<PAGE>
As filed with the Securities and Exchange Commission on May 4, 1999
Registration No. 333-74619
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act Of 1933
---------------
WIT CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 6211 13-3900397
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code
organization) Number)
826 Broadway, Sixth Floor
New York, New York 10003
(212) 253-4400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Robert H. Lessin
Ronald Readmond
Co-Chief Executive Officers
Wit Capital Group, Inc.
826 Broadway, Sixth Floor
New York, New York 10003
(212) 253-4400
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
---------------
Copies to:
Stephen P. Farrell, Esq. Robert Rosenman, Esq.
Eduardo R. Vidal, Esq. Cravath, Swaine & Moore
Morgan, Lewis & Bockius LLP Worldwide Plaza
101 Park Avenue
New York, New York 10178 825 Eighth Avenue
New York, New York 10019
(212) 309-6000 (212) 474-1000
Fax: (212) 309-6273 Fax: (212) 474-3700
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum
Title of Each Class of Aggregate Amount of
Securities to be Registered Offering Price(1)(2) Registration Fee
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per
share(3)............................... $80,000,000 (4)
</TABLE>
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- -------------------------------------------------------------------------------
(1)Includes shares to be sold upon exercise of the underwriters' over-
allotment option. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 of Regulation C under the Securities Act of 1933, as amended.
(3)Includes the associated rights to purchase preferred stock.
(4)Registration fee was previously paid.
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained 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 MAY , 1999
PROSPECTUS
Shares
[LOGO]
Common Stock
------------
We are an Internet investment banking and brokerage firm. This is an initial
public offering of our common stock. We anticipate that the initial public
offering price will be between $ and $ per share.
There is currently no public market for the shares. We have applied to have our
common stock approved for quotation on the Nasdaq National Market under the
symbol "WITC."
See "Risk Factors" beginning on page 7 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
------------
<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price ............................................ $ $
Underwriting discounts and commissions ........................... $ $
Total proceeds, before expenses, to us............................ $ $
</TABLE>
------------
The underwriters may purchase up to an additional shares of common stock
from us at the initial public offering price less the underwriting discount to
cover over-allotments.
The underwriters expect to deliver the shares of common stock in New York, New
York on , 1999.
------------
Bear, Stearns & Co. Inc. Wit Capital Corporation
Thomas Weisel Partners LLC
The date of this prospectus is , 1999.
<PAGE>
[Images of prospectus cover pages.]
[Bargraphs indicating number of customers, secondary
market trades per month and page impressions per month.]
[Image of pie chart describing the e-Dealer network's share of online
brokerage trades in the fourth quarter of 1998 and accompanying text.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Dilution................................................................. 17
Capitalization........................................................... 19
Selected Historical Financial Data....................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 39
Certain Transactions..................................................... 52
Stock Ownership Management and Principal Stockholders.................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Opinions........................................................... 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 68
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
An electronic version of this prospectus is available on a special Web site
(http://www.witcapital.com/stok3/stok/WITCb.html) being maintained by our
broker-dealer subsidiary, Wit Capital Corporation, which is acting as a co-lead
manager (designated as e-Manager(TM)) in this initial public offering. Other
than the electronic version of this prospectus that is available on this
special Web site, none of the information on our Web sites is part of this
prospectus.
This prospectus contains registered service marks, trademarks and trade names
of Wit Capital including the Wit Capital name.
(i)
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all the information that is important to you. To understand this
offering fully, you should read carefully the entire prospectus, including the
risk factors and the financial statements. In this prospectus, unless the
context requires otherwise, "we" and "us" refer to Wit Capital Group, Inc. and
its subsidiaries and "common stock" includes non-voting Class B common stock.
Unless otherwise indicated, all information in this prospectus: (1) reflects
the automatic conversion upon consummation of this offering of all outstanding
shares of Series A, B, C and D preferred stock into an aggregate of 48,539,018
shares of our common stock and all outstanding shares of Series E preferred
stock into 16,666,667 shares of Class B common stock and (2) assumes no
exercise of the underwriters' over-allotment option.
Our Business
We are an Internet investment banking and brokerage firm that uses electronic
mail and the Web to offer and sell shares in public offerings to individuals.
We also produce and electronically disseminate investment research to
individual investors. Directly and through arrangements with twenty-two
discount brokerage firms, we expect to be able to offer and sell shares to a
substantial number of online individual investors. We also advise corporate
clients in connection with significant transactions like mergers and
acquisitions and assist them with the development of Internet strategies and
businesses and in raising funds from private sources. Our investment banking
activities focus on companies that principally use the Internet to conduct
their businesses and, more generally, on issuers seeking to market their stock
offerings to online individual investors. Beginning recently, we are focusing
as well on other rapidly growing sectors of the economy that are related to or
dependent on Internet technology. We also provide online brokerage services and
are developing a Web-based after-hours digital trading facility through which
individual investors will be able to trade Nasdaq and exchange listed
securities directly with each other. In addition, we intend to create and
manage proprietary Angel Funds(TM) primarily for high net worth individuals.
Under our management, these funds will make private investments in companies in
the Internet sector and other industries.
We believe the Internet will open the equity markets to individual investors
and thereby change the model of capital formation that exists today. In
particular, we believe that the Internet presents the opportunity to align the
interests of individual investors and corporate issuers by making public
offering materials and investment research available to individuals on a timely
basis and by providing individual investors the opportunity to purchase new
issue shares at the offering price. By marketing public offerings to individual
investors electronically, we believe underwriters and corporate issuers will be
able to access efficiently individual investors in the so-called retail market
and will have at hand nearly instantaneous information as to the level of these
investors' interest for their equity offerings. Information about individual
investor interest in public offerings will also provide valuable indications of
the demand for the underwritten securities once they are publicly traded,
commonly referred to as secondary market demand. This demand can be an
important factor in pricing the equity securities of first time issuers.
As the Internet rapidly becomes a critical medium for collecting and
exchanging information and conducting commerce for nearly all businesses, we
believe that corporate clients will gravitate towards those investment banking
firms that use their knowledge and expertise about the Internet. The speed of
this development is driven by the Internet's power to reduce costs related to
the sale and delivery of traditionally provided goods and services and by its
capacity to support new forms of business-to-business, business-to-consumer and
consumer-to-consumer relationships. It is also driven by the increasing
awareness of, and the relatively inexpensive access to, the Internet by
individuals.
1
<PAGE>
Investment Banking
We participate in public offerings of securities through the Internet. In
contrast to the way securities are offered by traditional underwriters, we
offer and sell shares to online individual investors on a first-come, first-
served basis. We also assist issuers in electronically marketing their
offerings to individuals who have a preexisting relationship with them, which
we refer to as an affinity relationship, such as their customers, suppliers or
employees. Since commencing operations in September 1997, we have participated
in seventy public equity offerings, including fifty-five initial public
offerings. In seventeen of these offerings, we played a sufficiently
significant role such that our name appeared on the cover of the prospectus.
