and Restated 1996
Stock Option Plan, issuances of Common Stock pursuant to the
exercise of such options as are outstanding on the date hereof or
issuances of Common Stock pursuant to the Company's Employee Stock
Purchase Plan.
(i) The Company agrees with the Underwriter that the Company will
pay all expenses incident to the performance of the obligations of
the Company under this Agreement, for any filing fees and other
expenses (including fees and disbursements of counsel) in connection
with qualification of the Offered Securities for sale under the laws
of such jurisdictions as the Underwriter designates and the printing
of memoranda relating thereto, for the filing fee incident to, and
the reasonable fees and disbursements of counsel to the Underwriter
in connection with the review by the National Association of
Securities Dealers, Inc. of the Offered Securities, for any travel
expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting
meetings with prospective purchasers of the Offered Securities and
for expenses incurred in distributing preliminary prospectuses and
the Prospectus (including any amendments and supplements thereto) to
the Underwriter.
(j) The Company shall, prior to or concurrently with the execution
of this Agreement, deliver an agreement executed by (i) each of the
directors and officers of the Company and (ii) each other
shareholder of the Company to the effect that such person will not
without the prior written consent of Invemed Associates LLC during
the period commencing on the date such person signs such agreement
and ending 180 days after the date of the Prospectus (i) offer,
sell, contract to sell, pledge, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities or other
rights convertible into or exchangeable or exercisable for any
shares of Common Stock or publicly disclose the intention to make
any such offer, sale, contract to sell, pledge, or disposition, (ii)
enter into any swap or other arrangement that transfers, in whole or
in part, all or a portion of the economic consequences of ownership
of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of
Common Stock, or such other securities, in cash or otherwise) or
(iii) make any demand for, or exercise any right with respect to,
the registration of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock.
6. Conditions of the Obligations of the Underwriter. The obligations of
the Underwriter to purchase and pay for the Firm Securities on the First Closing
Date and the Optional Securities to be purchased on each Optional Closing Date
will be subject to the accuracy of the representations and warranties on the
part of the Company herein, to the accuracy of the statements of Company
officers made pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions
precedent:
(a) The Underwriter shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of
this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to
the registration statement to be filed shortly prior to such
Effective Time), of PricewaterhouseCoopers LLP confirming that they
are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and
stating to the effect that:
(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements
comply as to form in all material respects with
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<PAGE> 9
the applicable accounting requirements of the Act and the
related published Rules and Regulations;
(ii) they have performed the procedures specified by the
American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in clause (ii)
above, a reading of the latest available interim financial
statements of the Company, inquiries of officials of the
Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their
attention that caused them to believe that:
(1) the unaudited financial statements included in the
Registration Statements do not comply as to form in all
material respects with the applicable accounting
requirements of the Act and the related published Rules
and Regulations or any material modifications should be
made to such unaudited financial statements for them to
be in conformity with generally accepted accounting
principles;
(2) at the date of the latest available balance sheet
read by such accountants, or at a subsequent specified
date not more than three business days prior to the date
of this Agreement, there was any change in the capital
stock or any increase in short-term indebtedness or
long-term debt of the Company and its consolidated
subsidiaries or, at the date of the latest available
balance sheet read by such accountants, there was any
decrease in consolidated net current assets or net
assets, as compared with amounts shown on the latest
balance sheet included in the Prospectus; or
(3) for the period from the closing date of the latest
income statement included in the Prospectus to the
closing date of the latest available income statement
read by such accountants there were any decreases, as
compared with the corresponding period of the previous
year and with the period of corresponding length ended
the date of the latest income statement included in the
Prospectus, in consolidated net sales or net operating
income or in the total or per share amounts of
consolidated net income;
(4) except in all cases set forth in clauses (B) and (C)
above for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which
are described in such letter; and
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and other financial information to
be in agreement with such results, except as otherwise
specified in such letter.
For purposes of this subsection, (i) if the Effective
Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement,
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<PAGE> 10
"Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or
post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery
of this Agreement but the Effective Time of the Additional
Registration Statement is subsequent to such execution and
delivery, "Registration Statements" shall mean the Initial
Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended
by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the
prospectus included in the Registration Statements.
(b) The Company shall have received from PricewaterhouseCoopers LLP
(and furnished to the Underwriter) a review report with respect to
Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company for the fiscal years ending
1996, 1997 and 1998 and for the three-month period ending March 31,
1999, and the corresponding period for the prior fiscal year, each
in accordance with Statement on Standards for Attestation Engagement
No. 8 issued by the Auditing Standards Board of the American
Institute of Certified Public Accountants.
(c) If the Effective Time of the Initial Registration Statement is
not prior to the execution and delivery of this Agreement, such
Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by the Underwriter. If the Effective Time of
the Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or, if earlier, the time the Prospectus is printed
and distributed to the Underwriter, or shall have occurred at such
later date as shall have been consented to by the Underwriter. If
the Effective Time of the Initial Registration Statement is prior to
the execution and delivery of this Agreement, the Prospectus shall
have been filed with the Commission in accordance with the Rules and
Regulations and Section 5(a) of this Agreement. Prior to such
Closing Date, no stop order suspending the effectiveness of a
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted or, to the knowledge of any
Selling Stockholder, the Company or the Underwriter, shall be
contemplated by the Commission.
(d) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) any change, or any development or
event involving a prospective change, in the condition (financial or
other), business, properties or results of operations of the Company
and its subsidiaries taken as a whole which, in the judgment of the
Underwriter, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities; (ii) any suspension
or limitation of trading in securities generally on the New York
Stock Exchange, or any setting of minimum prices for trading on such
exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (iii) any
banking moratorium declared by U.S. Federal or New York authorities;
or (iv) any outbreak or escalation of major hostilities in which the
United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency
if, in the judgment of the Underwriter, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities.
(e) The Underwriter shall have received an opinion, dated such
Closing Date, of O'Sullivan, Graev & Karabell, LLP, counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to
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<PAGE> 11
own its properties and conduct its business as described in
the Prospectus; and the Company is duly qualified to do
business as a foreign corporation in good standing in all
other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except where the failure to be so qualified
would not have a material adverse effect on the Company;
(ii) The Offered Securities delivered on such Closing Date
(assuming issuance and delivery against payment therefor in
accordance with the terms hereof) and all other outstanding
shares of the Common Stock of the Company have been duly
authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained
in the Prospectus; and the stockholders of the Company have no
statutory preemptive rights or, to such counsel's knowledge,
similar rights with respect to the Common Stock;
(iii) To the best of the knowledge of such counsel, the number
of options and warrants outstanding is as set forth in the
Registration Statement. The grant of such options and the
issuance of such warrants have been duly authorized and such
options and warrants have been validly issued;]
(iv) Except for the Registration Rights Agreement dated March
7, 1996, as amended, between the Company and the holders of
Series A Preferred Stock there are no contracts, agreements or
understandings known to such counsel between the Company and
any person granting such person the right to require the
Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act. To such counsel's knowledge no person
has any registration rights with respect to a Registration
Statement covering the Offered Securities;
(v) No consent, approval, authorization or order of, or filing
with, any governmental agency or body or any court is required
to be obtained or made by the Company for the consummation of
the transactions contemplated by this Agreement in connection
with the sale of the Offered Securities, except such as have
been obtained and made under the Act and such as may be
required under state securities laws;
(vi) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under the charter
or by-laws of the Company or any subsidiary of the Company,
any statute, any rule, regulation or, to such counsel's
knowledge, order of any governmental agency or body or any
court having jurisdiction over the Company or any subsidiary
of the Company or any of their properties, or, to such
counsel's knowledge, any material agreement or instrument to
which the Company or any such subsidiary is a party or by
which the Company or any such subsidiary is bound or to which
any of the properties of the Company or any such subsidiary is
subject;
(vii) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the knowledge of such
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<PAGE> 12
counsel, no stop order suspending the effectiveness of a
Registration Statement or any part thereof has been issued and
no proceedings for that purpose have been instituted or are
pending or contemplated under the Act, and each Registration
Statement and the Prospectus, and each amendment or supplement
thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations; the
descriptions in the Registration Statements and Prospectus of
statutes, legal and governmental proceedings and contracts and
other documents are accurate and fairly present the
information required to be shown; and such counsel does not
know of any legal or governmental proceedings required to be
described in a Registration Statement or the Prospectus which
are not described as required or of any contracts or documents
of a character required to be described in a Registration
Statement or the Prospectus or to be filed as exhibits to a
Registration Statement which are not described and filed as
required; it being understood that such counsel need express
no opinion as to the financial statements or other financial
data contained in the Registration Statements or the
Prospectus; and
(viii)This Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall also state that it has no reason to believe
that any part of a Registration Statement or any amendment thereto,
as of its effective date or as of such Closing Date, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading
(f) The Underwriter shall have received an opinion, dated such
Closing Date, of Gottlieb, Rackman & Reisman, P.C., patent counsel
for the Company, to the effect that:
(i) Such counsel has no knowledge of any reason that any
patent of the Company is not valid and has no knowledge of any
reason why any patents that may issue from applications for
patents filed by the Company with the United States Patent and
Trademark Office would not be valid;
(ii) To the knowledge of such counsel, the Company is not
infringing or otherwise violating any patents, trade secrets,
know-how or proprietary rights or techniques of others and
there is no pending, or, to the knowledge of such counsel,
threatened action, suit, proceeding or claim by others that
the Company has infringed or otherwise violated any patents,
licensing rights, licensing or royalty arrangements or
agreements, trade secrets or know-how and proprietary rights;
(iii) To the knowledge of such counsel, there is no
infringement on the part of any third party of any patent,
application for patent, trade secret, know-how or other
proprietary right of the Company, and there is no pending or,
to the knowledge of such counsel, threatened action, suit,
proceeding or claim by others challenging the validity or
scope of any patent or application for patent by the Company;
(iv) To the knowledge of such counsel, the statements in the
Registration Statements and Prospectus and any amendments and
supplements thereto under the captions "Risk Factors--Our
proprietary rights may not be fully protected, and we may be
subject to intellectual property infringement claims by
others" and "Business--Proprietary Rights," insofar as such
statements constitute a summary of the Company's patents,
applications for patents and proprietary technology, are in
all material respects accurate descriptions of the legal
matters, documents and proceedings relating thereto; and
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<PAGE> 13
(v) Such counsel has reviewed the statements in the
Registration Statements and Prospectus and any amendments and
supplements thereto under the captions "Risk Factors--Our
proprietary rights may not be fully protected, and we may be
subject to intellectual property infringement claims by others
and "Business--Proprietary Rights," and such counsel has no
reason to believe that as of their respective effective dates
or as of such Closing Date, such portions of the Registration
Statement or the Prospectus or any amendment or supplement
thereto contained any untrue statement of a material fact or
omitted to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading or that as of its issue date or such Closing Date,
such portions of the Prospectus or any amendment or supplement
contains any untrue statement of a material fact or omits to
state any material fact necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading.
(g) The Underwriter shall have received an opinion, dated such
Closing Date of Amy Aguilar-Brown, Vice President, Legal Affairs of
the Company, to the effect that she has no reason to believe that
any part of a Registration Statement or any amendment thereto, as of
its effective date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; and she does not know of any legal or
governmental proceedings required to be described in a Registration
Statement or the Prospectus which are not described as required or
of any contracts or documents of a character required to be
described in a Registration Statement or the Prospectus or to be
filed as exhibits to a Registration Statement which are not
described and filed as required; it being understood that she need
express no opinion as to the financial statements or other financial
data contained in the Registration Statements or the Prospectus; and
(h) The Underwriter shall have received from Morgan, Lewis & Bockius
LLP, counsel for the Underwriter, such opinion or opinions, dated
such Closing Date, with respect to the incorporation of the Company,
the validity of the Offered Securities delivered on such Closing
Date, the Registration Statements, the Prospectus and other related
matters as the Representatives may require, and the Company shall
have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
(i) The Underwriter shall have received a certificate, dated such
Closing Date, of the President and the Chief Financial Officer of
the Company in which such officers, to the best of their knowledge
after reasonable investigation, shall state that: the
representations and warranties of the Company in this Agreement are
true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to such Closing Date; no stop order suspending
the effectiveness of any Registration Statement has been issued and
no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration
Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including
payment of the applicable filing fee in accordance with Rule 111(a)
or (b) under the Act, prior to the time the Prospectus was printed
and distributed to the Underwriter; and, subsequent to the
respective dates of the most recent financial statements in the
Prospectus, there has been no material adverse change, nor any
development or event involving a prospective material adverse
change, in the condition (financial or other), business, properties
or results of operations of the Company and its subsidiaries taken
as a whole except as set forth in or contemplated by the Prospectus
or as described in such certificate.
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<PAGE> 14
(j) The Company shall have delivered to you the agreements specified
in Section 5(j) hereof which agreements shall be in full force and
effect on the Closing Date.
(k) The Underwriter shall have received a letter, dated such Closing
Date, of PricewaterhouseCoopers LLP which meets the requirements of
subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than three
business days prior to such Closing Date for the purposes of this
subsection.
The Company will furnish the Underwriter with such conformed copies of such
opinions, certificates, letters and documents as the Underwriter reasonably
requests. The Underwriter may in its sole discretion waive compliance with any
conditions to the obligations of the Underwriter hereunder, whether in respect
of an Optional Closing Date or otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless the Underwriter
against any losses, claims, damages or liabilities, joint or
several, to which the Underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary
prospectus, 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 to make the statements therein not
misleading, and will reimburse the Underwriter for any legal or
other expenses reasonably incurred by the Underwriter in connection
with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in
or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished
to the Company by the Underwriter specifically for use therein, it
being understood and agreed that the only such information furnished
by the Underwriter consists of the information described as such in
subsection (c) below.
(b) Insofar as the foregoing indemnity agreement, or the
representations and warranties contained in Section 2(b), may permit
indemnification for liabilities under the Act of any person who is
an Underwriter or a partner or controlling person of an Underwriter
within the meaning of Section 15 of the Act and who, at the date of
this Agreement, is a director, officer or controlling person of the
Company, the Company has been advised that in the opinion of the
Commission such provisions may contravene Federal public policy as
expressed in the Act and may therefore be unenforceable. In the
event that a claim for indemnification under such agreement or such
representations and warranties for any such liabilities (except
insofar as such agreement provides for the payment by the Company of
expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding)
is asserted by such a person, the Company will submit to a court of
appropriate jurisdiction (unless in the opinion of counsel for the
Company the matter has already been settled by controlling
precedent) the question of whether or not indemnification by it for
such liabilities is against public policy as expressed in the Act
and therefore unenforceable, and the Company will be governed by the
final adjudication of such issue.
(c) The Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the
Company may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any
Registration Statement, the Prospectus, or any amendment or
supplement thereto,
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<PAGE> 15
or any related preliminary prospectus, or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company
by the Underwriter specifically for use therein, and will reimburse
any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being
understood and agreed that the only such information furnished by
the Underwriter consists of the concession and reallowance figures
appearing in the fourth paragraph under the caption "Underwriting";
the information pertaining to prior compensation and shareholdings
of the Underwriter and certain related persons in the twelfth
paragraph under the heading "Underwriting"; and the information
appearing in the last paragraph under the caption "Underwriting."
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against an indemnifying party under subsection (a) or (c) above,
notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it
from any liability which it may have to any indemnified party
otherwise than under subsection (a) or (c) above. In case any such
action is brought against any indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party (who shall not, except with
the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or
threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought
hereunder by such indemnified party unless such settlement includes
an unconditional release of such indemnified party from all
liability on any claims that are the subject matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party
under subsection (a) or (c) above, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified
party as a result of the losses, claims, damages or liabilities
referred to in subsection (a) or (c) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriter on the other from the
offering of the Offered Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault
of the Company on the one hand and the Underwriter 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 benefits received by the
Company on the one hand and the Underwriter on the other shall be
deemed to be in the same proportion as the total net proceeds from
the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by
the Underwriter. The relative fault shall be determined by reference
to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company
or the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified
party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (e) shall be
deemed to include any
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<PAGE> 16
legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or
claim which is the subject of this subsection (e). Notwithstanding
the provisions of this subsection (e), the Underwriter shall not be
required to contribute any amount in excess of the amount by which
the total price at which the Offered Securities underwritten by it
and distributed to the public were offered to the public exceeds the
amount of any damages which the Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(d) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
f. The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each person, if
any, who controls the Underwriter within the meaning of the Act; and
the obligations of the Underwriter under this Section shall be in
addition to any liability which the Underwriter may otherwise have
and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has
signed a Registration Statement and to each person, if any, who
controls the Company within the meaning of the Act.
8. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and the Underwriter set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation, or statement as to the results thereof, made by or on behalf of
the Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriter is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriter pursuant to Section 7 shall
remain in effect, and if any Offered Securities have been purchased hereunder
the representations and warranties in Section 2 and all obligations under
Section 5 shall also remain in effect. If the purchase of the Offered Securities
by the Underwriter is not consummated for any reason other than solely because
of the occurrence of any event specified in clause (ii), (iii) or (iv) of
Section 6(c), the Company will reimburse the Underwriter for all out-of-pocket
expenses (including fees and disbursements of counsel) reasonably incurred by it
in connection with the offering of the Offered Securities.
9. Notices. All communications hereunder will be in writing and, if sent
to the Underwriter, will be mailed, delivered or telegraphed and confirmed to
the Underwriter, Invemed Associates, LLC, 375 Park Avenue, New York, NY
10152-0189 Attention: Cristina H. Kepner - Executive Vice President, or, if sent
to the Company, will be mailed, delivered or telegraphed and confirmed to it at
InterWorld Corporation, 395 Hudson Street, 6th Floor, New York, N.Y. 10014,
Attention: Amy Aguilar-Brown.
10. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective personal representatives and
successors and the officers and directors and controlling persons referred to in
Section 7, and no other person will have any right or obligation hereunder.