When we facilitate online distribution in a public offering and our name
appears on the cover of the prospectus, we characterize our role as e-Manager,
a term for which we have a pending trademark application. As of April 30, 1999,
we were participating as e-Manager in an additional thirteen offerings in
registration, including this offering. In every public offering in which we
have participated or are participating, one or more traditional investment
banking firms acted or is acting as the lead manager.
We maintain direct access to online individual investors who have accounts
with us or who are active members on our electronic mailing list. In addition,
we expect to be able to offer and sell shares to a substantial number of online
investors through relationships with twenty-two online discount brokerage firms
("e-Dealers(TM)"). While we have agreements ("e-Dealer agreements") with each
of these e-Dealers, the e-Dealer network is in the developmental stage and is
not yet operational. Under the e-Dealer agreements, the e-Dealers will be able
to act as selected dealers in public offerings in which we are the e-Manager.
In the aggregate, we believe these firms handled approximately 29% of the total
number of online brokerage trades in the fourth quarter of 1998. When we act as
e-Manager, subject to the agreement of the lead manager and the issuer, online
brokerage customers of the participating e-Dealers and our direct customers
will be offered the shares designated for electronic distribution in a first-
come, first-served process that allocates shares to them without regard to
which brokerage firm holds their accounts. Because the e-Dealers have not
completed the technical interfaces necessary to bring the e-Dealer network into
operation, up to now we have offered and sold shares only to our direct
customers and to groups with preexisting relationships with the issuers.
Through the Internet, we offer issuers contemplating initial public offerings
several capabilities:
. We provide broad dissemination of offerings to online individual
investors, which should result in more demand for shares in the offering
and in the secondary market. For retail-oriented issuers, such broad
dissemination should also result in increased customer awareness for the
company's products or services.
. We broaden the investor demand for the issuer's shares by providing a
timely and cost-effective way to access groups having an affinity
relationship with the issuer.
. We are able to deliver and analyze data about the retail demand for a
proposed offering with our central electronic order book. This should
enable issuers to negotiate more appropriate prices for their shares as
compared to prices negotiated primarily on the basis of data about
institutional investor interest.
. We offer broad online dissemination to individuals of investment
research, which should result in more interest in and recognition of the
issuer among individual investors in the secondary market.
Brokerage
We offer brokerage services to our direct customers using our Web site and
touch-tone telephone access. Our brokerage services include stock and option
trading, access to more than 3,800 mutual funds, portfolio tracking and record
management as well as cash management services and market information, news and
other information services. Our ordinary commission rates are $14.95 for market
orders and $19.95 for limit orders.
2
<PAGE>
The following table shows the growth in the number of customers who have
opened accounts with us and in the daily average number of secondary market
trades these customers have executed through us. Secondary market trades, which
involve the buying and selling of publicly traded securities, do not include
shares purchased in public offerings.
<TABLE>
<CAPTION>
Daily Average Number
Approximate Number of Secondary Market
of Customer Accounts Trades During
at Period End Three-Month Period
-------------------- --------------------
<S> <C> <C>
March 31, 1998........................ 3,100 12
June 30, 1998......................... 5,300 25
September 30, 1998.................... 7,800 45
December 31, 1998..................... 10,800 106
March 31, 1999........................ 26,000 405
</TABLE>
At April 30, 1999, we had approximately 41,000 customer accounts, and the daily
average number of secondary market trades for the month of April 1999 was 926.
Recent Developments
In April 1999, The Goldman Sachs Group, L.P. purchased securities that will
automatically convert at the time this offering is consummated into shares of
non-voting Class B common stock constituting approximately % of our
outstanding stock after completion of this offering and warrants exercisable
for shares of non-voting Class B common stock. If Goldman Sachs were to
exercise these warrants, which will become exercisable in October 2000, its
ownership interest in our stock would increase to approximately % of our
outstanding stock after completion of this offering (assuming no other
exercises of options or warrants). In connection with Goldman Sachs' investment
in us, Goldman Sachs and we agreed to cooperate, on a non-exclusive basis, with
respect to portions of our respective investment banking businesses.
Competitive Strengths
First Mover Advantage. As the first Internet investment banking firm, we have
pioneered the business of online retail distribution of shares in public
offerings. As a result, we have benefited from publicity and word of mouth
exposure which we believe has established Wit Capital as a leading provider of
online investment banking services.
E-Dealer Agreements. We have agreements with twenty-two online discount
brokerage firms that give us the exclusive right to offer these e-Dealers
participation in public offerings in which retail customer orders from more
than one broker-dealer are aggregated in a central electronic order book. All
but two of these agreements have remaining terms of two to three years; those
two agreements expire in August 2000.
Investment Banking Relationships. We believe that our relationship with
Goldman Sachs will enhance our investment banking business in several important
ways, particularly by giving us increased stature in the investment banking
community and with corporate clients. We have also worked with several other
traditional investment banking firms and plan to continue to develop these
mutually commercially beneficial relationships.
Strong Client Relationships and Internet Experience. Our investment bankers,
executive officers and investors have strong relationships with corporate
issuers, venture capitalists and others in the financial services sector. In
addition, our senior investment banking and research professionals have a
strong history of working with Internet companies and developing Internet
strategies and businesses. Venture capital funds that have invested in our
company also provide valuable access to prospective corporate clients.
3
<PAGE>
Experienced and Innovative Management. Our chairman and co-chief executive
officer, Robert H. Lessin, was previously vice chairman at Salomon Smith
Barney. Our co-chief executive officer and president, Ronald Readmond, was
previously vice chairman of Charles Schwab. Our founder and chief strategist,
Andrew Klein, engineered the world's first Internet public offering. Our
director of investment banking, Mark Loehr, was previously head of equity
capital markets at Salomon Smith Barney.
Technology. We have developed or acquired significant software and procedures
that, among other things, allow us to effectively market and execute public
offerings over the Internet.
Low Customer Acquisition Cost. We have experienced growth in our customer
base with limited marketing expenditures. The number of page impressions on our
Web site has increased from 1.9 million page impressions during January 1999 to
38 million page impressions during April 1999.
Our Goals
We want to be the preeminent Internet investment banking firm. Specifically,
we want to be both the premier underwriter for offering and selling securities
to online individual investors and a leading financial advisor to companies
developing Internet strategies and businesses.
Our goals are as follows:
. We want to continue growing our access to individual investors.
. We want to increase the number of shares allocated for online
distribution to individual investors in the public offerings in which we
participate.
. We want to broaden our investment banking capabilities beyond our initial
Internet focus to include capabilities in other fast growing sectors of
the economy that are related to or dependent on Internet technology, such
as hardware, software, consumer goods, telecommunications, education and
healthcare.
. We want to cost effectively build our name recognition by distributing
stock offerings we underwrite through the e-Dealers, as well as by broadly
distributing our investment research.
. We want to expand our brokerage services by extending the range of
products and services we provide.
. We want to successfully launch our Web-based after-hours digital trading
facility.
. We want to create and manage proprietary Angel Funds primarily for high
net worth individuals.
. Since the opportunity to reengineer the capital raising process is not
limited to the U.S. marketplace, we want to leverage our technology and
intellectual capital by creating international joint ventures.
Corporate Information
We are a Delaware corporation. Our executive offices are located at 826
Broadway, Sixth Floor, New York, New York 10003. Our telephone number is (212)
253-4400. Our Web site is http://www.witcapital.com. Other than the electronic
version of this prospectus that is available on a special Web site, none of the
information on our Web sites is part of this prospectus. Our regulated
activities are carried out through our wholly owned subsidiary, Wit Capital
Corporation, which is a broker-dealer licensed with the Securities and Exchange
Commission and a member of the National Association of Securities Dealers.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common Stock Offered...................... shares
Common Stock to be Outstanding After this
Offering................................. shares(1)(2)
Use of Proceeds........................... We intend to use the net proceeds
from this offering for general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.... WITC
</TABLE>
- --------
(1) Excludes a 30-day option granted to the underwriters to purchase up to
additional shares of common stock to cover over-allotments, if any.
(2) Based on the number of shares of common stock currently outstanding and the
shares of common stock to be issued as a result of the conversion of our
outstanding preferred stock upon consummation of this offering, including
16,666,667 shares of Class B common stock held by Goldman Sachs, which
automatically convert into the same number of shares of common stock if
they are transferred to a non-affiliate of Goldman Sachs. Does not include
(a) 9,629,609 shares of common stock, including 8,053,279 shares of Class B
common stock, issuable upon exercise of outstanding warrants, (b) the
800,000 shares of common stock that are referred to in "Business--Legal
Matters", (c) 218,924 shares of Class B common stock subject to additional
warrants that may be issued to Goldman Sachs after September 25, 1999 as
described in "Business--Investment Banking" and (d) 30,000,000 shares of
common stock reserved for issuance under our Stock Incentive Plan, of which
options to purchase 13,892,852 shares were outstanding on April 30, 1999
(see "Management--Management Benefit Plans").
5
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Period From
March 27, 1996
(Inception) Year Ended Three Months Ended
through December 31, March 31,
December 31, ---------------------- -----------------------
1996 1997 1998 1998 1999
-------------- ---------- ---------- ----------- ----------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 41 $ 246 $ 2,038 $ 76 $ 3,903
Operating loss.......... (1,758) (2,970) (8,760) (1,390) (4,882)
Net loss................ (1,774) (2,993) (8,794) (1,398) (4,900)
Basic and diluted net
loss per share......... $ (.23) $ (.29) $ (.86) $ (.14) $ (.47)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 7,683,096 10,432,876 10,200,176 10,080,136 10,351,270
Pro forma net loss per
share from continuing
operations(1).......... $ (.23) $ (.21) $ (.41) $ (.10) $ (.22)
Shares used in computing
pro forma basic and
diluted net loss per
share(1)............... 7,789,995 14,186,252 21,601,240 14,046,249 22,390,143
</TABLE>
- --------
(1) Per share amounts are computed by using the weighted average number of
shares of common stock outstanding in the relevant period as adjusted to
give effect to the conversion of shares of preferred stock outstanding
during the respective periods.
In the following table the Actual column reflects our financial condition as
of March 31, 1999. The Pro Forma column reflects the issuance and sale to
Goldman Sachs of 16.7 million shares of preferred stock and the receipt of
$24.9 million in net cash proceeds as well as the exercise of an aggregate of
4,249,269 stock options by employees and related loans from us as described in
"Certain Transactions--Loans to Officers" subsequent to March 31, 1999. The Pro
Forma As Adjusted column reflects the sale of shares of common stock in
this offering (at an assumed offering price of $ ) after deducting
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......................... $41,194 $66,094
Working capital................................... 41,902 66,186
Total assets...................................... 50,292 75,192
Stockholders' equity.............................. 47,500 71,784
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below may not be
the only ones we will face. Additional risks and uncertainties not presently
known to us or that we currently deem not material may also impair our
business operations. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have a limited operating history upon which you may evaluate us.
We have a limited operating history upon which to evaluate the merits of
investing in our common stock. Our prospects are subject to the risks,
expenses and uncertainties encountered by companies in the new and rapidly
evolving markets for Internet products and services. These risks include the
failure to continue to develop our name recognition and reputation, the
rejection of our services by Internet users or vendors, our inability to
maintain and increase the usage of our online services, increased competition
from other investment banking firms and our inability to attract, retain and
motivate highly qualified employees. While these risks can affect any
business, they are particularly relevant to new companies, like ours, which do
not have a firmly established reputation or a large customer base, and
Internet sector companies whose customers are just recently dealing with
electronic commerce.We may not be successful in addressing these risks, and
our business and financial condition could suffer.
We have incurred losses since our inception and expect to incur significant
losses for the foreseeable future.
As of March 31, 1999, we had an accumulated deficit of $18.5 million.
Although our revenue has grown in recent periods, there can be no assurance
that our revenues will continue at their current level or increase in the
future. We have not achieved profitability on a quarterly or annual basis to
date. We anticipate that we will continue to incur net losses for the
foreseeable future. We currently expect to increase our operating expenses
significantly, expand our investment banking staff and our sales and marketing
operations and continue to develop and extend our online services. If such
expenses precede or are not followed by increased revenues, our business,
results of operations and financial condition could be materially and
adversely affected.
Our limited operating history and the uncertain nature of the markets we
address make it difficult or impossible to predict future results of
operations. Therefore, our recent revenue growth should not be an indicator of
the rate of revenue growth, if any, we can expect in the future.
Our investment banking business may be adversely affected if the e-Dealer
system does not become operational.
While we have agreements with the e-Dealers, the e-Dealer network is in the
developmental stage and is not yet operational. No selling group of e-Dealers
has participated in any underwritten offering in which we have participated.
The principal reason for this has been that the e-Dealers are in various
stages of developing the technical capacity and interfaces necessary to enable
them to participate in offerings in which we are the e-Manager. As a result,
up to now we have offered and sold shares only to our direct customers and to
groups with preexisting relationships with the issuers. There can be no
assurance that the individual e-Dealers will complete development of the
technical capacity and interfaces necessary to participate as e-Dealers in
offerings in which we act as e-Manager. There can be no assurance that the e-
Dealer network will ever become operational.