11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
12. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
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<PAGE> 17
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company one of the counterparts hereof,
whereupon it will become a binding agreement among the Company and the
Underwriter in accordance with its terms.
Very truly yours,
INTERWORLD CORPORATION
By_______________________________
[Insert title]
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.
INVEMED ASSOCIATES, LLC
By___________________________
[Insert title]
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<PAGE> 1
Exhibit 3.1A
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
--------------------------------
InterWorld Corporation, a Delaware corporation (the
"Corporation"), does hereby certify that:
FIRST: The present name of the Corporation is "InterWorld
Corporation." The Corporation was originally incorporated under the name
"InterWorld Technology Ventures, Inc." The date of filing of the original
Certificate of Incorporation of the Corporation with the Secretary of State of
the State of Delaware was March 28, 1995. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on July 12, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on December 17, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on May 21, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on September 10, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on February 20, 1998.
SECOND: This Restated Certificate of Incorporation (the
"Certificate") amends and restates in its entirety the present Certificate of
Incorporation of the Corporation. This Certificate has been duly adopted and
approved by the Board of Directors of the Corporation by unanimous written
consent in lieu of a meeting thereof in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware and by the Stockholders of the Corporation by written consent in lieu
of a meeting thereof in accordance with the provisions of Sections 228(a), 242
and 245 of the General Corporation Law at the State of Delaware.
THIRD: This Certificate shall become effective immediately
upon its filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the
State of Delaware of this Certificate, the Certificate of Incorporation of the
Corporation shall be amended and restated in its entirety to read as set forth
on Exhibit A attached hereto.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be executed by a duly authorized officer this __th day of
_______, 1999 and hereby affirms that the facts stated herein are true.
INTERWORLD CORPORATION
By: _______________________________
Alan J. Andreini
President and Chief Executive Officer
<PAGE> 3
EXHIBIT A
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
<PAGE> 4
RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
-------------------------------------------------------
Pursuant to Section 103, Section 242 and Section 245 of
the General Corporation Law of the State of Delaware
-------------------------------------------------------
ARTICLE I
NAME
The name of the corporation is InterWorld Corporation (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the initial registered and principal office of
this corporation in this state is c/o National Registered Agents, Inc., 9 East
Loockerman Street, City of Dover, County of Kent, State of Delaware 19901 and
the name of the registered agent at said address is National Registered Agents,
Inc.
ARTICLE III
OBJECT AND PURPOSES
The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the corporation laws
of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
The Corporation shall be authorized to issue 123,200,000
shares of all classes, consisting of (i) [100,000,000] shares of Common Stock,
$.01 par value (the "Common Stock"), and (ii) [23,200,000] shares of Preferred
Stock, $.01 par value (the "Preferred Stock"). Of the Preferred Stock, 8,200,000
shares shall be designated as "Series A Preferred Stock" (the "Series A
Preferred Stock") and 2,500,000 shares shall be designated as "Series B
Preferred Stock" (the "Series B Preferred Stock"). [Blank Check Preferred]
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<PAGE> 5
The Series A Preferred Stock and the Series B Preferred Stock
shall have the following designations, preferences, and other rights:
1. DIVIDENDS.
The holders of Series A Preferred Stock and Series B Preferred
Stock shall be entitled to share in any dividends declared and paid upon or set
aside for the Common Stock of the Corporation, pro rata in accordance with the
number of shares of Common Stock into which such shares of Series A Preferred
Stock and Series B Preferred Stock are then convertible pursuant to Section 6.
2. LIQUIDATION.
(a) Upon a Liquidation (as defined below), after payment or
provision for payment of the debts and other liabilities of the Corporation and
all amounts which the holders of any class of capital stock ranking senior to
the Series A Preferred Stock shall be entitled to receive upon such Liquidation,
the holders of Series A Preferred Stock shall be entitled to receive, out of the
remaining assets of the Corporation available for distribution to its
stockholders, with respect to each share of Series A Preferred Stock an amount
(the "Series A Preference Amount") equal to the sum of (i)(A) $2 for shares
issued prior to July 1, 1996 (or pursuant to the Warrant Agreements dated March
1, 1996 (the "First Comdisco Warrants"), between the Corporation and Comdisco,
Inc. ("Comdisco")), (B) $4.732 for shares issued on or after July 1, 1996, and
prior to December 2, 1996, (C) $6.25 for shares issued on or after December 2,
1996, and prior to May 21, 1997 (or pursuant to the Warrant Agreement dated
January 9, 1997, between the Corporation and Comdisco (the "Second Comdisco
Warrants") or the Warrant Agreement dated February 4th, 1997, between the
Corporation and Comdisco (the "Third Comdisco Warrants")), (D) $7.50 for shares
issued on or after May 21, 1997, and before August 4, 1997 or pursuant to the
Warrant Agreements dated April 22, 1997, between the Corporation and Global
Retail Partners L.P. and their affiliates (the "Global Warrants"), (E) $8.50 for
shares issued on or after August 4, 1997 (except for shares issued pursuant to
the Warrants referred to in clause (F)), (F) $9.775 for up to 253,690 shares
issued pursuant to (1) the Warrant Agreements dated November 26, 1997 and March
27, 1998, between the Corporation and associates of Invemed Corporation and its
affiliates (the "Invemed Advisor Warrants") and (2) a Warrant Agreement dated
October 26, 1998 between the Corporation and Comdisco (the "Fourth Comdisco
Warrants"), and (ii) all declared but unpaid dividends payable with respect to
such share under Section 1, before any distribution shall be made to the holders
of the Common Stock or any other class of capital stock of the Corporation
ranking junior to the Series A Preferred Stock.
(b) Upon a Liquidation, after payment or provision for payment
of the debts and other liabilities of the Corporation and all amounts which the
holders of any class of capital stock ranking senior to the Series B Preferred
Stock shall be entitled to receive upon such Liquidation, the holders of Series
B Preferred Stock shall be entitled to receive, out of the remaining assets of
the Corporation available for distribution to its stockholders, with respect to
each share of Series B Preferred Stock an amount (the "Series B Preference
Amount" and together with the Series A Preference Amount, the "Preference
Amounts") equal to the sum of (i) $10.00 and (ii) all declared but unpaid
dividends payable with respect to such share under
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<PAGE> 6
Section 1, before any distribution shall be made to the holders of the Common
Stock or any other class of capital stock of the Corporation ranking junior to
the Series B Preferred Stock.
(c) If upon any Liquidation the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of Series A Preferred Stock and the Series B Preferred Stock the full
Preference Amounts to which they shall be entitled, the holders of Series A
Preferred Stock and Series B Preferred Stock shall share pro rata in any
distribution of assets in accordance with their respective full Preference
Amounts and the amount of Series A Preferred or Series B Preferred Stock, as
applicable, owned by each such stockholder.
(d) Upon any Liquidation, after payment or provision for
payment in full of all Preference Amounts, the holders of Common Stock shall be
entitled to share pro rata in the distribution of the remaining assets of the
Corporation.
(e) "Liquidation" means any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, other
than any dissolution, liquidation or winding up in connection with any
reincorporation of the Corporation in another jurisdiction.
3. REDEMPTION UPON CORPORATE TRANSACTION.
(a) In connection with any Corporate Transaction (as defined
below), each holder of shares of Series A Preferred Stock and Series B Preferred
Stock may demand that the Corporation redeem (out of funds legally available for
that purpose) all or a portion of all shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, then held by such holder for a
cash amount per share equal to the applicable Preference Amount. The Corporation
shall send notice of any proposed Corporate Transaction by first-class certified
mail, return receipt requested, postage prepaid, to the holders of record of the
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, at their respective addresses as they appear on the books of the
Corporation. Such notice shall be mailed prior to or at the same time as any
notice of a stockholders meeting to be held for the purpose of voting on such
Corporate Transaction or as any request for consent in lieu of such meeting. If
no such notice or consent is required, the notice of such proposed Corporate
Transaction shall be mailed no later than 20 days before the anticipated date of
closing of the Corporate Transaction. The right of each holder of Series A
Preferred Stock and Series B Preferred Stock under this Section may be exercised
by delivering to the Corporation, prior to the consummation of such Corporate
Transaction, a notice specifying the number of shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, to be redeemed.
(b) At any time on or after the date of consummation of such
Corporate Transaction, each holder of record of shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, to be redeemed on such
date shall be entitled to receive the redemption price upon actual delivery to
the Corporation or its agents of the certificate or certificates representing
the shares to be redeemed. On any such date, all rights in respect of the shares
of Series A Preferred Stock or Series B Preferred Stock, as the case may be, to
be redeemed, except the right to receive the redemption price, shall cease and
terminate (unless default shall be made by the Corporation in the payment of the
applicable redemption price, in
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<PAGE> 7
which event such rights shall be exercisable until such default is cured), and
such shares shall no longer be deemed to be outstanding, whether or not the
certificate or certificates representing such share have been received by the
Corporation.
(c) If the Corporation has insufficient funds legally
available to redeem any shares of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, required to be redeemed in connection with any
Corporate Transaction, those funds legally available for such purpose shall be
used to redeem the number of such shares which may be redeemed. The holders of
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, to be redeemed shall participate in any such partial redemption pro rata
according to the number of such shares then held by them. At any time and from
time to time thereafter when additional funds become legally available for the
redemption of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, such funds shall be used promptly to redeem the balance of the shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, to be
redeemed.
(d) "Corporate Transaction" means (i) any consolidation or
merger of the Corporation, other than any merger or consolidation resulting in
the holders of the capital stock of the Corporation entitled to vote for the
election of directors holding a majority of the capital stock of the surviving
or resulting entity entitled to vote for the election of directors, and (ii) any
sale or other disposition by the Corporation of all or substantially all of its
assets.
4. MANDATORY REDEMPTION.
(a) At any time on or after March 11, 2003 (the seventh
anniversary of the date of original issuance of the first share of Series A
Preferred Stock) (the "Original Issuance Date"), the holders of a majority of
all shares of Series A Preferred Stock and Series B Preferred Stock (voting as a
single class on a common stock equivalent basis) may demand (which demand shall
be binding upon all holders of Series A Preferred Stock and Series B Preferred
Stock, as the case may be,) that the Corporation redeem (out of funds legally
available for that purpose) all, but not less than all, shares of Series A
Preferred Stock and Series B Preferred Stock then outstanding for a cash amount
per share equal to the applicable Preference Amount. Such right may be exercised
by delivery to the Corporation of a notice (a "Mandatory Redemption Notice")
requesting such redemption. The Corporation shall redeem all shares of Series A
Preferred Stock and Series B Preferred Stock on a date (the "Mandatory
Redemption Date") that is not more than 120 days after the date of delivery of
the Mandatory Redemption Notice.
(b) If the Corporation has insufficient funds legally
available to redeem all shares of Series A Preferred Stock and Series B
Preferred Stock, as the case may be, required to be redeemed on the Mandatory
Redemption Date, those funds legally available for such purpose shall be used to
redeem the number of such shares which may be redeemed. The holders of shares of
Series A Preferred Stock and Series B Preferred Stock shall participate in any
such partial redemption pro rata according to the number of such shares then
held by each such holder. At any time and from time to time thereafter when
additional funds become legally available for the redemption of Series A
Preferred Stock and Series B Preferred Stock such funds shall be used promptly
to redeem the balance of the shares of Series A Preferred Stock and Series B
Preferred Stock to be redeemed.
4
<PAGE> 8
(c) At any time on or after the Mandatory Redemption Date,
each holder of record of shares of Series A Preferred Stock and Series B
Preferred Stock to be redeemed on such date shall be entitled to receive the
applicable Preference Amount upon actual delivery to the Corporation or its
agents of the certificate or certificates representing the shares to be
redeemed. On the Mandatory Redemption Date, all rights in respect of the shares
of Series A Preferred Stock and Series B Preferred Stock to be redeemed, except
the right to receive the applicable redemption price, shall cease and terminate
(unless default shall be made by the Corporation in the payment of the
applicable redemption price, in which event such rights shall be exercisable
until such default is cured), and such shares shall no longer be deemed to be
outstanding, whether or not the certificate or certificates representing such
shares have been received by the Corporation.
5. VOTING RIGHTS.
(a) In addition to the rights provided by law or in paragraphs
(b), (c) and (d) below, the holders of Series A Preferred Stock and the Series B
Preferred Stock, as the case may be, shall be entitled to vote on all matters as
to which holders of Common Stock shall be entitled to vote, in the same manner
and with the same effect as such holders of Common Stock, voting together with
the holders of Common Stock as one class. Each share of Series A Preferred Stock
or Series B Preferred Stock, as the case may be, shall entitle the holder
thereof to such number of votes as shall equal the number of whole and
fractional shares of Common Stock into which such share of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, is then convertible
pursuant to Section 6.
(b) In addition, to the rights provided by law, the
Corporation shall not, without the affirmative consent or approval of the
holders of a majority of the shares of Series A Preferred Stock and Series B
Preferred Stock then outstanding, voting together separately as a single class:
(i)authorize any class or series of capital stock
ranking senior to or pari passu with the Series A Preferred Stock and
the Series B Preferred; or
(c) In addition to the rights provided by law, the Corporation
shall not, without the affirmative consent or approval of the holders of a
majority of the shares of Series A Preferred Stock then outstanding, voting
separately as a class, in any manner alter or change the powers, preferences,
rights or qualifications of, or limitations or restrictions on, the shares of
Series A Preferred Stock so as to affect them adversely.
(d) In addition to the rights provided by law, the Corporation
shall not, without the affirmative consent or approval of the holders of a
majority of the shares of Series B Preferred Stock then outstanding, voting
separately as a class, in any manner alter or change the powers, preferences,
rights or qualifications of, or limitations or restrictions on, the shares of
Series B Preferred Stock so as to affect them adversely.
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<PAGE> 9
6. OPTIONAL CONVERSION.
(a) Upon the terms set forth in this Section, each holder of
shares of Series A Preferred Stock shall have the right, at such holder's
option, at any time and from time to time, to convert any of such shares into
the number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Series A Preference Amount
and the number of shares of Series A Preferred Stock being converted, by (ii)
the Series A Conversion Price (as defined below), as last adjusted and then in
effect, by surrender of the certificates representing the shares of Series A
Preferred Stock to be converted. The conversion price per share at which shares
of Common Stock shall be issuable upon conversion of shares of Series A
Preferred Stock (the "Series A Conversion Price") shall be (A) $2 upon
conversion of shares of Series A Preferred Stock issued before July 1, 1996, or
pursuant to the First Comdisco Warrants, (B) $4.732 upon conversion of shares of
Series A Preferred Stock issued on or after July 1, 1996, and before December 2,
1996, (C) $6.25 upon conversion of shares of Series A Preferred Stock issued on
or after December 2, 1996 and before May 21, 1997, or pursuant to the Second
Comdisco Warrants or the Third Comdisco Warrants, (D) $7.50 upon conversion of
shares of Series A Preferred Stock issued on or after May 21, 1997, and before
August 4, 1997, or pursuant to the Global Warrants, (E) $8.50 upon conversion of
shares of Series A Preferred Stock issued on or after August 4, 1997 (except for
shares issued pursuant to the Warrants referred to in clause (F)), and (F)
$9.775 upon conversion of shares of Series A Preferred Stock issued pursuant to
the Invemed Advisor Warrants or the Fourth Comdisco Warrants, in each case
subject to adjustment as set forth in paragraph (e) below.
(b) Upon the terms set forth in this Section, each holder of
shares of Series B Preferred Stock shall have the right, at such holder's
option, at any time and from time to time, to convert any of such shares into
the number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Series B Preference Amount
and the number of shares of Series B Preferred Stock being converted, by (ii)
the Series B Conversion Price (as defined below), as last adjusted and then in
effect, by surrender of the certificates representing the shares of Series B
Preferred Stock to be converted. The conversion price per share at which shares
of Common Stock shall be issuable upon conversion of shares of Series B
Preferred Stock (the "Series B Conversion Price" and each of the Series A
Conversion Price and Series B Conversion Price, a "Conversion Price") shall be
$10.00, subject to adjustment as set forth in paragraph (e) below.
(c) The holder of any shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, may exercise the conversion right
pursuant to paragraph (a) or (b) above, as the case may be, by delivering to the
Corporation the certificate or certificates for the shares to be converted, duly
endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating that the holder elects to convert such
shares and stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. Conversion shall
be deemed to have been effected on the date when such delivery is made (the
"Conversion Date"). As promptly as practicable thereafter, the Corporation shall
issue and deliver to or upon the written order of such holder, to the place
designated by such holder, a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled, and a cash amount in
respect of any fractional interest in a share of Common Stock as provided in
paragraph (d) below. The person in whose name the
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<PAGE> 10
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a stockholder of record on the applicable Conversion Date unless the
transfer books of the Corporation are closed on that date, in which event such
person shall be deemed to have become a stockholder of record on the next
succeeding date on which the transfer books are open, but the applicable
Conversion Price shall be that in effect on the Conversion Date. Upon conversion
of only a portion of the number of shares covered by a certificate representing
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, surrendered for conversion, the Corporation shall issue and deliver to or
upon the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, representing the unconverted portion of the certificate so
surrendered.
(d) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be. The number of full shares of Common Stock
issuable upon conversion of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, shall be computed on the basis of the aggregate
number of shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, to be converted. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, the Corporation
shall pay a cash adjustment in respect of such fractional interest in an amount
equal to the product of (i) the price of one share of Common Stock as determined
in good faith by the Board and (ii) such fractional interest. The holders of
fractional interests shall not be entitled to any rights as stockholders of the
Corporation in respect of such fractional interests.