Our investment banking business may be adversely affected if the e-Dealer
network becomes operational and the e-Dealers fail to participate in
offerings in which we act as e-Manager.
The e-Dealer agreements do not obligate the e-Dealers to accept our
invitation to participate in any offerings. Their failure to participate could
adversely affect our ability to demand an adequate share of the
7
<PAGE>
management fees or a sufficient allotment of shares in public offerings in
which we participate. Moreover, the exclusivity provisions of the e-Dealer
agreements all have remaining terms of less than three years. There can be no
assurance that the individual e-Dealers will elect to extend these commitments
following their expiration. In addition, our inability to provide specified
share allocations in public offerings or a specified number of offers to
participate in public offerings to the e-Dealers could lead to the early
termination of the exclusivity provisions based on our failure to meet the
minimum criteria stated in the e-Dealer agreements. If the exclusivity
provisions of the e-Dealer agreements expire and are not renewed or are
terminated before their expiration dates, our ability to participate in
underwriting syndicates and ultimately to develop a profitable online
investment banking business could be adversely affected.
We must receive increased share allotments in underwritten offerings or our
investment banking business may be seriously affected by limited revenues
from public underwriting activities.
To date, we have been given only minimal share allocations in the offerings
in which we have participated, and, until recently, we have received none or
only neglible portions of the fees usually paid to co-managing underwriters
for their services. As a result, our revenues from public underwriting
activities have been limited. An inability to secure more than a minimal
portion of the underwriting and management fees and selling concessions may
force us to rethink our strategy of seeking to be a co-manager only and
require us to seek to be a lead underwriter, which may be more difficult to
achieve and would result in our having significant additional
responsibilities. These responsibilities include forming and managing
underwriting syndicates, leading underwriters' due diligence examination of
the issuers, taking the lead underwriter's role in the preparation of
prospectuses and other offering materials and developing and coordinating the
marketing efforts for the securities. While we have been assembling an
experienced group of investment bankers and syndicate managers, the ability to
coordinate these efforts and effectively sell an issuer's securities will be
critical to our ability to develop and maintain a reputation as a leading
investment banking firm.
We must receive increased share allotments in underwritten offerings and
improve our telecommunications capacity and infrastructure or our investment
banking business may be seriously affected by customer dissatisfaction.
We have not received in any offering an allotment of shares for sale that
has satisfied our customers' demand. We have experienced a high level of
customer dissatisfaction principally due to our inability to sell to our
customers the number of shares they want to purchase, and, once our e-Dealer
system is operational, the e-Dealers and their customers may be similarly
dissatisfied. We have also experienced customer dissatisfaction due to our
telecommunications system's inability to manage the level of our customer
inquiries and to failures which have temporarily disrupted our Web site
service.
We may incur losses and liabilities in the course of business which could
prove costly to defend or resolve.
Participation in underwritings involves significant economic risks. An
underwriter may incur losses if it is unable to resell the securities it is
committed to purchase or if it is forced to liquidate its commitment at less
than the price at which it purchased the securities from the issuer. In
addition, the trend toward larger commitments on the part of managing
underwriters means that, from time to time, an underwriter may retain
significant position concentrations in individual securities.
Underwriters also face significant legal risks, and the volume and amount of
damages claimed in lawsuits against financial intermediaries are increasing.
These risks include potential liability under federal and state securities and
other laws for allegedly false or misleading statements made in connection
with securities offerings and other transactions. We also face the possibility
that customers or counterparties will claim that we improperly
8
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failed to apprise them of applicable risks or that they were not authorized or
permitted under applicable corporate or regulatory requirements to enter into
transactions with us and that their obligations to us are not enforceable.
These risks often may be difficult to assess or quantify and their existence
and magnitude often remain unknown for substantial periods of time. We may
incur significant legal expenses in defending against litigation. We expect to
be active in the underwriting of initial public offerings and follow-on
offerings of the securities of emerging and mid-size growth companies, which
often involve a high degree of risk and volatility. Substantial legal
liability or a regulatory action against us could have a material adverse
financial effect on us.
Our relationship with Goldman Sachs may make it more difficult for us to
develop or maintain strategic relationships with other investment banking
firms.
Since our inception, we have consistently tried to develop constructive
working relationships with a number of traditional investment banking firms.
In certain cases, these relationships have enabled us to obtain assignments in
public offerings that we might not otherwise have obtained. The Goldman Sachs
investment may make it more difficult for us to develop or maintain
relationships with firms that compete with Goldman Sachs and, as a result, may
make it more difficult for us to obtain assignments in public offerings lead
managed by competitors of Goldman Sachs. In addition, under the terms of our
agreement with Goldman Sachs, if we intend to offer equity securities
representing more than 5% of our shares on a fully diluted basis to any of a
number of designated competitors of Goldman Sachs, Goldman Sachs will have a
first right to purchase all the offered shares on the same terms as offered to
the competitor.
Our agreement with Goldman Sachs is not exclusive and does not prohibit
Goldman Sachs from competing directly or indirectly with us.
Although Goldman Sachs has invested in us, it is not prohibited from
assisting any other broker-dealer involved in online investment banking.
Goldman Sachs is not precluded from competing directly against us. Moreover,
Goldman Sachs will have an observer attend meetings of our Board of Directors
and will have access to our confidential information. Finally, Goldman Sachs
is not required to reserve for us any particular number of shares--or even to
include us--in any public offerings that they lead manage. Our relationship
with Goldman Sachs is very recent and we cannot predict how it will develop or
whether we will receive significant benefits from our association with them.
The failure of our brokerage customers to meet their margin requirements may
cause us to incur significant liabilities.
Our brokerage business, by its nature, is subject to risks related to
defaults by our customers in paying for securities they have agreed to
purchase and deliver securities they have agreed to sell. U.S. Clearing, a
division of Fleet Securities, Inc., provides clearing services to our
brokerage business, including the confirmation, receipt, execution, settlement
and delivery functions involved in securities transactions, as well as the
safekeeping of customers' securities and assets and certain customer record
keeping, data processing and reporting functions. U.S. Clearing makes margin
loans to our customers to purchase securities with funds they borrow from U.S.
Clearing. We must indemnify U.S. Clearing for, among other things, any loss or
expense incurred due to defaults by our customers in failing to repay margin
loans or to maintain adequate collateral for those loans. We are subject to
risks inherent in extending credit, especially during periods of rapidly
declining markets and we are particularly at risk because many of our
customers purchase Internet stocks, the trading prices of which are highly
volatile, leading potentially to higher risk of customer defaults.
Our planned digital trading facility is subject to risks associated with
development, enhancement and proper functioning, and may never meet its
performance expectations.
We intend to invest substantial amounts of time and capital in the launch of
our digital trading facility. This investment is subject to the following
risks:
. Our software is still in the developmental phase, and any delays in
development or problems discovered in the testing of the software could
result in significant delays. We cannot assure you that we will
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<PAGE>
complete development of a product that provides secure and dependable
technology and meets performance expectations. In addition, our technology
will require continual enhancements if we are to maintain a competitive
edge. Accordingly, we will need to make substantial ongoing investments in
software design and development.
. Established markets such as the New York Stock Exchange and the Nasdaq-
Amex Group have announced plans to extend their trading hours, and this
may adversely affect our plans for an after-hours trading facility.
. We cannot assure you that the digital trading facility will attract a
critical mass of trading activity to ensure the liquidity needed for a
viable market.
If we do not become the after-hours digital trading facility of choice for
individual investors, our investment may prove to be of little or no value.
We have not implemented, and may not implement successfully, our goals of
conducting private equity placements over the Internet and creating
profitable Angel Funds.
Our private equity group currently focuses on raising capital from
traditional institutional and venture capital sources and strategic investors.
In the future, we plan to offer private equity to high net worth individuals
through the Internet. This may not be feasible. In particular, this plan faces
the legal uncertainty of determining under applicable securities laws the
degree to which we can leverage the distributive capacity of the Internet in
offering private equity. Our Angel Funds have not yet been established and we
cannot assure you as to how much money we can raise or how quickly we can
raise those funds. Once the first Angel Funds are established, they may not be
successful. Failure of these Angel Funds may impair our ability to establish
additional Angel Funds.
We may not be able to keep up in a cost-effective way with rapid technological
change.
The online financial services industry is characterized by rapid
technological change, changes in customer requirements, frequent new service
and product introductions and enhancements and evolving industry standards.
Our future success will depend, in part, on our ability to develop
technologies and enhance our existing services and products. We must also
develop new services and products that address the increasingly sophisticated
and varied needs of our customers and prospective customers. We must respond
to technological advances and evolving industry standards and practices on a
timely and cost-effective basis. The development and enhancement of services
and products entails significant technical and financial risks. We may not (1)
effectively use new technologies, (2) adapt services and products to evolving
industry standards or (3) develop, introduce and market service and product
enhancements or new services and products. In addition, we may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, and our new service
and product enhancements may not achieve market acceptance. If we encounter
these problems, our business, financial condition and operating results will
be materially adversely affected.
Periods of declining securities prices, inactivity or uncertainty in the
public or private equity markets may adversely affect our revenues.
Our revenues are likely to be lower during periods of declining securities
prices or securities market inactivity in the sectors on which we focus. Our
business is particularly dependent on the public and private equity markets
for companies in the Internet and technology industries. The public markets
have historically experienced significant volatility not only in the number
and size of share offerings, but also in the secondary market trading volume
and prices of newly issued securities. For example, the market for offerings
by companies in the Internet industry has recently experienced significant
activity and volatility. This recent activity may not sustain its current
levels. Activity in the private equity markets frequently reflects the trends
in the public markets. As a result, our revenues from private capital raising
activity may also be adversely affected during periods of declining prices or
inactivity in the public markets. In addition, we may lose customers who have
incurred losses by investing in highly volatile securities of Internet-related
companies.
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The growth in our revenues will depend largely on a significant increase in
the number and size of underwritten transactions by companies in our targeted
industries and by the related increase in secondary market trading for these
companies. Underwriting activity in these industries can decline for a number
of reasons. Such activity may also decrease during periods of market
uncertainty occasioned by concerns over inflation, rising interest rates and
related issues. Disappointments in quarterly performance relative to analysts'
expectations or changes in long-term prospects for an industry can also
adversely affect capital raising activities to a significant degree.
We may not be able to develop and maintain marketing relationships with other
Internet companies, which may adversely affect our business growth.
Our strategy for expanding brand recognition and exposure depends to some
extent on our relationship with other Internet companies. We plan to enter
into marketing agreements with these companies that will permit us to
advertise our products and services on their Web pages. We plan to reach a
larger and broader potential customer base by disseminating our own investment
research and the quote and execution streams for the digital trading facility
on popular Web sites. If we cannot secure or maintain these marketing
agreements on favorable terms, our prospects could be harmed. Additionally,
other online brokers which advertise on popular Web sites may object to and
attempt to undermine our marketing agreements or relationships. If successful,
the efforts of competing brokers could materially and adversely affect our
growth.
We may not be able to protect our intellectual property rights, which may
cause us to incur significant costs.
Our business is dependent on proprietary technology and other intellectual
property rights. We rely primarily on copyright, trade secret and trademark
law to protect our technology. We currently have no patents. We have, however,
filed patent applications covering concepts and technologies integral to the
digital trading facility. These concepts and technologies may not be
patentable. In addition, effective trademark protection may not be available
for our trademarks. Notwithstanding the precautions we have taken, a third
party may copy or otherwise obtain and use our software or other proprietary
information without authorization or may develop similar software
independently. Policing unauthorized use of our technology is difficult,
particularly because the global nature of the Internet makes it difficult to
control the ultimate destination or security of software or other data
transmitted. The laws of other countries may afford us little or no effective
protection of our intellectual property. The steps we have taken may not
prevent misappropriation of our technology or the agreements entered into for
that purpose may not be enforceable. In addition, litigation may be necessary
in the future to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the proprietary rights
of others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversions of resources,
either of which could have a material adverse effect on our business,
financial condition and operating results.
Our success is dependent on our key personnel whom we may not be able to
retain, and we may not be able to hire enough additional qualified personnel
to meet our growing needs.
Our business requires the employment of highly skilled personnel. The
recruitment and retention of experienced investment banking professionals and
proficient technologists are particularly important to our performance and
success. We do not have "key person" life insurance policies on any of our
officers or associates. The loss of the services of any of our key personnel
or the inability to recruit and retain experienced investment banking
professionals and proficient technologists in the future could have a material
adverse effect on our business, financial condition and operating results. Our
chairman and co-chief executive officer was hospitalized for approximately
eight weeks with a stroke in 1994. We expect further growth in the number of
our personnel, particularly if markets remain favorable to investment banking
transactions. Competition for such personnel is intense. Our continued ability
to compete effectively in our business depends on our ability to attract and
retain the quality personnel our operations and development require.
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We may have difficulty effectively managing our growth.
We expect our business to develop rapidly. Our current senior management has
limited experience managing a rapidly growing enterprise and may not be able
to effectively manage our growth.
The intensifying competition we face from both established and recently formed
entities may adversely affect our revenues and profitability.
We encounter intense competition in all aspects of our business, and we
expect this competition to increase. Our principal competitors in connection
with our investment banking activities are traditional investment banking
firms, some of which offer their underwritten securities through the Internet.