(e) The applicable Conversion Price shall be subject to
adjustment from time to time as follows:
(i)If the Corporation shall at any time or from time
to time after the Original Issuance Date issue any shares of Common
Stock other than Excluded Stock (as defined below) without
consideration or for a consideration per share less than the Conversion
Price in effect immediately prior to the issuance of such Common Stock,
then the Conversion Price in effect immediately prior to each such
issuance shall forthwith be lowered to a price equal to the quotient
obtained by dividing:
(A)an amount equal to the sum of (x) the
total number of shares of Common Stock outstanding (including
any shares of Common Stock deemed to have been issued pursuant
to subdivision (C) of clause (ii) below) immediately prior to
such issuance, multiplied by the Conversion Price in effect
immediately prior to such issuance, and (y) the consideration
received by the Corporation upon such issuance; by
(B)the total number of shares of Common
Stock outstanding (including any shares of Common Stock deemed
to have been issued pursuant to subdivision (C) of clause (ii)
below) immediately after the issuance of such Common Stock.
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<PAGE> 11
(ii)For the purposes of any adjustment of the
Conversion Price pursuant to clause (i) above, the following provisions
shall be applicable:
(A)In the case of the issuance of Common
Stock for cash in a public offering or private placement, the
consideration shall be deemed to be the amount of cash paid
therefor after deducting therefrom any discounts, commissions
or placement fees payable by the Corporation to any
underwriter or placement agent in connection with the issuance
and sale thereof.
(B)In the case of the issuance of Common
Stock for a consideration in whole or in part other than cash,
the consideration other than cash shall be deemed to be the
fair market value thereof as determined in good faith by the
Board of Directors of the Corporation, irrespective of any
accounting treatment.
(C)In the case of the issuance of options to
purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common
Stock, or options to purchase or rights to subscribe for such
convertible or exchangeable securities:
(1) the aggregate maximum number of
shares of Common Stock deliverable upon exercise of
such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at
the time such options or rights were issued and for a
consideration equal to the consideration (determined
in the manner provided in subdivisions (A) and (B)
above), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum
purchase price provided in such options or rights for
the Common Stock covered thereby;
(2) the aggregate maximum number of
shares of Common Stock deliverable upon conversion of
or in exchange for any such convertible or
exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to
have been issued at the time such securities,
options, or rights were issued and for a
consideration equal to the consideration received by
the Corporation for any such securities and related
options or rights (excluding any cash received on
account of accrued interest or accrued dividends),
plus the additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such securities or the exercise of any
related options or rights (the consideration in each
case to be determined in the manner provided in
subdivisions (A) and (B) above);
(3) on any change in the number of
shares or exercise price of Common Stock deliverable
upon exercise of any such options or rights or
conversions of or exchange for such securities, other
than a change resulting from the antidilution
provisions thereof, the Conversion Price shall
forthwith be readjusted to such Conversion Price as
would have
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obtained had the adjustment made upon the issuance of
such options, rights or securities not converted
prior to such change or options or rights related to
such securities not converted prior to such change
been made upon the basis of such change; and
(4) on the expiration of any such
options or rights, the termination of any such rights
to convert or exchange or the expiration of any
options or rights related to such convertible or
exchangeable securities, the Conversion Price shall
forthwith be readjusted to such Conversion Price as
would have obtained had the adjustment made upon the
issuance of such options, rights, securities or
options or rights related to such securities been
made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon
the exercise of such options or rights, upon the
conversion or exchange of such securities, or upon
the exercise of the options or rights related to such
securities and subsequent conversion or exchange
thereof.
(iii) "Excluded Stock" means (1) 6,600,000 shares of
Common Stock, and options therefor, reserved for issuance or grant
under the 1996 Stock Option Plan of the Corporation, as amended; (2)
shares of Common Stock issued upon conversion of shares of Series A
Preferred Stock or Series B Preferred Stock; and (3) 800,000 shares of
Series A Preferred Stock reserved for issuance under the First Comdisco
Warrants, the Second Comdisco Warrants, the Third Comdisco Warrant, the
Global Warrants, the Invemed Advisor Warrants or the Fourth Comdisco
Warrants.
(iv)If, at any time after July 12, 1996, the number
of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall be increased in
proportion to such increase in outstanding shares.
(v)If, at any time after the Original Issuance Date,
the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following
the record date for such combination, the Conversion Price shall be
appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall be decreased in
proportion to such decrease in outstanding shares.
(vi)In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation
(other than a change in par value or from no par value to par value or
from par value to no par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or any consolidation
or merger of the Corporation, each share of Series A Preferred Stock or
Series B Preferred
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Stock, as the case may be, shall after such reorganization,
reclassification, consolidation, or merger be convertible into the kind
and number of shares of stock or other securities or property of the
Corporation or of the corporation resulting from such consolidation or
surviving such merger to which the holder of the number of shares of
Common Stock deliverable (immediately prior to the time of such
reorganization, reclassification, consolidation or merger) upon
conversion of such share of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, would have been entitled upon such
reorganization, reclassification, consolidation or merger. The
provisions of this clause shall similarly apply to successive
reorganizations, reclassifications, consolidations or mergers.
(vii) All calculations under this paragraph shall be
made to the nearest one hundredth (1/100) of a cent or the nearest one
tenth (1/10) of a share, as the case may be.
(viii) In any case in which the provisions of this
paragraph (e) shall require that an adjustment shall become effective
immediately after a record date of an event, the Corporation may defer
until the occurrence of such event (i) issuing to the holder of any
share of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, converted after such record date and before the occurrence
of such event the shares of capital stock issuable upon such conversion
by reason of the adjustment required by such event in addition to the
shares of capital stock issuable upon such conversion before giving
effect to such adjustments, and (ii) paying to such holder any amount
in cash in lieu of a fractional share of capital stock pursuant to
paragraph (d) above; provided, however, that the Corporation shall
deliver to such holder an appropriate instrument evidencing such
holder's right to receive such additional shares and such cash.
(f) Whenever a Conversion Price shall be adjusted as provided
in paragraph (e), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
applicable Conversion Price that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by first class
certified mail, return receipt requested and postage prepaid, to each holder of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, at
such holder's address appearing on the Corporation's records. Where appropriate,
such copy may be given in advance and may be included as part of any notice
required to be mailed under the provisions of paragraph (g) below.
(g) If the Corporation shall propose to take any action of the
types described in clauses (v), (vi) or (vii) of paragraph (e) above, the
Corporation shall give notice to each holder of shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, in the manner set forth
in paragraph (f) above, which notice shall specify the record date, if any, with
respect to any such action and the date on which such action is to take place.
Such notice shall also set forth such facts with respect thereto as shall be
reasonably necessary to indicate the effect of such action (to the extent such
effect may be known at the date of such notice) on the applicable Conversion
Price and the number, kind or class of shares or other securities or property
which shall be deliverable or purchasable upon the occurrence of such action or
deliverable upon conversion of shares of Series A Preferred Stock or Series B
Preferred Stock, as
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<PAGE> 14
the case may be. In the case of any action which would require the fixing of a
record date, such notice shall be given at least 20 days prior to the date so
fixed, and in case of all other action, such notice shall be given at least 30
days prior to the taking of such proposed action. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such
action.
(h) The Corporation shall reserve, and at all times from and
after the date of Original Issuance Date keep reserved, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, sufficient shares of
Common Stock to provide for the conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock.
(i) At any time the Corporation makes or fixes a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in securities of the Corporation other than shares
of Common Stock, provision shall be made so that each holder of shares of Series
A Preferred Stock or Series B Preferred Stock, as the case may be, shall receive
upon conversion thereof, in addition to the shares of Common Stock receivable
thereupon, the number of securities of the Corporation which it would have
received had its shares of Series A Preferred Stock or Series B Preferred Stock,
as the case may be, been converted into shares of Common Stock on the date of
such event and had such holder thereafter, during the period from the date of
such event to and including the date of conversion, retained such securities
receivable by it pursuant to this paragraph during such period, subject to the
sum of all other adjustments called for during such period under this Section
with respect to the rights of such holder of shares of Series A Preferred Stock
or Series B Preferred Stock, as the case may be.
7. MANDATORY CONVERSION.
(a) Upon the consummation of the first underwritten public
offering for the account of the Corporation of Common Stock pursuant to a
registration statement filed under the Securities Act of 1933 with aggregate
proceeds (net of underwriting discounts and commissions) to the Corporation of
not less than $25,000,000 (a "Qualified Public Offering"), each share of Series
A Preferred Stock and Series B Preferred Stock then outstanding shall, by virtue
of and simultaneously with such Qualified Public Offering, be deemed
automatically converted (a "Mandatory Conversion") into the number of fully paid
and nonassessable shares of Common Stock equal to the quotient obtained (i) in
the case of the Series A Preferred Stock, by dividing (A) the Series A
Preference Amount by (B) the Series A Conversion Price, as last adjusted and
then in effect and (ii) in the case of the Series B Preferred Stock, by dividing
(A) the Series B Preference Amount by (B) the Series B Conversion Price, as last
adjusted and then in effect; provided, however, that if a Mandatory Conversion
occurs on or prior to December 31, 2000 and the initial price per share of
Common Stock to the public in the Qualified Public Offering (the "IPO Price") is
less than $12.00, then each share of Series B Preferred Stock shall be converted
into the number of fully paid and nonassessable shares of Common Stock equal to
the quotient obtained by dividing (C) $12.00 by (D) the IPO Price.
(b) As promptly as practicable after the date of consummation
of any Qualified Public Offering and the delivery to the Corporation of the
certificate or certificates for the shares
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<PAGE> 15
of Series A Preferred Stock or Series B Preferred Stock, as the case may be,
which have been converted, duly endorsed or assigned in blank to the Corporation
(if required by it), the Corporation shall issue and deliver to or upon the
written order of each holder of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, to the place designated by such holder, a certificate
or certificates for the number of full shares of Common Stock to which such
holder is entitled, and a cash amount in respect of any fractional interest in a
share of Common Stock as provided in paragraph (c) below. The person in whose
name the certificate or certificates for Common Stock are to be issued shall be
deemed to have become a stockholder of record on the date of such Qualified
Public Offering and on such date the shares of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall cease to be outstanding,
whether or not the certificates representing such shares have been received by
the Corporation.
(c) The provisions set forth in Section 6(d) shall apply to
the conversion of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, pursuant to this Section in the same manner as they apply to the
conversion of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, pursuant to Section 6.
ARTICLE V
DIRECTORS
1. The number of directors of the corporation shall be such as
from time to time shall be fixed by, or in the manner provided in the By-Laws.
Election of directors need not be by ballot unless the By-Laws so provide.
2. The Board of Directors shall have power without the assent
or vote of the stockholders:
(a) To make, alter, amend, change, add to or repeal the
By-Laws of the corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and liens upon
all or any part of the property of the corporation; to determine the use and
disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
(b) To determine from time to time whether, and to what times
and places, and under what conditions the accounts and books of the corporation
(other than the stock ledger) or any of them, shall be open to the inspection of
the stockholders.
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3. The directors in their discretion may submit any contract
or act for approval or ratification at any annual meeting of the stockholders or
at any meeting of the stockholders called for the purpose of considering any
such act or contract, and any contract or act that shall be approved or be
ratified by the vote of the holders of a majority of the stock of the
corporation which is represented in person or by proxy at such meeting and
entitled to vote thereat (provided that a lawful quorum of stockholders be there
represented in person or by proxy) shall be as valid and as binding upon the
corporation and upon all the stockholders as though it had been approved or
ratified by every stockholder of the corporation, whether or not the contract or
act would otherwise be open to legal attack because of directors' interest, or
for any other reason.
4. In addition to the powers and authorities hereinbefore or
by statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the corporation; subject, nevertheless, to the provisions of the
statutes of Delaware, of this certificate, and to any by-laws from time to time
made by the stockholders; provided, however, that no by-laws so made shall
invalidate any prior act of the directors which would have been valid if such
by-law had not been made.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
ARTICLE VII
COMPROMISE OR ARRANGEMENT WITH CREDITORS
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court or equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in
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<PAGE> 17
value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of this corporation as
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors, and/or on all the stockholders or class of stockholders, of
this corporation, as the case may be, and also on this corporation.
ARTICLE VIII
AMENDMENTS
The corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation in the
manner now or hereafter prescribed by law, and all rights and powers conferred
herein on stockholders, directors and officers are subject to this reserved
power.
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Exhibit 3.1B
[To be filed immediately prior to execution of Underwriting Agreement.]
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
-------------------------------------------------------
Pursuant to Section 103, Section 242 and Section 245 of
the General Corporation Law of the State of Delaware
-------------------------------------------------------
ARTICLE I
NAME
The name of the corporation is InterWorld Corporation (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the initial registered and principal office of
this corporation in this state is c/o National Registered Agents, Inc., 9 East
Loockerman Street, City of Dover, County of Kent, State of Delaware 19901 and
the name of the registered agent at said address is National Registered Agents,
Inc.
ARTICLE III
OBJECT AND PURPOSES
The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the corporation laws
of the State of Delaware.
ARTICLE IV
CAPITAL STOCK
The Corporation shall be authorized to issue 125,700,000
shares of all classes, consisting of (i) 100,000,000 shares of Common Stock,
$.01 par value (the "Common Stock"), and (ii) 25,700,000 shares of Preferred
Stock, $.01 par value (the "Preferred Stock"). Of the Preferred Stock, 8,200,000
shares shall be designated as "Series A Preferred Stock" (the "Series A
Preferred Stock") and 2,500,000 shares shall be designated as "Series B
Preferred Stock" (the "Series B Preferred Stock").
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Subject to the limitations and in the manner provided by law,
shares of the Preferred Stock may be issued from time to time in series, and the
Board of Directors of the Corporation or a duly-authorized committee of the
Board of Directors of the Corporation, in accordance with the laws of the State
of Delaware, is hereby authorized to determine or alter the relative rights,
powers (including voting powers), preferences, privileges and restrictions
granted to or imposed upon Preferred Stock or any wholly unissued series of
shares of Preferred Stock, and to increase or decrease (but not below the number
of shares of any series of Preferred Stock then outstanding) the number of
shares of any such series subsequent to the issue of shares of that series. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall upon the taking of any action required by
applicable law resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
The Series A Preferred Stock and the Series B Preferred Stock
shall have the following designations, preferences, and other rights:
1. DIVIDENDS.
The holders of Series A Preferred Stock and Series B Preferred
Stock shall be entitled to share in any dividends declared and paid upon or set
aside for the Common Stock of the Corporation, pro rata in accordance with the
number of shares of Common Stock into which such shares of Series A Preferred
Stock and Series B Preferred Stock are then convertible pursuant to Section 6.
2. LIQUIDATION.
(a) Upon a Liquidation (as defined below), after payment
or provision for payment of the debts and other liabilities of the Corporation
and all amounts which the holders of any class of capital stock ranking senior
to the Series A Preferred Stock shall be entitled to receive upon such
Liquidation, the holders of Series A Preferred Stock shall be entitled to
receive, out of the remaining assets of the Corporation available for
distribution to its stockholders, with respect to each share of Series A
Preferred Stock an amount (the "Series A Preference Amount") equal to the sum of
(i)(A) $2 for shares issued prior to July 1, 1996 (or pursuant to the Warrant
Agreements dated March 1, 1996 (the "First Comdisco Warrants"), between the
Corporation and Comdisco, Inc. ("Comdisco")), (B) $4.732 for shares issued on or
after July 1, 1996, and prior to December 2, 1996, (C) $6.25 for shares issued
on or after December 2, 1996, and prior to May 21, 1997 (or pursuant to the
Warrant Agreement dated January 9, 1997, between the Corporation and Comdisco
(the "Second Comdisco Warrants") or the Warrant Agreement dated February 4th,
1997, between the Corporation and Comdisco (the "Third Comdisco Warrants")), (D)
$7.50 for shares issued on or after May 21, 1997, and before August 4, 1997 or
pursuant to the Warrant Agreements dated April 22, 1997, between the Corporation
and Global Retail Partners L.P. and their affiliates (the "Global Warrants"),
(E) $8.50 for shares issued on or after August 4, 1997 (except for shares issued
pursuant to the Warrants referred to in clause (F)), (F) $9.775 for up to
253,690 shares issued pursuant to (1) the Warrant Agreements dated November 26,
1997 and March 27, 1998, between the Corporation and associates of Invemed
Corporation and its affiliates (the "Invemed Advisor Warrants") and (2) a
Warrant Agreement dated October 26, 1998 between the Corporation and Comdisco
(the
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"Fourth Comdisco Warrants"), and (ii) all declared but unpaid dividends payable
with respect to such share under Section 1, before any distribution shall be
made to the holders of the Common Stock or any other class of capital stock of
the Corporation ranking junior to the Series A Preferred Stock.
(b) Upon a Liquidation, after payment or provision for
payment of the debts and other liabilities of the Corporation and all amounts
which the holders of any class of capital stock ranking senior to the Series B
Preferred Stock shall be entitled to receive upon such Liquidation, the holders
of Series B Preferred Stock shall be entitled to receive, out of the remaining
assets of the Corporation available for distribution to its stockholders, with
respect to each share of Series B Preferred Stock an amount (the "Series B
Preference Amount" and together with the Series A Preference Amount, the
"Preference Amounts") equal to the sum of (i) $10.00 and (ii) all declared but
unpaid dividends payable with respect to such share under Section 1, before any
distribution shall be made to the holders of the Common Stock or any other class
of capital stock of the Corporation ranking junior to the Series B Preferred
Stock.
(c) If upon any Liquidation the assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of Series A Preferred Stock and the Series B Preferred Stock the full
Preference Amounts to which they shall be entitled, the holders of Series A
Preferred Stock and Series B Preferred Stock shall share pro rata in any
distribution of assets in accordance with their respective full Preference
Amounts and the amount of Series A Preferred or Series B Preferred Stock, as
applicable, owned by each such stockholder.
(d) Upon any Liquidation, after payment or provision for
payment in full of all Preference Amounts, the holders of Common Stock shall be
entitled to share pro rata in the distribution of the remaining assets of the
Corporation.
(e) "Liquidation" means any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, other
than any dissolution, liquidation or winding up in connection with any
reincorporation of the Corporation in another jurisdiction.