We also face competition from recently formed online investment banking
initiatives, such as E*Offering, recently formed by online broker E*Trade in
conjunction with the founder and former chief executive of Robertson Stephens,
Sanford Robertson, or W. R. Hambrecht & Co., recently formed by the founder
and former chief executive of Hambrecht & Quist, William Hambrecht. In the
context of online distributions of public offerings, we are facing growing
competition from brokerage firms such as Charles Schwab, Fidelity Brokerage
Services and E*Trade, among others, which offer equity securities through the
Internet. In our online brokerage business, we encounter direct competition
from discount brokerage firms and online brokerage firms, including Charles
Schwab, Fidelity Brokerage Services, Waterhouse Investor Services and Datek
Online, and from full-service brokerage firms such as Morgan Stanley Dean
Witter, PaineWebber, Donaldson, Lufkin & Jenrette and Merrill Lynch. Most of
these investment banking and brokerage firms have been established for longer
and are far better capitalized and staffed than we are, and have much larger,
established customer bases than we do. See "Business--Competition."
Operational risks may disrupt our business or limit our growth.
Our business is highly dependent on information processing and
telecommunications systems. We face operational risks arising from mistakes
made in the confirmation or settlement of transactions or from transactions
not being properly booked, evaluated or accounted for. Our business is highly
dependent on our ability, and the ability of our clearing firm, to process, on
a daily basis, a large and growing number of transactions across numerous and
diverse markets. Consequently, our clearing firm and we rely heavily on our
respective financial, accounting, telecommunications and other data processing
systems. If any of these systems do not operate properly or are unavailable
due to problems with our physical infrastructure, we could suffer financial
loss, a disruption of our business, liability to clients, regulatory
intervention or reputational damage. In addition, the rapidly increasing level
of telephone and e-mail customer inquiries has at times strained the capacity
of our telecommunications system and our customer service staff. On occasion
we have also experienced temporary disruptions in our Web site service. As a
result, our customers have sometimes been unable to contact us in a timely
manner. The inability of our systems to accommodate an increasing volume of
transactions and customer inquiries could also constrain our ability to expand
our businesses. We are currently upgrading and expanding the capabilities of
our data and telecommunications systems and other operating technology. We
expect that in the future we will need to continue to upgrade and expand our
systems infrastructure. We intend to expand our telecommunications system
capacity in order to better ensure customer satisfaction.
If we fail to comply with applicable laws and regulations, we may face
penalties or other sanctions that may be detrimental to our business.
When enacted, the Securities Act of 1933, which governs the offer and sale
of securities, and the Securities Exchange Act of 1934, which governs, among
other things, the operation of the securities markets and broker-dealers, did
not contemplate the conduct of a securities business through the Internet.
Uncertainty regarding the application of these laws and other regulations to
our business may adversely affect the viability and profitability of our
business. If we fail to comply with an applicable law or regulation,
government regulators and self regulatory organizations may institute
administrative or judicial proceedings against us that could result in
censure, fine, civil penalties (including treble damages in the case of
insider trading violations), the issuance of cease-and-desist orders, the loss
of our status as a broker-dealer, the suspension or disqualification of our
officers or employees or other adverse consequences. The imposition of any
material penalties or orders on us could have a material adverse effect on our
business, operating results and financial condition.
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<PAGE>
If we engage in market-making or proprietary trading activities in the future,
we will face increased risks which could be harmful to our business.
We do not currently engage in market-making or proprietary trading, which is
the buying and selling of securities for our own account. We may, however,
engage in such activities in the future. These activities involve significant
risks, including market, credit, leverage, counterparty and liquidity risks.
We may not be able to secure financing if we need it in the future.
We may require additional financing beyond the proceeds of this offering to
support more rapid expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses or
technologies or respond to unanticipated requirements. We can give investors
no assurance that additional financing will be available when needed on
favorable terms, if at all.
Employee misconduct could harm us and is difficult to detect and deter.
There have been a number of highly publicized cases involving fraud or other
misconduct by employees in the financial services industry in recent years,
and we run the risk that employee misconduct could occur. Misconduct by
employees could include binding us to transactions that exceed authorized
limits or present unacceptable risks, or hiding from us unauthorized or
unsuccessful activities. In either case, this type of conduct could result in
unknown and unmanaged risks or losses. Employee misconduct could also involve
the improper use of confidential information, which could result in regulatory
sanctions and serious reputational harm. It is not always possible to deter
employee misconduct, and the precautions we take to prevent and detect this
activity may not be effective in all cases.
An independent business venture of our co-chief executive officer may present
a potential conflict of interest.
Our co-chief executive officer, Robert Lessin, is the majority owner and a
general partner of DT Advisors, which manages Dawntreader Fund I, a venture
capital fund. This fund invests in developmental stage companies. Such
investments may prove to be in competition with one or more of the Angel Funds
we intend to organize and manage. It is not possible now to determine whether
any such conflict will in fact develop or what steps would be appropriate in
the event such a situation were to arise.
Despite our efforts, our systems as well as those of others may prove not to
be Year 2000 compliant, which could significantly disrupt our business.
We may realize exposure and risk if the systems on which we are dependent to
conduct our operations are not Year 2000 compliant. Because we are largely
dependent on our ability to conduct our operations through the Internet, any
significant disruption of this computer infrastructure caused by the Year 2000
problem could significantly interfere with our business operations. Our
potential areas of exposure include products purchased from third parties,
computers, software, telephone systems and other equipment used internally. If
our present efforts to address Year 2000 compliance issues are not successful,
or if vendors with whom we conduct business do not successfully address such
issues, our business, operating results and financial position could be
materially and adversely affected.
Risks Related to Online Commerce and the Internet
Our long-term success depends on the development of the Internet as a
commercial marketplace, which is uncertain.
The markets for investment banking and brokerage services through the
Internet are at an early stage of development and are rapidly evolving.
Because the markets for our online services are new and evolving, it is
difficult to predict the future growth (if any) and the future size of these
markets. We cannot assure you that the markets for our online services will
continue to develop or become sustainable. A substantial number of our clients
have been Internet related companies. Sales of many of our services and
products will depend upon the
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<PAGE>
acceptance of the Internet as a widely used medium for commerce and
communication. A number of factors could prevent such acceptance, including
the following:
. Electronic commerce is at an early stage and buyers may be unwilling to
shift their purchasing from traditional vendors to online vendors;
. The necessary network infrastructure for substantial growth in usage of
the Internet may not be adequately developed;
. Increased government regulation or taxation may adversely affect the
viability of electronic commerce;
. Insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times or
increased costs; and
. Adverse publicity and consumer concern about the security of electronic
commerce transactions could discourage its acceptance and growth.
Conducting investment banking operations through the Internet involves a new
approach to the securities business. We may have to undertake intensive
marketing and sales efforts to educate prospective clients on the uses and
benefits of our services and products in order to generate demand. For
example, corporate issuers may be reluctant to accept our online underwriting
capabilities.
Questions related to the security of our systems and our ability to transmit
confidential information over the Internet may adversely impact our business.
The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications. We are
potentially vulnerable to attempts by unauthorized computer users to penetrate
our network security. If successful, those individuals could misappropriate
proprietary information or cause interruptions in our online services. We may
be required to expend significant capital and resources to protect against the
threat of such security breaches or to alleviate problems. In addition to
security breaches, inadvertent transmission of computer viruses could expose
us to the risk of disruption of our business, loss and possible liability.
Continued concerns over the security of Internet transactions and the privacy
of its users may also inhibit the growth of the Internet generally as a means
of conducting commercial transactions.
Failure of our encryption technology could compromise the confidentiality of
our customer transactions and adversely affect our business.
We rely upon encryption and authentication technology, including public key
cryptography technology licensed from third parties, to provide the security
and authentication necessary to effect secure transmission of confidential
information over the Internet. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in
a compromise or breach of the procedures we use to protect customer
transaction data. If any such compromise of our security occurs, our business,
financial condition and operating results could be materially adversely
affected.
Risks Related to this Offering
We have broad discretion in how we use the proceeds from this offering.
We intend to use the net proceeds from the sale of the shares of common
stock offered through this prospectus for general corporate purposes.
Accordingly, our management will have significant flexibility in applying the
net proceeds of this offering. The failure of our management to apply such
funds effectively could have a material adverse effect on our business,
results of operations and financial condition. See "Use of Proceeds."
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<PAGE>
Our common stock has never been publicly traded so we cannot predict the
extent to which a market will develop for our common stock or how volatile
that market will be.
Prior to this offering, there has been no market for our common stock. The
initial public offering price of our common stock will be determined by
negotiations between ourselves and Bear Stearns. The price of our common stock
after this offering may fluctuate widely. The reasons for such fluctuations
may include the business community's perception of our prospects and of the
securities and financial services industries in general. Differences between
our actual operating results and those expected by investors and analysts and
changes in analysts' recommendations or projections could also affect the
price of our common stock. Other factors potentially causing volatility in the
price for our common stock may include changes in general economic or market
conditions and broad market fluctuations, particularly those affecting the
prices of the common stocks of companies engaged in commerce through the
Internet. We will apply to include our common stock for quotation on the
Nasdaq National Market. Such inclusion does not, however, guarantee that an
active and liquid trading market for our common stock will develop.
Shares eligible for future sale by our current stockholders may adversely
affect our stock price.
A substantial amount of our common stock, including shares issued upon the
exercise of outstanding options and warrants, will be available for sale in
the public market following the offering. The future sale of these shares by
our current stockholders may adversely affect our stock price. See "Shares
Eligible for Future Sale."
This offering will cause immediate dilution.
Investors in this offering will experience immediate and substantial
dilution in the net tangible book value of $ per share based on an assumed
initial public offering price of $ .
We do not anticipate paying dividends.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future.
Anti-takeover provisions and our right to issue preferred stock could make a
third-party acquisition of us difficult.
Certain provisions of the Delaware General Corporation Law may delay,
discourage or prevent a change in control. These provisions may discourage
bids for our common stock at a premium over the market price and may adversely
affect the market price and the voting and other rights of the holders of our
common stock. In addition, upon consummation of this offering, our governing
documents will provide for a staggered board and authorize the issuance of up
to 30 million shares of preferred stock. Such preferred stock, which will be
issuable without stockholder approval, could grant its holders rights and
powers that would tend to discourage changes in control.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in the prospectus generally. When used
in this prospectus, the words "anticipate," "believe," "expect," "estimate"
and similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of certain factors, including
the risks described in "Risk Factors" and elsewhere in this prospectus.
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USE OF PROCEEDS
Based upon an assumed offering price of $ , we estimate that we will
receive net proceeds from the sale of the shares of common stock offered
through this prospectus (after deducting underwriting discounts and
commissions and estimated offering expenses) of $ million ($ million
if the underwriters exercise their over-allotment option in full).
We intend to use the net proceeds from this offering for general corporate
purposes. While we have not determined specifically how the proceeds will be
applied, we believe they will be required for the development of our business
and to enable us to compete against other investment banking firms with much
larger capital bases than we currently have. The general corporate purposes
for which we expect to use the net proceeds of this offering include expanding
our investment banking staff and our sales and marketing capabilities,
expanding our investment research department, launching our digital trading
facility, working capital requirements and making investments, as appropriate,
in the Angel Funds we plan to establish. A portion of the net proceeds may
possibly be used for proprietary trading in support of our investment banking
business and for strategic acquisitions or investments. The proceeds of this
offering will generally help us cover operating costs, including compensation
for professionals, at a time when our revenues are growing but are not
sufficient to cover our costs. Finally, as we expand our underwriting, trading
and other market activities, we will need to maintain larger capital balances
under applicable regulatory requirements.
The foregoing represents our present intentions based upon our present plans
and business conditions. The occurrence of unforeseen events or changed
business conditions, however, could result in the application of the proceeds
of this offering in a manner other than as described in this prospectus.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. We currently intend to retain
any earnings to finance the expansion and development of our business. Any
future payment of dividends will be made at the discretion of our Board of
Directors based upon conditions then existing, including our earnings,
financial condition and capital requirements as well as such economic and
other conditions as our Board of Directors may deem relevant.
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DILUTION
The net tangible book value of our common stock, including our Class B
common stock, as of March 31, 1999, after giving effect to the sale of shares
of preferred stock to Goldman Sachs as well as the exercise of an aggregate of
4,249,269 stock options by employees and related loans from us as described in
"Certain Transactions--Loans to Officers" subsequent to March 31, 1999 and
conversion of all outstanding preferred stock upon consummation of this
offering, was $71.8 million, or $0.81 per share of common stock. Net tangible
book value per share is equal to our total tangible assets minus total
liabilities divided by the number of shares of common stock, including our
Class B common stock, outstanding. After giving effect to our sale of
shares of common stock offered through this prospectus at the assumed initial
public offering price of $ per share (the mid-point of the filing range),
deducting underwriting discounts and commissions and estimated offering
expenses payable by us, our net tangible book value as adjusted as of March
31, 1999 would have been $ million, or $ per share of common stock.
This represents an immediate increase in net tangible book value as adjusted
of $ per share to existing stockholders, and an immediate dilution in net
tangible book value as adjusted of $ per share to new investors purchasing
shares of common stock in this offering. Dilution is determined by subtracting
pro forma net tangible book value per share after this offering from the
amount of cash paid by a new investor for a share of common stock.