3. REDEMPTION UPON CORPORATE TRANSACTION.
(a) In connection with any Corporate Transaction (as
defined below), each holder of shares of Series A Preferred Stock and Series B
Preferred Stock may demand that the Corporation redeem (out of funds legally
available for that purpose) all or a portion of all shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, then held by such holder
for a cash amount per share equal to the applicable Preference Amount. The
Corporation shall send notice of any proposed Corporate Transaction by
first-class certified mail, return receipt requested, postage prepaid, to the
holders of record of the shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be, at their respective addresses as they
appear on the books of the Corporation. Such notice shall be mailed prior to or
at the same time as any notice of a stockholders meeting to be held for the
purpose of voting on such Corporate Transaction or as any request for consent in
lieu of such meeting. If no such notice or consent is required, the notice of
such proposed Corporate Transaction shall be mailed no later than 20 days before
the anticipated date of closing of the Corporate Transaction. The right of each
holder of
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Series A Preferred Stock and Series B Preferred Stock under this Section may be
exercised by delivering to the Corporation, prior to the consummation of such
Corporate Transaction, a notice specifying the number of shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, to be redeemed.
(b) At any time on or after the date of consummation of
such Corporate Transaction, each holder of record of shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, to be redeemed
on such date shall be entitled to receive the redemption price upon actual
delivery to the Corporation or its agents of the certificate or certificates
representing the shares to be redeemed. On any such date, all rights in respect
of the shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, to be redeemed, except the right to receive the redemption price,
shall cease and terminate (unless default shall be made by the Corporation in
the payment of the applicable redemption price, in which event such rights shall
be exercisable until such default is cured), and such shares shall no longer be
deemed to be outstanding, whether or not the certificate or certificates
representing such share have been received by the Corporation.
(c) If the Corporation has insufficient funds legally
available to redeem any shares of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, required to be redeemed in connection with any
Corporate Transaction, those funds legally available for such purpose shall be
used to redeem the number of such shares which may be redeemed. The holders of
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, to be redeemed shall participate in any such partial redemption pro rata
according to the number of such shares then held by them. At any time and from
time to time thereafter when additional funds become legally available for the
redemption of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, such funds shall be used promptly to redeem the balance of the shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, to be
redeemed.
(d) "Corporate Transaction" means (i) any consolidation or
merger of the Corporation, other than any merger or consolidation resulting in
the holders of the capital stock of the Corporation entitled to vote for the
election of directors holding a majority of the capital stock of the surviving
or resulting entity entitled to vote for the election of directors, and (ii) any
sale or other disposition by the Corporation of all or substantially all of its
assets.
4. MANDATORY REDEMPTION.
(a) At any time on or after March 11, 2003 (the seventh
anniversary of the date of original issuance of the first share of Series A
Preferred Stock) (the "Original Issuance Date"), the holders of a majority of
all shares of Series A Preferred Stock and Series B Preferred Stock (voting as a
single class on a common stock equivalent basis) may demand (which demand shall
be binding upon all holders of Series A Preferred Stock and Series B Preferred
Stock, as the case may be,) that the Corporation redeem (out of funds legally
available for that purpose) all, but not less than all, shares of Series A
Preferred Stock and Series B Preferred Stock then outstanding for a cash amount
per share equal to the applicable Preference Amount. Such right may be exercised
by delivery to the Corporation of a notice (a "Mandatory Redemption Notice")
requesting such redemption. The Corporation shall redeem all shares of Series A
Preferred
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Stock and Series B Preferred Stock on a date (the "Mandatory Redemption Date")
that is not more than 120 days after the date of delivery of the Mandatory
Redemption Notice.
(b) If the Corporation has insufficient funds legally
available to redeem all shares of Series A Preferred Stock and Series B
Preferred Stock, as the case may be, required to be redeemed on the Mandatory
Redemption Date, those funds legally available for such purpose shall be used to
redeem the number of such shares which may be redeemed. The holders of shares of
Series A Preferred Stock and Series B Preferred Stock shall participate in any
such partial redemption pro rata according to the number of such shares then
held by each such holder. At any time and from time to time thereafter when
additional funds become legally available for the redemption of Series A
Preferred Stock and Series B Preferred Stock such funds shall be used promptly
to redeem the balance of the shares of Series A Preferred Stock and Series B
Preferred Stock to be redeemed.
(c) At any time on or after the Mandatory Redemption Date,
each holder of record of shares of Series A Preferred Stock and Series B
Preferred Stock to be redeemed on such date shall be entitled to receive the
applicable Preference Amount upon actual delivery to the Corporation or its
agents of the certificate or certificates representing the shares to be
redeemed. On the Mandatory Redemption Date, all rights in respect of the shares
of Series A Preferred Stock and Series B Preferred Stock to be redeemed, except
the right to receive the applicable redemption price, shall cease and terminate
(unless default shall be made by the Corporation in the payment of the
applicable redemption price, in which event such rights shall be exercisable
until such default is cured), and such shares shall no longer be deemed to be
outstanding, whether or not the certificate or certificates representing such
shares have been received by the Corporation.
5. VOTING RIGHTS.
(a) In addition to the rights provided by law or in
paragraphs (b), (c) and (d) below, the holders of Series A Preferred Stock and
the Series B Preferred Stock, as the case may be, shall be entitled to vote on
all matters as to which holders of Common Stock shall be entitled to vote, in
the same manner and with the same effect as such holders of Common Stock, voting
together with the holders of Common Stock as one class. Each share of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, shall entitle
the holder thereof to such number of votes as shall equal the number of whole
and fractional shares of Common Stock into which such share of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, is then
convertible pursuant to Section 6.
(b) In addition, to the rights provided by law, the
Corporation shall not, without the affirmative consent or approval of the
holders of a majority of the shares of Series A Preferred Stock and Series B
Preferred Stock then outstanding, voting together separately as a single class:
(i)authorize any class or series of capital stock
ranking senior to or pari passu with the Series A Preferred Stock and
the Series B Preferred; or
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<PAGE> 6
(ii)amend or waive any provision of the Corporation's
Restated Certificate of Incorporation.
(c) In addition to the rights provided by law, the
Corporation shall not, without the affirmative consent or approval of the
holders of a majority of the shares of Series A Preferred Stock then
outstanding, voting separately as a class, in any manner alter or change the
powers, preferences, rights or qualifications of, or limitations or restrictions
on, the shares of Series A Preferred Stock so as to affect them adversely.
(d) In addition to the rights provided by law, the
Corporation shall not, without the affirmative consent or approval of the
holders of a majority of the shares of Series B Preferred Stock then
outstanding, voting separately as a class, in any manner alter or change the
powers, preferences, rights or qualifications of, or limitations or restrictions
on, the shares of Series B Preferred Stock so as to affect them adversely.
6. OPTIONAL CONVERSION.
(a) Upon the terms set forth in this Section, each holder
of shares of Series A Preferred Stock shall have the right, at such holder's
option, at any time and from time to time, to convert any of such shares into
the number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Series A Preference Amount
and the number of shares of Series A Preferred Stock being converted, by (ii)
the Series A Conversion Price (as defined below), as last adjusted and then in
effect, by surrender of the certificates representing the shares of Series A
Preferred Stock to be converted. The conversion price per share at which shares
of Common Stock shall be issuable upon conversion of shares of Series A
Preferred Stock (the "Series A Conversion Price") shall be (A) $2 upon
conversion of shares of Series A Preferred Stock issued before July 1, 1996, or
pursuant to the First Comdisco Warrants, (B) $4.732 upon conversion of shares of
Series A Preferred Stock issued on or after July 1, 1996, and before December 2,
1996, (C) $6.25 upon conversion of shares of Series A Preferred Stock issued on
or after December 2, 1996 and before May 21, 1997, or pursuant to the Second
Comdisco Warrants or the Third Comdisco Warrants, (D) $7.50 upon conversion of
shares of Series A Preferred Stock issued on or after May 21, 1997, and before
August 4, 1997, or pursuant to the Global Warrants, (E) $8.50 upon conversion of
shares of Series A Preferred Stock issued on or after August 4, 1997 (except for
shares issued pursuant to the Warrants referred to in clause (F)), and (F)
$9.775 upon conversion of shares of Series A Preferred Stock issued pursuant to
the Invemed Advisor Warrants or the Fourth Comdisco Warrants, in each case
subject to adjustment as set forth in paragraph (e) below.
(b) Upon the terms set forth in this Section, each holder
of shares of Series B Preferred Stock shall have the right, at such holder's
option, at any time and from time to time, to convert any of such shares into
the number of fully paid and nonassessable shares of Common Stock equal to the
quotient obtained by dividing (i) the product of the Series B Preference Amount
and the number of shares of Series B Preferred Stock being converted, by (ii)
the Series B Conversion Price (as defined below), as last adjusted and then in
effect, by surrender of the certificates representing the shares of Series B
Preferred Stock to be converted. The conversion price per share at which shares
of Common Stock shall be issuable upon conversion of shares of Series B
Preferred Stock (the "Series B Conversion Price" and each of the Series A
Conversion
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<PAGE> 7
Price and Series B Conversion Price, a "Conversion Price") shall be $10.00,
subject to adjustment as set forth in paragraph (e) below.
(c) The holder of any shares of Series A Preferred Stock
or Series B Preferred Stock, as the case may be, may exercise the conversion
right pursuant to paragraph (a) or (b) above, as the case may be, by delivering
to the Corporation the certificate or certificates for the shares to be
converted, duly endorsed or assigned in blank or to the Corporation (if required
by it), accompanied by written notice stating that the holder elects to convert
such shares and stating the name or names (with address) in which the
certificate or certificates for the shares of Common Stock are to be issued.
Conversion shall be deemed to have been effected on the date when such delivery
is made (the "Conversion Date"). As promptly as practicable thereafter, the
Corporation shall issue and deliver to or upon the written order of such holder,
to the place designated by such holder, a certificate or certificates for the
number of full shares of Common Stock to which such holder is entitled, and a
cash amount in respect of any fractional interest in a share of Common Stock as
provided in paragraph (d) below. The person in whose name the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
stockholder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event such person
shall be deemed to have become a stockholder of record on the next succeeding
date on which the transfer books are open, but the applicable Conversion Price
shall be that in effect on the Conversion Date. Upon conversion of only a
portion of the number of shares covered by a certificate representing shares of
Series A Preferred Stock or Series B Preferred Stock, as the case may be,
surrendered for conversion, the Corporation shall issue and deliver to or upon
the written order of the holder of the certificate so surrendered for
conversion, at the expense of the Corporation, a new certificate covering the
number of shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, representing the unconverted portion of the certificate so
surrendered.
(d) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be. The number of full shares of Common Stock
issuable upon conversion of Series A Preferred Stock or Series B Preferred
Stock, as the case may be, shall be computed on the basis of the aggregate
number of shares of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, to be converted. Instead of any fractional shares of Common Stock
which would otherwise be issuable upon conversion of any shares of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, the Corporation
shall pay a cash adjustment in respect of such fractional interest in an amount
equal to the product of (i) the price of one share of Common Stock as determined
in good faith by the Board and (ii) such fractional interest. The holders of
fractional interests shall not be entitled to any rights as stockholders of the
Corporation in respect of such fractional interests.
(e) The applicable Conversion Price shall be subject to
adjustment from time to time as follows:
(i)If the Corporation shall at any time or from time
to time after the Original Issuance Date issue any shares of Common
Stock other than Excluded Stock (as defined below) without
consideration or for a consideration per share less than the Conversion
Price in effect immediately prior to the issuance of such Common Stock,
then
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<PAGE> 8
the Conversion Price in effect immediately prior to each such issuance
shall forthwith be lowered to a price equal to the quotient obtained by
dividing:
(A)an amount equal to the sum of (x) the
total number of shares of Common Stock outstanding (including
any shares of Common Stock deemed to have been issued pursuant
to subdivision (C) of clause (ii) below) immediately prior to
such issuance, multiplied by the Conversion Price in effect
immediately prior to such issuance, and (y) the consideration
received by the Corporation upon such issuance; by
(B)the total number of shares of Common
Stock outstanding (including any shares of Common Stock deemed
to have been issued pursuant to subdivision (C) of clause (ii)
below) immediately after the issuance of such Common Stock.
(ii)For the purposes of any adjustment of the
Conversion Price pursuant to clause (i) above, the following provisions
shall be applicable:
(A)In the case of the issuance of Common
Stock for cash in a public offering or private placement, the
consideration shall be deemed to be the amount of cash paid
therefor after deducting therefrom any discounts, commissions
or placement fees payable by the Corporation to any
underwriter or placement agent in connection with the issuance
and sale thereof.
(B)In the case of the issuance of Common
Stock for a consideration in whole or in part other than cash,
the consideration other than cash shall be deemed to be the
fair market value thereof as determined in good faith by the
Board of Directors of the Corporation, irrespective of any
accounting treatment.
(C)In the case of the issuance of options to
purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common
Stock, or options to purchase or rights to subscribe for such
convertible or exchangeable securities:
(1) the aggregate maximum number of
shares of Common Stock deliverable upon exercise of
such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at
the time such options or rights were issued and for a
consideration equal to the consideration (determined
in the manner provided in subdivisions (A) and (B)
above), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum
purchase price provided in such options or rights for
the Common Stock covered thereby;
(2) the aggregate maximum number of
shares of Common Stock deliverable upon conversion of
or in exchange for any such convertible or
exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed
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<PAGE> 9
to have been issued at the time such securities,
options, or rights were issued and for a
consideration equal to the consideration received by
the Corporation for any such securities and related
options or rights (excluding any cash received on
account of accrued interest or accrued dividends),
plus the additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such securities or the exercise of any
related options or rights (the consideration in each
case to be determined in the manner provided in
subdivisions (A) and (B) above);
(3) on any change in the number of
shares or exercise price of Common Stock deliverable
upon exercise of any such options or rights or
conversions of or exchange for such securities, other
than a change resulting from the antidilution
provisions thereof, the Conversion Price shall
forthwith be readjusted to such Conversion Price as
would have obtained had the adjustment made upon the
issuance of such options, rights or securities not
converted prior to such change or options or rights
related to such securities not converted prior to
such change been made upon the basis of such change;
and
(4) on the expiration of any such
options or rights, the termination of any such rights
to convert or exchange or the expiration of any
options or rights related to such convertible or
exchangeable securities, the Conversion Price shall
forthwith be readjusted to such Conversion Price as
would have obtained had the adjustment made upon the
issuance of such options, rights, securities or
options or rights related to such securities been
made upon the basis of the issuance of only the
number of shares of Common Stock actually issued upon
the exercise of such options or rights, upon the
conversion or exchange of such securities, or upon
the exercise of the options or rights related to such
securities and subsequent conversion or exchange
thereof.
(iii) "Excluded Stock" means (1) 6,600,000 shares of
Common Stock, and options therefor, reserved for issuance or grant
under the 1996 Stock Option Plan of the Corporation, as amended; (2)
shares of Common Stock issued upon conversion of shares of Series A
Preferred Stock or Series B Preferred Stock; and (3) 800,000 shares of
Series A Preferred Stock reserved for issuance under the First Comdisco
Warrants, the Second Comdisco Warrants, the Third Comdisco Warrant, the
Global Warrants, the Invemed Advisor Warrants or the Fourth Comdisco
Warrants.
(iv) If, at any time after July 12, 1996, the number
of shares of Common Stock outstanding is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Conversion Price shall be
appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall be increased in
proportion to such increase in outstanding shares.
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<PAGE> 10
(v) If, at any time after the Original Issuance Date, the
number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following
the record date for such combination, the Conversion Price shall be
appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall be decreased in
proportion to such decrease in outstanding shares.
(vi) In the event of any capital reorganization of the
Corporation, any reclassification of the stock of the Corporation
(other than a change in par value or from no par value to par value or
from par value to no par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or any consolidation
or merger of the Corporation, each share of Series A Preferred Stock or
Series B Preferred Stock, as the case may be, shall after such
reorganization, reclassification, consolidation, or merger be
convertible into the kind and number of shares of stock or other
securities or property of the Corporation or of the corporation
resulting from such consolidation or surviving such merger to which the
holder of the number of shares of Common Stock deliverable (immediately
prior to the time of such reorganization, reclassification,
consolidation or merger) upon conversion of such share of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, would
have been entitled upon such reorganization, reclassification,
consolidation or merger. The provisions of this clause shall similarly
apply to successive reorganizations, reclassifications, consolidations
or mergers.
(vii) All calculations under this paragraph shall be made to
the nearest one hundredth (1/100) of a cent or the nearest one tenth
(1/10) of a share, as the case may be.
(viii) In any case in which the provisions of this paragraph
(e) shall require that an adjustment shall become effective immediately
after a record date of an event, the Corporation may defer until the
occurrence of such event (i) issuing to the holder of any share of
Series A Preferred Stock or Series B Preferred Stock, as the case may
be, converted after such record date and before the occurrence of such
event the shares of capital stock issuable upon such conversion by
reason of the adjustment required by such event in addition to the
shares of capital stock issuable upon such conversion before giving
effect to such adjustments, and (ii) paying to such holder any amount
in cash in lieu of a fractional share of capital stock pursuant to
paragraph (d) above; provided, however, that the Corporation shall
deliver to such holder an appropriate instrument evidencing such
holder's right to receive such additional shares and such cash.
(f) Whenever a Conversion Price shall be adjusted as provided
in paragraph (e), the Corporation shall make available for inspection during
regular business hours, at its principal executive offices or at such other
place as may be designated by the Corporation, a statement, signed by its chief
executive officer, showing in detail the facts requiring such adjustment and the
applicable Conversion Price that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by first class
certified mail, return receipt requested and postage prepaid, to each holder of
Series A Preferred Stock or Series B Preferred Stock, as the case may be, at
such holder's address appearing on the Corporation's
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records. Where appropriate, such copy may be given in advance and may be
included as part of any notice required to be mailed under the provisions of
paragraph (g) below.
(g) If the Corporation shall propose to take any action of the
types described in clauses (v), (vi) or (vii) of paragraph (e) above, the
Corporation shall give notice to each holder of shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, in the manner set forth
in paragraph (f) above, which notice shall specify the record date, if any, with
respect to any such action and the date on which such action is to take place.
Such notice shall also set forth such facts with respect thereto as shall be
reasonably necessary to indicate the effect of such action (to the extent such
effect may be known at the date of such notice) on the applicable Conversion
Price and the number, kind or class of shares or other securities or property
which shall be deliverable or purchasable upon the occurrence of such action or
deliverable upon conversion of shares of Series A Preferred Stock or Series B
Preferred Stock, as the case may be. In the case of any action which would
require the fixing of a record date, such notice shall be given at least 20 days
prior to the date so fixed, and in case of all other action, such notice shall
be given at least 30 days prior to the taking of such proposed action. Failure
to give such notice, or any defect therein, shall not affect the legality or
validity of any such action.
(h) The Corporation shall reserve, and at all times from and
after the date of Original Issuance Date keep reserved, free from preemptive
rights, out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of Series A Preferred
Stock or Series B Preferred Stock, as the case may be, sufficient shares of
Common Stock to provide for the conversion of all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock.
(i) At any time the Corporation makes or fixes a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in securities of the Corporation other than shares
of Common Stock, provision shall be made so that each holder of shares of Series
A Preferred Stock or Series B Preferred Stock, as the case may be, shall receive
upon conversion thereof, in addition to the shares of Common Stock receivable
thereupon, the number of securities of the Corporation which it would have
received had its shares of Series A Preferred Stock or Series B Preferred Stock,
as the case may be, been converted into shares of Common Stock on the date of
such event and had such holder thereafter, during the period from the date of
such event to and including the date of conversion, retained such securities
receivable by it pursuant to this paragraph during such period, subject to the
sum of all other adjustments called for during such period under this Section
with respect to the rights of such holder of shares of Series A Preferred Stock
or Series B Preferred Stock, as the case may be.
7. MANDATORY CONVERSION.
(a) Upon the consummation of the first underwritten public
offering for the account of the Corporation of Common Stock pursuant to a
registration statement filed under the Securities Act of 1933 with aggregate
proceeds (net of underwriting discounts and commissions) to the Corporation of
not less than $10,000,000 (a "Qualified Public Offering"), each share of Series
A Preferred Stock and Series B Preferred Stock then outstanding shall, by virtue
of and simultaneously with such Qualified Public Offering, be deemed
automatically converted (a
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<PAGE> 12
"Mandatory Conversion") into the number of fully paid and nonassessable shares
of Common Stock equal to the quotient obtained (i) in the case of the Series A
Preferred Stock, by dividing (A) the Series A Preference Amount by (B) the
Series A Conversion Price, as last adjusted and then in effect and (ii) in the
case of the Series B Preferred Stock, by dividing (A) the Series B Preference
Amount by (B) the Series B Conversion Price, as last adjusted and then in
effect; provided, however, that if a Mandatory Conversion occurs on or prior to
December 31, 2000 and the initial price per share of Common Stock to the public
in the Qualified Public Offering (the "IPO Price") is less than $12.00, then
each share of Series B Preferred Stock shall be converted into the number of
fully paid and nonassessable shares of Common Stock equal to the quotient
obtained by dividing (C) $12.00 by (D) the IPO Price.
(b) As promptly as practicable after the date of consummation
of any Qualified Public Offering and the delivery to the Corporation of the
certificate or certificates for the shares of Series A Preferred Stock or Series
B Preferred Stock, as the case may be, which have been converted, duly endorsed
or assigned in blank to the Corporation (if required by it), the Corporation
shall issue and deliver to or upon the written order of each holder of Series A
Preferred Stock or Series B Preferred Stock, as the case may be, to the place
designated by such holder, a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled, and a cash amount in
respect of any fractional interest in a share of Common Stock as provided in
paragraph (c) below. The person in whose name the certificate or certificates
for Common Stock are to be issued shall be deemed to have become a stockholder
of record on the date of such Qualified Public Offering and on such date the
shares of Series A Preferred Stock or Series B Preferred Stock, as the case may
be, shall cease to be outstanding, whether or not the certificates representing
such shares have been received by the Corporation.
(c) The provisions set forth in Section 6(d) shall apply to
the conversion of Series A Preferred Stock or Series B Preferred Stock, as the
case may be, pursuant to this Section in the same manner as they apply to the
conversion of Series A Preferred Stock or Series B Preferred Stock, as the case
may be, pursuant to Section 6.
ARTICLE V
DIRECTORS
1. The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in the By-Laws.
Election of directors need not be by ballot unless the By-Laws so provide.
2. The Board of Directors shall have power without the assent or vote
of the stockholders:
(a) To make, alter, amend, change, add to or repeal the
By-Laws of the corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and liens upon
all or any part of the property of the corporation; to determine the use and
disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
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(b) To determine from time to time whether, and to what times
and places, and under what conditions the accounts and books of the corporation
(other than the stock ledger) or any of them, shall be open to the inspection of
the stockholders.
3. The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interest, or for any other reason.
4. In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any by-laws from time to time made by the
stockholders; provided, however, that no by-laws so made shall invalidate any
prior act of the directors which would have been valid if such by-law had not
been made.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
ARTICLE VII
COMPROMISE OR ARRANGEMENT WITH CREDITORS
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court or equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of
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<PAGE> 14
any receiver or receivers appointed for this corporation under the provisions of
Section 279 Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths (3/4) in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
ARTICLE VIII
AMENDMENTS
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed by law, and all rights and powers conferred herein on
stockholders, directors and officers are subject to this reserved power.
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<PAGE> 15
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
--------------------------------
InterWorld Corporation, a Delaware corporation (the "Corporation"),
does hereby certify that:
FIRST: The present name of the Corporation is "InterWorld Corporation."
The Corporation was originally incorporated under the name "InterWorld
Technology Ventures, Inc." The date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware was March 28, 1995. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on July 12, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on December 17, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on May 21, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on September 10, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on February 20, 1998. A Restated Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware on January 12, 1999.
SECOND: This Amended and Restated Certificate of Incorporation (the
"Certificate") amends and restates in its entirety the present Certificate of
Incorporation of the Corporation. This Certificate has been duly adopted and
approved by the Board of Directors of the Corporation by unanimous written
consent in lieu of a meeting thereof in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware and by the Stockholders of the Corporation by written consent in lieu
of a meeting thereof in accordance with the provisions of Sections 228(a), 242
and 245 of the General Corporation Law at the State of Delaware.
THIRD: This Certificate shall become effective immediately upon its
filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the State of
Delaware of this Certificate, the Certificate of Incorporation of the
Corporation shall be amended and restated in its entirety to read as set forth
on Exhibit A attached hereto.
<PAGE> 16
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by a duly authorized officer this __th day of _______, 1999 and hereby
affirms that the facts stated herein are true.
INTERWORLD CORPORATION
By: _______________________________
Alan J. Andreini
President and Chief Executive Officer
<PAGE> 17
EXHIBIT A
---------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
<PAGE> 1
Exhibit 3.1C
[To be filed immediately after the closing of the Offering.]
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
-------------------------------------------------------
Pursuant to Section 103, Section 242 and Section 245 of
the General Corporation Law of the State of Delaware
-------------------------------------------------------
ARTICLE I
NAME
The name of the corporation is InterWorld Corporation (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the initial registered and principal office of this
corporation in this state is c/o National Registered Agents, Inc., 9 East
Loockerman Street, City of Dover, County of Kent, State of Delaware 19901 and
the name of the registered agent at said address is National Registered Agents,
Inc.
ARTICLE III
OBJECT AND PURPOSES
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the corporation laws of
the State of Delaware.
ARTICLE IV
CAPITAL STOCK
The Corporation shall be authorized to issue 115,000,000 shares of all
classes, consisting of (i) 100,000,000 shares of Common Stock, $.01 par value
(the "Common Stock"), and (ii) 15,000,000 shares of Preferred Stock, $.01 par
value (the "Preferred Stock").
Subject to the limitations and in the manner provided by law, shares of
the Preferred Stock may be issued from time to time in series, and the Board of
Directors of the Corporation or a duly-authorized committee of the Board of
Directors of the Corporation, in
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accordance with the laws of the State of Delaware, is hereby authorized to
determine or alter the relative rights, powers (including voting powers),
preferences, privileges and restrictions granted to or imposed upon Preferred
Stock or any wholly unissued series of shares of Preferred Stock, and to
increase or decrease (but not below the number of shares of any series of
Preferred Stock then outstanding) the number of shares of any such series
subsequent to the issue of shares of that series. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
upon the taking of any action required by applicable law resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
ARTICLE V
DIRECTORS
1. The number of directors of the corporation shall be such as from
time to time shall be fixed by, or in the manner provided in the By-Laws.
Election of directors need not be by ballot unless the By-Laws so provide.
2. The Board of Directors shall have power without the assent or vote
of the stockholders:
(a) To make, alter, amend, change, add to or repeal the
By-Laws of the corporation; to fix and vary the amount to be reserved for any
proper purpose; to authorize and cause to be executed mortgages and liens upon
all or any part of the property of the corporation; to determine the use and
disposition of any surplus or net profits; and to fix the times for the
declaration and payment of dividends.
(b) To determine from time to time whether, and to what times
and places, and under what conditions the accounts and books of the corporation
(other than the stock ledger) or any of them, shall be open to the inspection of
the stockholders.
3. The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and as binding upon the corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interest, or for any other reason.
4. In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this certificate, and to any by-laws from time to time made by the
stockholders; provided, however, that no by-laws so made shall invalidate any
prior act of the directors which would have been valid if such by-law had not
been made.
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ARTICLE VI
INDEMNIFICATION OF DIRECTORS
No director shall be liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except with respect to (1) a breach of the director's duty of loyalty to the
corporation or its stockholders, (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3)
liability under Section 174 of the Delaware General Corporation Law or (4) a
transaction from which the director derived an improper personal benefit, it
being the intention of the foregoing provision to eliminate the liability of the
corporation's directors to the corporation or its stockholders to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law,
as amended from time to time. The corporation shall indemnify to the fullest
extent permitted by Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Sections
grant the corporation the power to indemnify.
ARTICLE VII
COMPROMISE OR ARRANGEMENT WITH CREDITORS
Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court or equitable
jurisdiction within the State of Delaware, may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of Section 279 Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
ARTICLE VIII
AMENDMENTS
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this certificate of incorporation in the manner now
or hereafter prescribed by law, and all rights and powers conferred herein on
stockholders, directors and officers are subject to this reserved power.
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
--------------------------------
InterWorld Corporation, a Delaware corporation (the "Corporation"),
does hereby certify that:
FIRST: The present name of the Corporation is "InterWorld Corporation."
The Corporation was originally incorporated under the name "InterWorld
Technology Ventures, Inc." The date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware was March 28, 1995. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on July 12, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on December 17, 1996. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on May 21, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on September 10, 1997. An Amended and Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of the
State of Delaware on February 20, 1998. A Restated Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware on January 12, 1999. An Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
_____________, 1999.
SECOND: This Amended and Restated Certificate of Incorporation (the
"Certificate") amends and restates in its entirety the present Certificate of
Incorporation of the Corporation. This Certificate has been duly adopted and
approved by the Board of Directors of the Corporation by unanimous written
consent in lieu of a meeting thereof in accordance with the provisions of
Sections 141(f), 242 and 245 of the General Corporation Law of the State of
Delaware and by the Stockholders of the Corporation by written consent in lieu
of a meeting thereof in accordance with the provisions of Sections 228(a), 242
and 245 of the General Corporation Law at the State of Delaware.
THIRD: This Certificate shall become effective immediately upon its
filing with the Secretary of State of the State of Delaware.
FOURTH: Upon the filing with the Secretary of State of the State of
Delaware of this Certificate, the Certificate of Incorporation of the
Corporation shall be amended and restated in its entirety to read as set forth
on Exhibit A attached hereto.
<PAGE> 5
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by a duly authorized officer this __th day of _______, 1999 and hereby
affirms that the facts stated herein are true.
INTERWORLD CORPORATION
By: _______________________________
Alan J. Andreini
President and Chief Executive Officer
<PAGE> 6
EXHIBIT A
---------
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTERWORLD CORPORATION
<PAGE> 1
Exhibit 10.3
INDEMNIFICATION AGREEMENT dated as
of _______________ ____, 1999, between
INTERWORLD CORPORATION, a Delaware
corporation (the "Company"), and the
director or the executive officer named
on the signature page hereto (the
"Director/Executive Officer").
Section 145 of the Delaware General Corporation Law (the
"DGCL") empowers corporations to indemnify persons serving as a director,
officer, employee or agent of such corporation or persons who serve at the
request of such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and Section
145(f) of the DGCL further specifies that the indemnification set forth in said
Section shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
The Company desires to have the Director/Executive Officer
serve or continue to serve as an executive officer and/or director of the
Company free from undue concern for unpredictable, inappropriate or unreasonable
claims for damages by reason of his or her decisions or actions on its behalf;
and the Director/Executive Officer desires to serve, or to continue to serve, in
such capacity. Accordingly, in consideration of the Director/Executive Officer's
serving continuing to serve as an executive officer and/or director of the
Company, the parties agree as follows:
1. Indemnification. The Company shall indemnify, defend and hold
harmless the Director/Executive Officer against all expenses, losses, claims,
damages and liabilities, including, without limitation, attorneys' fees,
judgments, fines and amounts paid in settlement (all such expenses,
collectively, "Costs"), actually and reasonably incurred by him or her in
connection with the investigation, defense or appeal of any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, to which the Director/Executive Officer is a party or
threatened to be made a party (all such actions, collectively, "Proceedings")
(i) by reason of the fact that the Director/Executive Officer is or was a
director, officer, employee or agent of the Company or of any other corporation,
partnership, joint venture, trust or other enterprise (collectively,
"Affiliates") of which he or she has been or is serving at the request of, for
the convenience of or to represent the interest of the Company or (ii) by reason
of anything done or not done by the Director/Executive Officer in any such
capacity referred to in the foregoing clause (i).
2. Culpable Action.
(a) Notwithstanding the provisions of Section 1, the
Director/Executive Officer shall not be entitled to indemnification if (i) the
Company is prohibited from paying such indemnification under applicable law,
(ii) the Director/Executive Officer breached his or her duty of loyalty to the
Company or its stockholders or any Affiliate or its stockholders, (iii) the
Director/Executive Officer's actions or omissions were not in good faith or
involved intentional misconduct or a knowing violation of law or (iv) the
Director/Executive Officer derived an improper personal benefit from any
transaction which is a subject of the applicable Proceeding
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(any existence or occurrence described in the foregoing clauses (i) - (iv),
individually, a "Culpable Action").
(b) The existence or occurrence of a Culpable Action shall be
conclusively determined by (i) a non-appealable, final decision of the court
having jurisdiction over the applicable Proceeding or (ii) a non-appealable,
final decision of the Court of Chancery of the State of Delaware (or if such a
decision is appealable, by the court in such State which has jurisdiction to
render a non-appealable, final decision). Such determination shall be final and
binding upon the parties hereto.
(c) The existence or occurrence of a Culpable Action may also be
determined by (i) the Board of Directors of the Company, by a majority vote of a
quorum consisting of directors who were not parties to the applicable Proceeding
(the "Disinterested Directors"), (ii) the stockholders of the Company, by a
majority vote of a quorum consisting of stockholders who were not parties to the
applicable Proceeding (the "Disinterested Stockholders"), or (iii) any other
entity to which the Disinterested Directors or the Disinterested Stockholders
shall have delegated the authority to make such a determination; provided,
however, that such determination shall be binding upon the parties hereto only
if a determination shall not have been made or shall not be subsequently made
pursuant to Subsection (b) above.
(d) If a Proceeding involves more than one claim, issue or matter,
the determination as to whether there exists or has occurred a Culpable Action
shall be severable as to each and every claim, issue and matter.
(e) The termination of any Proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, does not
change the presumption of Section 1 that the Director/Executive Officer is
entitled to indemnification hereunder and does not create a presumption that
there exists a Culpable Action.
3. Payment of Costs. The Costs incurred by the Director/Executive
Officer in connection with any Proceeding, including any Proceeding brought
pursuant to Section (2)(b), shall be paid by the Company on an "as incurred"
basis; provided, however, that if it shall ultimately be determined that there
exists or has occurred a Culpable Action with respect to such Proceeding, the
Director/Executive Officer shall repay to the Company the amount (or the
appropriate portion thereof as contemplated by Section 2(d)) so advanced,
including the costs of obtaining a determination pursuant to Section 2(b).
4. Severability. If any provision of this Agreement shall be
determined to be illegal and unenforceable by any court of law, the remaining
provisions shall be severable and enforceable in accordance with their terms.
5. No Right to Employment or Directorship. This Agreement shall not
entitle the Director/Executive Officer to any right or claim to be retained as
an employee and/or director of the Company or limit the right of the Company to
terminate the employment and/or directorship of the Director/Executive Officer
or to change the terms of such employment and/or directorship.
6. Other Rights and Remedies. This Agreement shall not be deemed
exclusive as to any other non-contractual rights to indemnification to which the
Director/Executive Officer may
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be entitled under any provision of law, the Restated Certificate of
Incorporation of the Company, any By-law of the Company or otherwise.
7. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
8. Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
9. Modification. This Agreement shall not be altered or otherwise
amended except pursuant to an instrument in writing signed by each of the
parties.
10. Notice to the Company by the Director/Executive Officer. The
Director/Executive Officer, as a condition precedent to his or her right to be
indemnified under this Agreement, shall give to the Company notice in writing as
soon as practicable of any Proceeding for which indemnity will or could be
sought under this Agreement.
11. Notices. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or by facsimile transmission with
electronic confirmation of receipt or if sent by nationally recognized overnight
courier or first class certified mail, postage prepaid, return receipt
requested, addressed to such party at the address set forth below or such other
address as may hereafter be designated in writing by notice given pursuant to
this Section 11:
(i) if to the Company, to:
InterWorld Corporation
395 Hudson Street, 6th Floor
New York, New York 10014
Attention: President and Chief Executive Officer
Telephone:(212) 301-2000; and
(ii) if to the Director/Executive Officer, to:
the Director/Executive Officer's name and address as it
appears in the records of the Company.
12. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
made and performed wholly therein.
13. Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of the
Director/Executive Officer and his or her spouse, heirs, executors and
administrators.
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<PAGE> 4
IN WITNESS WHEREOF, each of the undersigned have duly executed
this Indemnification Agreement as of the date first above written.
INTERWORLD CORPORATION
By:
--------------------------------------------
Name: Alan J. Andreini
Title: President and Chief Executive Officer
------------------------------------------------
Director/Executive Officer
Name:
<PAGE> 1
EXHIBIT 10.6
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE, dated as of July 1, 1999 (this
"Amendment"), between NEW YORK CITY DISTRICT COUNCIL OF CARPENTERS PENSION FUND,
having an office at 395 Hudson Street, New York, New York 10014 ("Landlord"),
and INTERWORLD CORPORATION (FORMERLY KNOWN AS INTERWORLD TECHNOLOGY VENTURES), a
Delaware corporation, having an office at 395 Hudson Street, New York, New York
10014 ("Tenant").
W I T N E S S E T H
WHEREAS, Landlord and Tenant entered into that certain Lease dated as
of January 12, 1997 (along with all Exhibits thereto, the "Original Lease"),
covering the entire sixth (6th) floor (the "Original Premises") in the building
located at 395 Hudson Street, New York, New York (the "Building"); and
WHEREAS, Landlord and Tenant desire to modify the Original Lease to (i)
provide for the leasing by Tenant of certain additional space consisting of part
of the eighth (8th) floor of the Building, and (ii) otherwise modify the terms
and conditions of the Original Lease, all as hereinafter set forth (the Original
Lease, as modified by this Amendment, is hereinafter referred to as the
"Lease").
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree as
follows:
1. Capitalized Terms. All capitalized terms used and not otherwise
defined in this Amendment shall have the respective meanings ascribed to them in
the Original Lease.
2. Demise of Additional Premises.
(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, 50,576 square feet of the eighth (8th) floor of the Building
substantially as shown on Exhibit A annexed hereto (the "Additional Premises"),
for a term to commence on the date Landlord has substantially completed
Landlord's Additional Premises Work and delivers possession of the Additional
Premises but in no event later than October 1, 1999 (the "Additional Premises
Commencement Date"), and to end on December 31, 2015 (the "Expiration Date"), or
such earlier date upon which the term of the Lease may expire or be terminated
pursuant to the provisions of the Lease or pursuant to law.
(b) Effective as of the Additional Premises Commencement Date,
Tenant shall lease the Additional Premises upon all of the terms and conditions
of the Original Lease, except as follows:
(i) The fixed rent payable under the Lease shall be increased
by an amount per annum payable with respect to the Additional Premises
as set forth in Exhibit B hereto (the "Additional Premises Fixed
Rent"). Notwithstanding the foregoing,
<PAGE> 2
Additional Premises Fixed Rent otherwise payable under this Lease shall
be abated for the period commencing on the Additional Premises
Commencement Date and ending on the sixth (6th) month anniversary of
the Additional Premises Commencement Date (the "Partial Abatement
Period").
(ii) (x) The "Work Credit" allowed to Tenant with respect to
the Additional Premises shall be the sum of up to $354,032 and shall be
disbursed by Landlord in accordance with the provisions of Article 40
of the Original Lease provided that, as of the date on which Landlord
is required to make payments of the Work Credit: (i) the Lease is in
full force and effect, and (ii) Tenant is not in monetary default under
the Lease or material non-monetary default under the Lease beyond any
applicable notice and cure period. Tenant shall pay all costs of the
Tenant's Work in excess of the Work Credit. Landlord's Contribution
shall be payable solely on account of labor directly related to the
Tenant Improvements and materials delivered to the Additional Premises
in connection with the Tenant's Work, including "soft costs" incurred
in connection with the Tenant's Work, such as architectural, consulting
and engineering fees incurred by Tenant in connection therewith. Tenant
shall not be entitled to receive any portion of the Work Credit not
actually expended by Tenant in the performance of the Work Credit, nor
shall Tenant have any right to apply any unexpended portion of the Work
Credit as a credit against fixed rent or any other obligation of Tenant
under the Lease.
(y) Tenant shall pay to Landlord or its designee, within
twenty (20) days after demand, all out-of-pocket costs actually
incurred by Landlord in connection with the Tenant's Work (up to a
maximum amount of $5,000.00), including costs incurred in connection
with (i) Landlord's review of Tenant's Work to the Additional Premises
(including review of requests for approval thereof), and (ii) the
provision of Building personnel during the performance of the Tenant's
Work required by trade union policy or otherwise, to facilitate the
Tenant's Work.
(iii) Tenant has inspected the Additional Premises and agrees (x)
to accept possession of the Additional Premises in the "as is" condition
existing on the Additional Premises Commencement Date, (y) that neither the
Landlord nor Landlord's agents have made any representations or warranties with
respect to the Additional Premises or the Building except as expressly set forth
herein, and (z), except for the Landlord removing the pre-existing computer room
(not including the removal of the raised floor therein) and telephone room and
security camera system from the Additional Premises and the walling in of the
internal staircase between the eighth (8th) and ninth (9th) floors of the
Building ("Landlord's Additional Premises Work"), Landlord has no obligation to
perform any work, supply any materials, incur any expense or make any
alterations or improvements to the Additional Premises or the Building to
prepare the Additional Premises for Tenant's occupancy. Landlord shall use its
best efforts to substantially complete such Landlord's Additional Premises Work
on or prior to July 31, 1999. Landlord shall not be deemed to have substantially
completed any portion of Landlord's Additional Premises Work if such failure in
any way impedes or delays Tenant's Work. Tenant shall afford Landlord and its
employees, contractors and agents access to the Additional Premises at all
reasonable times upon reasonable prior notice for the performance of Landlord's
Additional Premises Work, and Tenant shall use reasonable efforts to avoid any
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interference with the performance of Landlord's Additional Premises Work.
Landlord shall use reasonable efforts to minimize interference with Tenant's
performance of the Tenant's Work during the performance of Landlord's Additional
Premises Work, provided that Landlord shall have no obligation to employ
contractors or labor at overtime or other premium pay rates or to incur any
other overtime costs or additional expenses whatsoever. There shall be no
allowance to Tenant for a diminution of rental value, no actual or constructive
eviction of Tenant, in whole or in part, no relief from any of Tenant's other
obligations under the Lease, and no liability on the part of Landlord, by reason
of inconvenience, annoyance or injury to business arising from the performance
or delays in the performance of Landlord's Additional Premises Work. Landlord
shall deliver to Tenant keys to the Additional Premises on or prior to the
Additional Premises Commencement Date.
(iv) The following provisions of the Original Lease shall not be
applicable to the Additional Premises or the Original Premises during the
Additional Period:
Sections 1.08, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12.
(v) Article 41 (Cancellation Option) of the Original Lease is
hereby deleted in its entirety.
(vi) The Original Lease is hereby further amended as follows:
(A) The term "Tax Base" as defined in Section 4.01(b)
of the Original lease shall remain unchanged for the original
Premises but, with respect to the Additional Premises, shall mean
the Taxes for the Tax Year commencing July 1, 1999 and ending on
June 30, 2000.
(B) The Term "Tax Year" as defined in Section 4.01(c)
of the Original Lease shall remain unchanged for the Original
Premises but, with respect to the Additional Premises, shall mean
the fiscal year for which Taxes are levied by the governmental
authority.
(C) From and after the Additional Premises
Commencement Date, Tenant's Proportionate Share, as such term is
defined in Section 4.01(d) of the Original Lease, shall be
18.1967%.
(D) Section 14.02 of the Original Lease is hereby
amended by deleting the words "(connected load)" therefrom.
Hereafter, Tenant shall, with respect to the Premises and the
Additional Premises be supplied with six (6) watts per square foot
of electricity demand load.
(E) From and after the Additional Premises
Commencement Date the term Operating Expense Base (for the Original
Premises) shall mean the Operating Expenses for Calendar year 1999.
There shall be no Tenant Operating Expense Payment for the
Additional Premises or during the Additional Period with respect to
the Original Lease.
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(F) The amount of the "Work Credit" as such term is
defined in Section 40.01 of the Original Lease shall be $354,032.00
as it relates to the Additional Premises.
(G) Article 42 of the Original Lease shall be modified
as hereinafter set forth. Tenant shall deposit with Landlord an
additional $1,200,000 (the "Additional Security") as security for
the faithful performance and observance by Tenant of the terms,
provisions and covenants and conditions of the Lease. Except as set
forth in this paragraph (g), all of the terms and provisions of
Article 42 of the Original Lease shall apply to the Additional
Security, including, without limitation, the provisions of Section
42.06, however, solely with respect to the Additional Security and
reductions thereof, the term "Commencement Date" as used in Section
42.06 shall be deemed to mean the Additional Premises Commencement
Date. On the second anniversary of the Commencement Date and every
two years thereafter on the Commencement Date anniversary, the
amount of the Additional Security shall be reduced by the sum of
$150,000.00 provided, however, that the Additional Security shall
never be less than two months Additional Premises Fixed Rent.
Except for the foregoing, all of the terms of Article 42 of the
Original Lease shall remain unchanged. Landlord acknowledges that
Tenant's financial condition may significantly improve and Landlord
agrees, without commitment of any kind, at Tenant's request, to
review the financial statements of the Tenant and consider, in its
sole and absolute discretion, a reduction in the security deposit.
(vii) In the event that any portion of the eighth (8th) floor of the
Building that is not part of the Additional Premises (the "Remainder") becomes
vacant and the Landlord, in its sole discretion chooses to market such Remainder
to non-Affiliate third parties, Tenant shall have a right of first offer on the
Remainder. Upon receipt of written notice from Landlord of Landlord's intention
to market the Remainder, or any part thereof, to any non-Affiliate third party,
Tenant shall have fifteen (15) business days in which to exercise it right of
first offer by written notice to Landlord in which Tenant shall agree to lease
all of the Remainder, or such part thereof to be marketed by Landlord. If
Landlord shall not have received such written notice by Tenant within such
fifteen (15) business day period, Tenant's right of first offer with respect to
the Remainder, or such part thereof to be marketed by Landlord, shall be
extinguished. Fixed rent for the Remainder, or any part thereof, shall be equal,
on a dollar per square foot basis, to the Additional Premises Fixed Rent as the
same may have been and may thereafter be adjusted from time to time in
accordance with the terms hereof. There shall be no rent abatement associated
with the lease of the Remainder nor shall the Landlord extend any credit for
tenant improvements to the Remainder. The term "Affiliate", as such term is used
in this Amendment, shall mean Landlord, the New York City District Council of
Carpenters, the New York City District Council of Carpenters Apprenticeship
Journeyman's Retraining Education and Industry Fund, all other New York City
District Council of Carpenters Benefit Funds (including, without limitation, the
Welfare Fund, Vacation Fund, Annuity Fund and Labor Management Cooperative
Fund), all related or affiliated benefit funds and union locals (including,
without limitation, Resilient Floor Coverers Local 2287, Dockbuilders, Pier
Carpenters, Shorers, House Movers, Pile
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Drivers, Drivers, Tenders and Foundations and Marine Constructors Local Union
1456), the collective bargaining units thereof, and all employees, agents,
managers (including third-party managers) and trustees of any of the foregoing.
(viii) Except as provided in this Amendment, all references in the
Original Lease to the "Demised Premises" shall be deemed to include the
Additional Premises for all purposes of the Lease.
3. Modifications. Effective as of the date hereof, the Original Lease
shall be amended as follows:
(a) Article I, Section 1.03 of the Original Lease is amended by
replacing the term "Expiration Date", used twice in such Section with the term
"Original Expiration Date" and adding the following sentence at the end thereof:
(b) The term of the Lease shall be extended for a term (the
"Additional Period") commencing on the Original Expiration Date and ending on
December 31, 2015. Hereafter, the term "Expiration Date" as used in the Lease
shall mean December 31, 2015.
(c) Article I, Section 1.04(a) of the Original Lease is amended by
(i) deleting the word "and" at the end of clause (i) thereof, (ii) deleting the
term "Expiration Date" in clause (ii) thereof and replacing it with the term
"Original Expiration Date", (iii) deleting the period at the end of clause (ii)
thereof and replacing it with a semicolon followed by the word "and", and (iv)
adding the following clause (iii) after clause (ii) thereof:
"(iii) the amount per annum payable with respect to
the Original Premises (as such term is defined in the First
Amendment to Lease) as listed in Exhibit C attached to the First
Amendment to Lease for the duration of the Additional Period (the
"Original Premises Additional Period Fixed Rent").
(d) The second sentence of Section 15.01 of the Original Lease is
deleted and shall be replaced with the following:
"Tenant shall pay to Landlord a condenser water
connection charge of $1,575.00 per ton for any supplemental
air-conditioning (excluding any Building Systems) now or hereafter
installed in or serving the Additional Premises, together with a
charge for condenser water capacity at a rate of $700 per ton per
year, promptly upon the rendition of Landlord's bill therefor, on a
monthly basis."
(e) Article 16, Section 16.01 of the Original Lease is amended by
deleting the brackets around the words "shall be delivered to the Building's
Managing Agent (Attn: District Manager - 395 Hudson Street)".
(f) Article 16, Section 16.04 of the Original Lease is amended by
deleting the reference to "Williams Real Estate, Inc." and replacing it with
"Cushman & Wakefield."
5
<PAGE> 6
(g) All references to Williams Real Estate, Inc. in Section 32.01 of
the Original Lease are hereby deleted. Hereafter, all notices to Landlord shall
be delivered in accordance with Section 32.01 to:
Building Manager
Cushman & Wakefield
395 Hudson Street
New York, New York 10014
with a copy to:
Peter Bassano, Esq.
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
(h) Copies of all notices to Tenant shall also be delivered to the
attention of the General Counsel.
4. Landlord and Tenant each covenant, warrant and represent to the
other that it had no negotiations or other dealings with any broker or finder
except Cushman & Wakefield ("Broker") concerning the leasing of the Additional
Premises and the Extension Period. Landlord and Tenant each agrees to hold the
other harmless against any claims for a brokerage commission arising out of any
negotiations or other dealings had by Landlord or Tenant, respectively, with any
broker or finder except the Broker. Landlord shall pay the commission to the
Broker pursuant to a separate agreement. Landlord and Tenant acknowledge that
the renting of the Additional Premises and the renting of the Original Premises
during the Extension Period are not pursuant to or in accordance with any
provision of the Original Lease but are transactions entered into independent of
and unrelated to any options or rights granted to the Tenant under the Original
Lease.
5. Representations and Warranties. Tenant hereby represents and
warrants to Landlord that, as of the date hereof, (a) the Original Lease is in
full force and effect and has not been modified except pursuant to this
Amendment; (b) there exist no valid abatements, causes of action, counterclaims,
disputes, defenses, offsets, credits, deductions, or claims against the
enforcement of any of the terms and conditions of the Lease; and (d) this
Amendment has been duly authorized, executed and delivered by Tenant and
constitutes the legal, valid and binding obligation of Tenant.
6. Subject to approval of the provisions of the terms of the sublease
agreement, which approval shall not be unreasonably withheld, delayed or
conditioned, Landlord hereby consents to the subletting of a portion of the
Additional Premises to UGO Networks, Inc. This consent does not in any way
modify Tenant's primary liability and obligation under the terms of the Original
Lease, as herein modified.
7. Miscellaneous.
6
<PAGE> 7
(a) Except as specifically set forth herein, nothing contained in
this Amendment shall be deemed to amend or modify in any respect the terms of
the Original Lease and such terms shall remain in full force and effect as
modified hereby. If there is any inconsistency between the terms of this
Amendment and the terms of the Original Lease, the terms of this Amendment shall
be controlling and prevail.
(b) This Amendment contains the entire agreement of the parties
with respect to its subject matter and all prior negotiations, discussions,
representations, agreements and understandings heretofore had among the parties
with respect thereto are merged herein.
(c) This Amendment may be executed in duplicate counterparts, each
of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same instrument.
(d) This Amendment shall not be binding upon Landlord or Tenant
unless and until Landlord shall have delivered a fully executed counterpart of
this Amendment to Tenant.
(e) This Amendment shall be binding upon and inure to the benefit
of Landlord and Tenant and their successors and permitted assigns.
7
<PAGE> 8
IN WITNESS WHEREOF, Landlord and Tenant have executed this
Amendment as of the day and year first above written.
LANDLORD:
NEW YORK CITY DISTRICT COUNCIL OF
CARPENTERS PENSION FUND
By:
--------------------------------
Name:
Title:
By:
--------------------------------
Name:
Title:
TENANT:
INTERWORLD CORPORATION
By:
--------------------------------
Name:
Title:
8
<PAGE> 1
Exhibit 10.7
CONFORMED COPY
AMENDED AND RESTATED REGISTRATION
RIGHTS AGREEMENT (the "Agreement") dated as
of January 12, 1999, among INTERWORLD
CORPORATION, a Delaware corporation (the
"Company"), and the investors listed on
Schedule I (the "Investors").
The Investors are entering into this Agreement to amend and
restate the Registration Rights Agreement dated March 7, 1996, as amended by
Amendment No. 1 to the Registration Rights Agreement dated as of July 1, 1998.
The Company has previously issued and sold to certain Investors (the "Series A
Investors") the number of shares of Series A Preferred Stock, $.01 par value
(the "Series A Preferred Stock"), set forth opposite the name of such Series A
Investor on Part A of Schedule I. Pursuant to the Subscription Agreement dated
the date hereof, among the Company and the Investors named therein, the Company
is issuing and selling to certain new Investors (the "Series B Investors") the
number of shares of Series B Preferred Stock, $.01 par value (the "Series B
Preferred Stock"), set forth opposite the name of such Series B Investor on Part
B of Schedule I. The Series A Preferred Stock and the Series B Preferred Stock
are convertible into shares of Common Stock, $.01 par value (the "Common
Stock"), of the Company. The Company and the Investors deem it to be in their
respective best interests to amend and restate the rights of the Investors in
connection with public offerings and sales of the Common Stock. Accordingly, the
Company and the Investors agree as follows:
Section 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
"COMMISSION" means the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor Federal statute, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect from time
to time.
"OTHER SHARES" means at any time those shares of Common Stock
which do not constitute Primary Shares or Registrable Shares.
"PRIMARY SHARES" means at any time the authorized but unissued
shares of Common Stock or shares of Common Stock held by the Company in its
treasury.
"REGISTRABLE SHARES" means at any time, with respect to any
Investor, the shares of Common Stock held by such Investor which constitute
Restricted Shares.
"REGISTRATION DATE" means the date on which any registration
statement pursuant to which the Company shall have initially registered shares
of Common Stock under the Securities Act for sale to the public shall have been
declared effective.
"RESTRICTED SHARES" means at any time, with respect to any
Investor, the shares of Series A Preferred Stock, the shares of Common Stock,
any other securities which by their terms
<PAGE> 2
are exercisable or exchangeable for or convertible into Common Stock, and any
securities of the Company received in respect thereof, which are held by such
Investor and which have not previously been sold to the public pursuant to a
registration statement under the Securities Act or are able to be sold under
Rule 144(k).
"RULE 144" means Rule 144 promulgated under the Securities Act
or any successor rule thereto.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
or any successor Federal statute, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in effect from time
to time.
"TRANSFER" means any disposition of any Restricted Shares or
of any interest therein which would constitute a sale thereof within the meaning
of the Securities Act, other than any such disposition pursuant to an effective
registration statement under the Securities Act and complying with all
applicable state securities and "blue sky" laws.
Section 2. REQUIRED REGISTRATION. If the Company shall be requested by
any Investor or group of Investors holding at least a majority of all Restricted
Shares (based upon Common Stock equivalents), at any time after the 180th day
after the Registration Date, to effect the registration under the Securities Act
of Registrable Shares, the Company shall promptly give written notice of such
proposed registration to all holders of Restricted Shares and shall offer to
include in such proposed registration any Registrable Shares requested to be
included in such proposed registration by the holders of Restricted Shares who
shall respond in writing to the Company's notice within 30 days after delivery
of such notice (which response shall specify the number of Registrable Shares
proposed to be included in such registration). The Company shall promptly use
its best efforts to effect such registration under the Securities Act of the
Registrable Shares which the Company has been so requested to register;
provided, however, that the Company shall not be obligated to effect any
registration under the Securities Act except in accordance with the following
provisions:
(a) the Company shall not be obligated to use its best efforts
to file and cause to become effective (i) more than two registration statements
initiated pursuant to this Section or (ii) any registration statement during any
period in which any other registration statement (other than on Form S-4 or Form
S-8 promulgated under the Securities Act or any successor forms thereto)
pursuant to which Primary Shares are to be or were sold has been filed and not
withdrawn or has been declared effective within the prior 90 days;
(b) the Company may delay the filing or effectiveness of any
registration statement for a period of up to 90 days after the date of a request
for registration pursuant to this Section if at the time of such request the
Company is engaged, or has fixed plans to engage within 60 days of the time of
such request, in a firm commitment underwritten public offering of Primary
Shares in which the holders of Restricted Shares may include Registrable Shares
pursuant to Section 4;
(c) with respect to any registration pursuant to this Section,
the Company may include in such registration any Primary Shares or Other Shares;
provided, however, that if any managing underwriter for the public offering
contemplated by such registration advises the
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<PAGE> 3
Company in writing that, in such firm's good faith opinion, the inclusion of all
Registrable Shares, Primary Shares and Other Shares proposed to be included in
such registration would adversely affect the offering and sale (including
pricing) of all such securities, then the number of Registrable Shares, Primary
Shares and Other Shares proposed to be included in such registration shall be
included in the following order:
(i)first, the Registrable Shares held by the
Investors, pro rata based upon the number of Restricted Shares (based
upon Common Stock equivalents) owned by each Investor at the time of
such registration; provided, however, that the Series B Investors shall
be entitled to include at least 15% of the Registrable Shares requested
to be registered by them; and
(ii) second, the Primary Shares and the Other
Shares;
(d) if, while a registration request is pending pursuant to
this Section 2, the Company has determined in good faith that (i) the filing of
a registration statement would require the disclosure of material information
that the Company has a bona fide business purpose for preserving as confidential
or (ii) the Company then is unable to comply with Commission requirements
applicable to the requested registration, the Company shall not be required to
effect a registration pursuant to this Section 2 until the earlier of (A) the
date upon which such material information is otherwise disclosed to the public
or ceases to be material or the Company is able to so comply with applicable
Commission requirements, as the case may be, and (B) 45 days after the Company
makes such good-faith determination, provided that the Company shall not be
permitted to delay a requested registration in reliance on this paragraph (d)
more than once in any 12-month period.
A requested registration under this Section may be rescinded
by written notice to the Company by the Investors initiating such request. Such
rescinded registration shall not count as a registration statement initiated
pursuant to this Section for purposes of paragraph (a) above if (1) such request
is rescinded by such Investors not later than five business days prior to the
proposed filing of a registration statement with the Commission and (2) such
Investors reimburse the Company for all expenses incurred in connection with
such withdrawn request. A registration rescinded later than five business days
prior to the proposed filing of a registration statement with the Commission
shall count as a registration statement initiated pursuant to paragraph (a) of
this Section.
Section 3. REGISTRATIONS ON FORM S-3. Anything contained in Section 2
to the contrary notwithstanding, at such time as the Company shall have
qualified for the use of Form S-3 promulgated under the Securities Act or any
successor form thereto, any Investor or group of Investors holding at least
33 1/3% of all Registrable Shares (based on Common Stock equivalents) shall have
the right to request in writing two registrations of Registrable Shares on Form
S-3 (or its successor form) during the twelve-month period commencing on the
first anniversary of the Registration Date on Form S-3 or such successor form of
Registrable Shares, which request or requests shall (i) specify the number of
Registrable Shares intended to be sold or disposed of and the holders thereof,
(ii) state the intended method of disposition of such Registrable Shares and
(iii) relate to Registrable Shares having anticipated net proceeds of at least
$5,000,000 (for underwritten offerings) or $1,000,000 (for non-underwritten
offerings). A
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<PAGE> 4
requested registration on Form S-3 or any such successor form in compliance with
this Section 3 shall not count as a registration statement initiated pursuant to
Section 2 but shall otherwise be treated as a registration initiated pursuant
to, and shall, except as otherwise expressly provided in this Section 3, be
subject to Section 2 (including Section 2(c)).
Section 4. PIGGYBACK REGISTRATION. If the Company at any time after the
Registration Date proposes for any reason to register Primary Shares or Other
Shares under the Securities Act (other than on Form S-4 or Form S-8 promulgated
under the Securities Act or any successor forms thereto), it shall promptly give
written notice to each Investor of its intention so to register the Primary
Shares or Other Shares at least 20 business days prior to the anticipated filing
date of the registration statement relating thereto. Upon the written request,
given within 10 business days after delivery of any such notice by the Company,
of any Investor to include in such registration Registrable Shares (which
request shall specify the number of Registrable Shares proposed to be included
in such registration), the Company shall use its best efforts to cause all such
Registrable Shares to be included in such registration on the same terms and
conditions as the securities otherwise being sold in such registration;
provided, however, that:
(a) if any managing underwriter for the public offering
contemplated by such registration advises the Company in writing that, in such
firm's good faith opinion, the inclusion of any or all Registrable Shares or
Other Shares proposed to be included in such registration would adversely affect
the offering and sale (including pricing) of the Primary Shares proposed to be
registered by the Company, then the number of Primary Shares, Registrable Shares
and Other Shares proposed to be included in such registration shall be included
in the following order:
(i) first, the Primary Shares; and
(ii) second, the Registrable Shares held by the
Investors, pro rata based upon the number of Restricted Shares (based
upon Common Stock equivalents) owned by each Investor at the time of
such registration; and
(iii) third, the Other Shares.
(b) if at any time after giving written notice of its
intention to register any Primary Shares or Other Shares and prior to the
effective date of such registration, the Company shall determine for any reason
not to register or to delay registration of such securities, the Company may, at
its election, give written notice of such determination to the Investors and,
thereupon, (A) in the case of a determination not to register, the Company shall
be relieved of its obligation to register any Registrable Shares in connection
with such registration and (B) in the case of a determination to delay such
registration, the Company shall be permitted to delay registration of any
Registrable Shares requested to be included in such registration for the same
period as the delay in registering such other securities.
Section 5. HOLDBACK AGREEMENT. If the Company at any time shall
register shares of Common Stock under the Securities Act (including any
registration pursuant to Section 2, 3 or 4) for sale to the public, the
Investors shall not sell, make any short sale of, grant any option for the
purchase of, or otherwise dispose of any Restricted Shares (other than those
shares of Common Stock included in such registration pursuant to Section 2, 3 or
4) without the prior written
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<PAGE> 5
consent of the Company for a period designated by the Company in writing to the
Investors, which period shall not begin more than 30 days prior to the
effectiveness of the registration statement pursuant to which such public
offering shall be made and shall not last more than 180 days after the effective
date of such registration statement or such longer period as any managing
underwriter for such public offering shall request. The Company may legend and
impose stop transfer instructions on any certificate evidencing Registrable
Shares relating to the restrictions provided in this Section 5.
Section 6. PREPARATION AND FILING. If and whenever the Company is under
an obligation pursuant to the provisions of this Agreement to use its best
efforts to effect the registration of any Registrable Shares under the
Securities Act, the Company shall, as expeditiously as practicable:
(a) use its best efforts to cause a registration statement
that registers such Registrable Shares to become and remain effective for a
period of 90 days or until all of such Registrable Shares have been disposed of
(if earlier);
(b) furnish, at least five business days before filing a
registration statement that registers such Registrable Shares, a prospectus
relating thereto or any amendments or supplements relating to such a
registration statement or prospectus, to one counsel selected by the holders of
a majority of such Registrable Shares (the "Selling Investors' Counsel"), copies
of all such documents proposed to be filed (it being understood that such
five-business-day period need not apply to successive drafts of the same
document proposed to be filed so long as such successive drafts are supplied to
such counsel in advance of the proposed filing by a period of time that is
customary and reasonable under the circumstances);
(c) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at least a period of 90 days or until all of such Registrable Shares have been
disposed of (if earlier) and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of such Registrable Shares;
(d) notify in writing the Selling Investors' Counsel promptly
(i) of the receipt by the Company of any notification with respect to any
comments by the Commission with respect to such registration statement or
prospectus or any amendment or supplement thereto or any request by the
Commission for the amending or supplementing thereof or for additional
information with respect thereto, (ii) of the receipt by the Company of any
notification with respect to the issuance by the Commission of any stop order
suspending the effectiveness of such registration statement or prospectus or any
amendment or supplement thereto or the initiation or threatening of any
proceeding for that purpose and (iii) of the receipt by the Company of any
notification with respect to the suspension of the qualification of such
Registrable Shares for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purposes;
(e) use its best efforts to register or qualify such
Registrable Shares under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Shares reasonably requests and do any
and all other acts and things which may be reasonably necessary or advisable to
enable such seller of Registrable Shares to consummate the disposition in such
jurisdictions of the Registrable Shares owned by such seller; provided, however,
that the
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<PAGE> 6
Company will not be required to register or qualify generally to do business,
subject itself to general taxation or consent to general service of process in
any jurisdiction where it would not otherwise be required so to do but for this
paragraph (e);
(f) furnish to each seller of such Registrable Shares such
reasonable number of copies of a summary prospectus or other prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents prepared by the Company in connection
with such registration as such seller of Registrable Shares may reasonably
request in order to facilitate the public sale or other disposition of such
Registrable Shares;
(g) use its best efforts to cause such Registrable Shares to
be registered with or approved by such other governmental agencies or
authorities as may be necessary by virtue of the business and operations of the
Company to enable the seller or sellers thereof to consummate the disposition of
such Registrable Shares;
(h) notify on a timely basis each seller of such Registrable
Shares at any time when a prospectus relating to such Registrable Shares is
required to be delivered under the Securities Act within the appropriate period
mentioned in paragraph (a) of this Section, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and, at the
request of such seller, prepare and furnish to such seller a reasonable number
of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the offerees of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
(i) make available for inspection by any seller of such
Registrable Shares, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent retained
by any such seller or underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall be reasonably
necessary to enable them to exercise their due diligence responsibility under
the Securities Act, and cause the Company's officers, directors and employees to
supply all information (together with the Records, the "Information") reasonably
requested by any such Inspector in connection with the preparation and filing of
such registration statement. Any of the Information which the Company determines
in good faith to be confidential, and of which determination the Inspectors are
so notified, shall not be disclosed by the Inspectors unless (i) the disclosure
of such Information is necessary to avoid or correct a misstatement or omission
in the registration statement, (ii) the release of such Information is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction or
(iii) such Information has been made generally available to the public. The
seller of Registrable Shares agrees that it will, upon learning that disclosure
of such Information is sought in a court of competent jurisdiction, give notice
to the Company and allow the Company, at the Company's expense, to undertake
appropriate action to prevent disclosure of the Information deemed confidential;
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<PAGE> 7
(j) use its best efforts to obtain from its independent
certified public accountants "cold comfort" letters in customary form and at
customary times and covering matters of the type customarily covered by cold
comfort letters;
(k) use its best efforts to obtain from its counsel an opinion
or opinions in customary form;
(l) provide a transfer agent and registrar (which may be the
same entity and which may be the Company) for such Registrable Shares to the
extent not already provided;
(m) issue to any underwriter to which any seller of
Registrable Shares may sell shares in such offering certificates evidencing such
Registrable Shares;
(n) list such Registrable Shares on any national securities
exchange or national automated quotation system on which any shares of the
Common Stock are listed or, if the Common Stock is not so listed, use its best
efforts to qualify such Registrable Shares for inclusion on the automated
quotation system of the National Association of Securities Dealers, Inc. (the
"NASD") or such national securities exchange as the Company shall reasonably
determine;
(o) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission and make available to its
securityholders, as soon as reasonably practicable, earnings statements (which
need not be audited) covering a period of 12 months beginning within three
months after the effective date of the registration statement, which earnings
statements shall satisfy the provisions of Section 11(a) of the Securities Act;
and
(p) use its best efforts to take all other steps necessary to
effect the registration of such Registrable Shares contemplated hereby.
Section 7. EXPENSES. Except as provided in Section 2, all expenses
incurred by the Company in complying with Section 6, including, without
limitation, all registration and filing fees (including all expenses incident to
filing with the NASD), fees and expenses of complying with securities and blue
sky laws, printing expenses, fees and expenses of the Company's counsel and
accountants, and fees and expenses of the Selling Investors' Counsel (provided
that the sellers of Registrable Shares use the same counsel as the Company),
shall be paid by the Company; provided, however, that all underwriting discounts
and selling commissions and all stock transfer taxes applicable to the
Registrable Shares shall be borne by the sellers thereof, in proportion to the
number of Registrable Shares sold by such sellers.
Section 8. INDEMNIFICATION. (a) In connection with any registration of
any Registrable Shares under the Securities Act pursuant to this Agreement, the
Company shall indemnify and hold harmless the seller of such Registrable Shares,
each underwriter, broker or any other person acting on behalf of such seller and
each other person, if any, who controls any of the foregoing persons within the
meaning of the Securities Act against any losses, claims, damages or
liabilities, joint or several, (or actions in respect thereof) to which any of
the foregoing persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the registration statement under which
such Registrable
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<PAGE> 8
Shares were registered under the Securities Act, any preliminary prospectus or
final prospectus contained therein or otherwise filed with the Commission, any
amendment or supplement thereto or any document incident to registration or
qualification of any Registrable Shares, 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 to make the statements therein not misleading or,
with respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made not misleading, or any
violation by the Company of the Securities Act or state securities or blue sky
laws applicable to the Company and relating to action or inaction required of
the Company in connection with such registration or qualification under such
state securities or blue sky laws; and shall reimburse such seller, such
underwriter, such broker or such other person acting on behalf of such seller
and each such controlling person for any legal or other expenses reasonably
incurred by any of them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in said
registration statement, preliminary prospectus, final prospectus, amendment,
supplement or document incident to registration or qualification of any
Registrable Shares in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by or on behalf of
such seller or underwriter specifically for use in the preparation thereof and
provided, further, however, that, as to any underwriter or any person
controlling any underwriter, this indemnity does not apply to any losses,
claims, damages or liabilities arising out of or based upon any untrue statement
or alleged untrue statement or omission or alleged omission in any preliminary
prospectus if a copy of a prospectus was not sent or given by or on behalf of an
underwriter to such person asserting such loss, claim, damage, liability or
action at or prior to the written confirmation of the sale of the Registrable
Shares as required by the Securities Act and such untrue statement or omission
had been corrected in such prospectus.
(a) In connection with any registration of Registrable Shares
under the Securities Act pursuant to this Agreement, each seller of Registrable
Shares shall indemnify and hold harmless (in the same manner and to the same
extent as set forth in the preceding paragraph of this Section) the Company,
each director of the Company, each officer of the Company who shall sign such
registration statement, each underwriter, broker or other person acting on
behalf of the Company, each person who controls any of the foregoing persons
within the meaning of the Securities Act and each other seller of Registrable
Shares under such registration statement with respect to any statement or
omission from such registration statement, any preliminary prospectus or final
prospectus contained therein or otherwise filed with the Commission, any
amendment or supplement thereto or any document incident to registration or
qualification of any Registrable Shares, if (other than with respect to such
seller's indemnification of an underwriter) such statement or omission was made
in reliance upon and in conformity with written information furnished to the
Company or such underwriter through an instrument duly executed by or on behalf
of such seller specifically for use in connection with the preparation of such
registration statement, preliminary prospectus, final prospectus, amendment,
supplement or document; provided, however, that the maximum amount of liability
in respect of such indemnification shall be limited, in the case of each seller
of Registrable Shares, to an amount equal to the net proceeds actually received
by such seller from the sale of Registrable Shares effected pursuant to such
registration; and provided, further, however, that, as to any underwriter or any
person controlling
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<PAGE> 9
any underwriter, this indemnity does not apply to any losses, claims, damages or
liabilities arising out of or based upon any untrue statement or alleged untrue
statement or omission or alleged omission in any preliminary prospectus if a
copy of a prospectus was not sent or given by or on behalf of an underwriter to
such person asserting such loss, claim, damage, liability or action at or prior
to the written confirmation of the sale of the Registrable Shares as required by
the Securities Act and such untrue statement or omission had been corrected in
such prospectus.
(b) Promptly after receipt by an indemnified party of notice
of the commencement of any action involving a claim referred to in the preceding
paragraphs of this Section, such indemnified party will, if a claim in respect
thereof is made against an indemnifying party, give written notice to the latter
of the commencement of such action. In case any such action is brought against
an indemnified party, the indemnifying party will be entitled to participate in
and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be responsible for any legal or other
expenses subsequently incurred by the latter in connection with the defense
thereof; provided, however, that if any indemnified party shall have reasonably
concluded that there may be one or more legal or equitable defenses available to
such indemnified party which are additional to or conflict with those available
to the indemnifying party, or that such claim or litigation involves or could
have an effect upon matters beyond the scope of the indemnity agreement provided
in this Section, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party and such indemnifying
party shall reimburse such indemnified party and any person controlling such
indemnified party for that portion of the fees and expenses of any counsel
retained by the indemnified party which is reasonably related to the matters
covered by the indemnity agreement provided in this Section.
(c) If the indemnification provided for in this Section is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, claim, damage, liability or action referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amounts paid or payable by such
indemnified party as a result of such loss, claim, damage, liability or action
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions which resulted in such loss, claim,
damage or liability as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Section 9. UNDERWRITING AGREEMENT. Notwithstanding the provisions of
Sections 5, 6, 7 and 8, to the extent that the Investors selling Registrable
Shares in a proposed registration shall enter into an underwriting or similar
agreement, which agreement contains provisions covering one or more issues
addressed in such Sections, the provisions contained in such Sections addressing
such issue or issues shall be of no force or effect with respect to such
registration.
-9-
<PAGE> 10
Each Investor that requested the registration of Registrable Shares in an
underwritten public offering pursuant to this Agreement shall execute (i) an
underwriting agreement containing (A) customary representations and warranties
and opinion requirements of such Investor and (B) other terms reasonably
satisfactory to such Investor, and (ii) customary ancillary documents, including
a power of attorney and a custody agreement.
Section 10. INFORMATION BY HOLDER. Each holder of Registrable Shares to
be included in any registration shall furnish to the Company such written
information regarding such holder and the distribution proposed by such holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement.
Section 11. EXCHANGE ACT COMPLIANCE. From and after the Registration
Date or such earlier date as a registration statement filed by the Company
pursuant to the Exchange Act relating to any class of the Company's securities
shall have become effective, the Company shall comply with all of the reporting
requirements of the Exchange Act and shall comply with all other public
information reporting requirements of the Commission which are conditions to the
availability of Rule 144 for the sale of shares of Common Stock. The Company
shall cooperate with each Investor in supplying such information as may be
necessary for such Investor to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of Rule 144.
Section 12. NO CONFLICT OF RIGHTS. The Company represents and warrants
to the Investors that the registration rights granted to the Investors hereby do
not conflict with any other registration rights granted by the Company. The
Company shall not, after the date hereof, grant any registration rights which
conflict with or impair the registration rights granted hereby; provided,
however, that the Company may add additional purchases of Series B Preferred
Stock to this Agreement without the consent of existing Investors.
Section 13. TERMINATION. This Agreement shall terminate and be of no
further force or effect when the Investors cease to hold any Restricted Shares.
Section 14. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the Company and the Investors and their respective successors
and assigns.
Section 15. ASSIGNMENT. Each Investor may assign its rights hereunder
to any other person or entity to whom Restricted Shares of such Investor have
been sold or otherwise transferred.
Section 16. EFFECTIVENESS. This Agreement shall become effective upon
its execution by the Company, each Series B Investor, and the holders of a
majority of all Registrable Shares (excluding Registrable Shares held by the
Series B Investors).
Section 17. ENTIRE AGREEMENT. This Agreement contains the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior arrangements or understandings with respect hereto.
-10-
<PAGE> 11
Section 18. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered or if sent by
nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to the Company:
InterWorld Corporation
395 Hudson Street
6th Floor
New York, New York 10014
Attention: Chief Financial Officer
Telecopier: (212) 301-2342
Telephone: (212) 301-2500
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Robert Seber, Esq.
Telecopier: (212) 408-2420
Telephone: (212) 408-2400
if to any Investor, to its address set forth on Schedule I;
or to such other address as the party to whom notice is to be given may have
furnished to the other parties in writing in accordance herewith. Any such
notice or communication shall be deemed to have been received (I) in the case of
personal delivery, on the date of such delivery, (II) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (III) in the case of telecopy transmission, when received, and (IV)
in the case of mailing, on the third business day following that on which the
piece of mail containing such communication is posted.
-11-
<PAGE> 12
Section 19. MODIFICATIONS; AMENDMENTS; WAIVERS. The terms and
provisions of this Agreement may not be modified or amended, except (i) pursuant
to a writing signed by the Company and the Investors holding at least a majority
of the Restricted Shares (based upon Common Stock equivalents) held by all
Investors, and (ii) that the Company may add additional Investors to this
Agreement without consent by existing Investors.
Section 20. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
Section 21. HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be a part of this Agreement.
Section 22. SEVERABILITY. It is the desire and intent of the parties
that the provisions of this Agreement be enforced to the fullest extent
permissible under the law and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any provision of this Agreement
would be held in any jurisdiction to be invalid, prohibited or unenforceable for
any reason, such provision, as to such jurisdiction, shall be ineffective,
without invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn so
as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 23. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the principles governing conflicts of laws.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement on the date first written above.
INTERWORLD CORPORATION
INC.
By:
______________________________
Name: Alan J. Andreini
Title: President and Chief Executive Officer
SERIES A PREFERRED STOCK INVESTORS:
ALEXANDER ENTERPRISE HOLDINGS CORP.
INC.
By:
______________________________
Name:
Title:
______________________________
Alan J. Andreini
______________________________
Nicole Arnaboldi
______________________________
Scott Bessent
<PAGE> 14
BEXLEY PARTNERS L.P.
INC.
By:
______________________
Name:
Title:
______________________________
Arthur M. Blank
______________________________
David C. Blatte
BOSTON INTERNATIONAL PARTNERS L.P.
INC.
By:
__________________________
Name: Alan M. Eisenberg
Title: General Partner
BOSTON INTERNATIONAL PARTNERS L.P. II
INC.
By:
__________________________
Name: Alan M. Eisenberg
Title: General Partner
BUCKINGHAM PROFIT SHARING TRUST
INC.
By:
__________________________
Name:
Title:
<PAGE> 15
BUCKINGHAM INVESTORS II
INC.
By:
-----------------------------------
Name:
Title:
- ----------------------------------------
Ralph Caulo
C.F. PARTNERS, L.P.
INC.
By:
-----------------------------------
Name:
Title:
- ----------------------------------------
Beth Dana Chartoff
Paul Chiapparone
COMDISCO, INC.
INC.
By:
----------------------------------------
Name:
Title:
- ----------------------------------------
Richard d'Abo
<PAGE> 16
- ----------------------------------------
Thomas R. DiBenedetto
- ----------------------------------------
Steven Dietz
STEVEN DIETZ C/F GRIFFIN DIETZ
INC.
By:
-----------------------------------
Name:
Title:
STEVEN DIETZ C/F TREVOR DIETZ
INC.
By:
-----------------------------------
Name:
Title:
DLJSC FBO STEVEN DIETZ IRA
INC.
By:
-----------------------------------
Name:
Title:
DLJ DIVERSIFIED PARTNERS, L.P.
INC.
By:
-----------------------------------
Name: Osamu R. Watanabe
Title: Vice President
<PAGE> 17
DLJ DIVERSIFIED PARTNERS-A, L.P.
INC.
By:
-----------------------------------
Name: Osamu R. Watanabe
Title: Vice President
DLJ FIRST ESC L.L.C.
INC.
By:
-----------------------------------
Name: Osamu R. Watanabe
Title: Vice President
- ----------------------------------------
Stanley Druckenmiller
- ----------------------------------------
Dana Dunbar
- ----------------------------------------
Kevin T. Dwyer
- ----------------------------------------
Arminio Fraga
- ----------------------------------------
Joel Friedman
<PAGE> 18
GE CAPITAL INFORMATION TECHNOLOGY SOLUTIONS, INC.
INC.
By:
-----------------------------------
Name:
Title:
GEA FUND, L.P.
INC.
By:
-----------------------------------
Name:
Title:
- ----------------------------------------
Gary Gladstein
GRP PARTNERS, L.P.
INC.
By:
-----------------------------------
Name: Osamu R. Watanabe
Title: Vice President
GLOBAL RETAIL PARTNERS L.P.
INC.
By:
-----------------------------------
Name: Osamu R. Watanabe
Title: Vice President
<PAGE> 19
GLOBAL RETAIL PARTNERS FUNDING INC.
By:
----------------------------
Name: Osamu R. Watanabe
Title: Vice President
David M. Goldsmith
- ---------------------------------
Arthur J. Hohmann
- ---------------------------------
David E. Homrich
THE HUDSON PARTNERSHIP, L.P.
INC.
By:
----------------------------
Name: Spencer Davidson
Title: General Partner
INVEMED FUND, L.P.
INC.
By:
----------------------------
Name: Cristina H. Kepner
Title: Executive Vice President, Invemed
Associates, General Partner
- ---------------------------------
Robert Jermain
<PAGE> 20
- --------------------------------
Georgia Keidan
- --------------------------------
John Kenning
- --------------------------------
Cristina H. Kepner
- --------------------------------
Gerald Kerner
THE KISKI SCHOOL
INC.
By: ----------------------------
Name: Linda Miller
Title: Business Manager
- ---------------------------------
Stanley Klein
- ---------------------------------
Manny Korman
- ---------------------------------
David Kowitz
- ---------------------------------
David Kwiat
<PAGE> 21
- ---------------------------------
Bruce M. Langone
- ---------------------------------
Kenneth G. Langone
- ---------------------------------
Lucetta M. Larkin
- ---------------------------------
Elizabeth Larson
- ---------------------------------
Steven E. Lebow
- ---------------------------------
Laurence C. Leeds, Jr.
LAURENCE C. LEEDS III, LAURENCE C.
LEEDS JR. & ROY M. GOODMAN TTEES UA
DATED 4/18/84 FBO LAURENCE C. LEEDS III
By: -----------------------------
Name: Laurence C. Leeds, Jr.
Title: Trustee
- ---------------------------------
Gerard V. Lyons
<PAGE> 22
- -------------------------------
Gerard Manolovici
- -------------------------------
Bernard Marcus
- -------------------------------
Alexander C. McAree
- -------------------------------
Paul McNulty
- -------------------------------
G. Allen Mebane
MERCURIUS PARTNERS L.P.
INC.
By:
----------------------------
Name: John Zwaanstra
Title: General Partner
MIC, LLC
INC.
By:
----------------------------
Name:
Title:
<PAGE> 23
MIC II, LLC
INC.
By:
----------------------------
Name:
Title:
HERBERT S. & PATRICE R. MILLER
CHARITABLE REMAINDER UNITRUST DTD
1/10/96
INC.
By:
----------------------------
Name:
Title:
THE IRREVOCABLE INTER VIVOS TRUST F/B/O THE MILLER CHILDREN
- -------------------------------
Name: Jason D. Smolen
Title: Trustee
MOORE GLOBAL INVESTMENTS, LTD.
- -------------------------------
Name:
Title:
- -------------------------------
Martin C. Murrer
<PAGE> 24
O'SULLIVAN GRAEV & KARABELL LLP
PROFIT SHARING PLAN
INC.
By:
----------------------------
Name: Gerard F. Cruse
Title: Trustee
THE OVERBROOK FOUNDATION
INC.
By:
----------------------------
Name:
Title:
OVERBROOK FUND I, LLC
INC.
By:
----------------------------
Name:
Title:
PALISADE INVESTORS, L.L.C.
INC.
By:
----------------------------
Name: Steven E. Berman
Title: Member
- -------------------------------
William H. Plummer
- -------------------------------
Steven Puccinelli
<PAGE> 25
RDV TECH, L.L.C.
INC.
By:
-----------------------------------
Name: William Boer
Title: Vice President, Chief Operating Officer
- -----------------------------------
Clint Regehr
REMINGTON INVESTMENT STRATEGIES, L.P.
INC.
By:
-----------------------------------
Name: Savvas Savvinidis
Title: Director of Operations
- -----------------------------------
Frank E. Richardson
- -----------------------------------
Janice Robinson
- -----------------------------------
Francis J. Saldutti
- -----------------------------------
Daniel R. Santell
- -----------------------------------
Susan C. Schnabel
<PAGE> 26
SUSAN C. SCHNABEL/EDWARD L. PLUMMER
INC.
By:
-------------------------------------------
Name: Susan C. Schnabel/Edward L. Plummer
Title:
- -----------------------------------
Robert Seber
- -----------------------------------
James T. Sington
- -----------------------------------
Yves Sisteron
- -----------------------------------
Frederick S. Slagle
- -----------------------------------
John F. Slevin
- -----------------------------------
Baldwin Smith Jr.
<PAGE> 27
TRUST FOR ALEXANDER G. SOROS UNDER GEORGE SOROS 1982 PRIVATE LEAD
TRUST DATED AS OF APRIL 1 1982
INC.
By:
-----------------------------------
Name: Gary S. Gladstein
Title: Trustee
TRUST FOR ANDREA SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1 1982
INC.
By:
-----------------------------------
Name: Gary S. Gladstein
Title: Trustee
- -----------------------------------
George Soros
By: Gary Gladstein, Attorney-in-Fact
TRUST FOR GREGORY SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1 1982
INC.
By:
-----------------------------------
Name: Gary S. Gladstein
Title: Trustee
<PAGE> 28
TRUST FOR JONATHAN SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1 1982
INC.
By:
-----------------------------------
Name: Gary S. Gladstein
Title: Trustee
TRUST FOR ROBERT SOROS UNDER
GEORGE SOROS 1982 PRIVATE LEAD TRUST
DATED AS OF APRIL 1 1982
INC.
By:
-----------------------------------
Name: Gary S. Gladstein
Title: Trustee
- -----------------------------------
Andrew R. Taussig
Sally G. Taussig
- -----------------------------------
Thomas Teague
- -----------------------------------
George Thompson
- -----------------------------------
Martin Tobias
<PAGE> 29
GENERAL ELECTRIC PENSION TRUST
By: General Electric Investment Corporation,
its investment manager
By: _________________________
Name: Michael M. Pastore
Title: Vice President
WARNACO, INC.
INC.
By: _________________________
Name: Carl J. Deddens
Title: Vice President
_________________________
Sean Warren
_________________________
Charles G. Weaver Jr.
_________________________
Edward Weller
_________________________
Allen D. Wheat
<PAGE> 30
WIGHT INVESTMENT PARTNERS
INC.
By: _________________________
Name: Russell Wight
Title: General Partner
HARDING W. WILLINGER 1992 TRUST
INC.
By: _________________________
Name: Harding Willinger
Title: Trustee
_________________________
Diego Winegardner
_________________________
Laurence S. Zimmerman
_________________________
Ian H. Zwicker
SERIES B PREFERRED STOCK INVESTORS:
CAMBRIDGE TECHNOLOGY CAPITAL FUND
I, L.P.
INC.
By: _________________________
Name: Barry Rosenbaum
Title: Managing Director
<PAGE> 31
CISCO SYSTEMS, INC.
INC.
By: _________________________
Name: Larry R. Carter
Title: Senior Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
GUESS?, INC.
INC.
By: _________________________
Name: Maurice Marciano
Title: Chairman and Chief Executive Officer
TRANS COSMOS USA, INC.
INC.
By: _________________________
Name: Shozo Okuda
Title: President
WARNACO, INC.
INC.
By: _________________________
Name: Stanley P. Silverstein
Title: Vice President, General Counsel
and Secretary
<PAGE> 1
EXHIBIT 16.1
[KPMG LETTERHEAD]
Securities and Exchange Commission July 8, 1999
Washington, D.C. 20549
Ladies and Gentlemen:
We were previously engaged as principal accountants to audit the consolidated
financial statements of InterWorld Corporation and its subsidiaries as of
December 31, 1996 and 1995 and for the period from inception (March 28, 1995)
through December 31, 1995 and for the year ended December 31, 1996. On July 10,
1997, we resigned. We have read InterWorld Corporation's statements included
under the heading "Change in Independent Accountants" in the Company's
Registration Statement on Form S-1, dated June 3, 1999, and we agree with such
statements.
Very truly yours,
/s/ KPMG LLP
KPMG LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 3, 1999, relating to the consolidated financial
statements and financial statement schedules of InterWorld Corporation, which
appears in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
New York, NY
July 16, 1999