The following table illustrates the dilution per share as described above:
<TABLE>
<S> <C>
Assumed initial public offering price.................................. $
Net tangible book value as of March 31, 1999 (after giving effect to
the sale of shares of preferred stock as well as the exercise of
an aggregate of 4,249,269 stock options by employees and related loans
from us subsequent to March 31, 1999 and conversion of all outstanding
preferred stock upon consummation of this offering)...................
Increase in net tangible book value attributable to new investors......
Pro forma net tangible book value after this offering..................
----
Dilution per share to new investors.................................... $
====
</TABLE>
The following table sets forth on an as adjusted basis, as of March 31,
1999, after giving effect to the sale of shares of preferred stock to Goldman
Sachs as well as the exercise of an aggregate of 4,249,269 stock options by
employees and related loans from us as described in "Certain Transactions--
Loans to Officers" subsequent to March 31, 1999 and conversion of all
outstanding preferred stock upon consummation of this offering, the number of
shares of common stock, including our Class B common stock, previously
purchased from us, the total cash consideration paid and the average price per
share paid by the existing stockholders and by new investors purchasing shares
of common stock in this offering, assuming an initial public offering price of
$ per share:
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Average
------------------- -------------- Price Per
Number Percent Amount Percent Share
------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... % $ % $
New Investors.................
------- --------- ---
------- --------- --- -----
Total......................... 100.0% 100.0%
======= ========= === =====
</TABLE>
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The foregoing tables assume no exercise of the underwriters' over-allotment
option. If the underwriters' over-allotment is exercised in full, the pro
forma net tangible book value per share of common stock, including our Class B
common stock, as of March 31, 1999, as adjusted, would have been $ per
share, which would result in dilution to the new investors of $ per share,
and the number of shares held by the new investors would increase to , or
% of the total number of shares to be outstanding after this offering, and
the number of shares held by the existing stockholders would be shares, or
% of the total number of shares to be outstanding after this offering. As of
April 30, 1999, there were outstanding options and warrants to purchase an
aggregate of 23,522,461 shares of common stock, 5,497,671 of which were then
exercisable, and we had also reserved up to an additional 11,029,381 shares of
common stock for issuance upon the exercise of options which had not yet been
granted under the Stock Incentive Plan. To the extent options or warrants are
exercised, there will be further dilution to new investors.
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CAPITALIZATION
The following table shows our capitalization as of March 31, 1999:
. on an Actual basis;
. on a Pro Forma basis to give effect to: (1) the issuance and sale to
Goldman Sachs of shares of preferred stock subsequent to March 31, 1999
and the receipt of $24.9 million in net proceeds; (2) the exercise of an
aggregate of 4,249,269 stock options by employees and related loans from
us as described in "Certain Transactions--Loans to Officers" subsequent to
March 31, 1999; (3) the increase in the number of authorized shares of
preferred stock; (4) the conversion of all outstanding preferred stock
into common stock and Class B common stock upon consummation of this
offering and (5) the increase in the number of authorized shares of common
stock and the authorization of our Class B common stock; and
. on a Pro Forma As Adjusted basis to reflect the sale of shares of
common stock in this offering (at an assumed offering price of $ ) after
deducting underwriting discounts and commissions and estimated offering
expenses.
This table should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Series A through E Preferred stock, $.01 par
value, 60,000,000 shares authorized,
48,539,018 issued and outstanding, actual;
104,000,000 shares authorized, none issued
and outstanding, pro forma and pro forma as
adjusted................................... 485 -- --
Preferred stock, $.001 par value, none
authorized, issued and outstanding, actual;
30,000,000 shares authorized, none issued
and outstanding, pro forma and pro forma as
adjusted................................... -- -- --
Common stock, $.01 par value, 120,000,000
shares authorized, 18,823,525 issued and
outstanding, actual; 159,000,000 shares
authorized, 72,407,977 issued and
outstanding, pro forma; 159,000,000 shares
authorized, issued and outstanding,
pro forma as adjusted...................... 188 716
Class B common stock, $.01 par value, none
authorized, issued and outstanding, actual;
25,000,000 shares authorized, 16,666,667
issued and outstanding, pro forma and pro
forma as adjusted.......................... -- 167
Additional paid-in capital.................. 74,862 104,695
Notes receivable............................ (9,575) (15,334)
Accumulated deficit......................... (18,460) (18,460)
------- ------- ---
Total stockholders' equity................ 47,500 71,784
------- ------- ---
Total capitalization...................... $47,500 $71,784
======= ======= ===
</TABLE>
This table excludes 15,469,182 shares of common stock issuable upon exercise
of outstanding options and warrants and 8,053,279 shares of Class B common
stock issuable upon exercise of warrants. This table also excludes the 800,000
shares of common stock that are referred to in "Business--Legal Matters" and
the 218,924 shares of Class B common stock subject to additional warrants that
may be issued to Goldman Sachs after September 25, 1999 as described in
"Business--Investment Banking."
19
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data as of December 31, 1996,
1997 and 1998 and as of March 31, 1999 and for the period from March 27, 1996
(inception) to December 31, 1996, for the years ended December 31, 1997 and
1998 and for the three months ended March 31, 1999 have been derived from
audited financial statements included elsewhere in this prospectus. These
financial statements have been audited by Arthur Andersen LLP, independent
public accountants. The following selected financial data as of and for the
three months ended March 31, 1998 are derived from unaudited financial
statements which, in management's opinion, include all adjustments, consisting
of only normally recurring adjustments, necessary for a fair presentation.
Results of the interim periods are not necessarily indicative of results to be
obtained for a full fiscal year. Pro forma per share amounts are computed by
using the weighted average number of shares of common stock outstanding in the
relevant period as adjusted to give effect to the conversion of shares of
preferred stock outstanding during the respective periods. The Pro Forma
column reflects the issuance and sale to Goldman Sachs of shares of preferred
stock and the receipt of $24.9 million in net cash proceeds as well as the
exercise of an aggregate of 4,249,269 stock options by employees and related
loans from us as described in "Certain Transactions--Loans to Officers"
subsequent to March 31, 1999. The Pro Forma As Adjusted column reflects the
sale of shares of common stock in this offering (at an assumed offering
price of $ ) after deducting underwriting discounts and commissions and
estimated offering expenses. Our historical results are not necessarily
indicative of future results. You should read the following selected financial
data together with the financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from March Year Ended Three Months Ended
27, 1996 December 31, March 31,
(Inception) to ---------------------- -----------------------
December 31, 1996 1997 1998 1998 1999
----------------- ---------- ---------- ----------- ----------
(unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Investment banking.... $ -- $ 43 $ 1,515 $ 34 $ 3,122
Brokerage............. -- 10 295 22 434
Interest.............. 31 54 183 20 192
Other................. 10 139 45 -- 155
--------- ---------- ---------- ---------- ----------
Total revenues...... 41 246 2,038 76 3,903
Expenses:
Compensation and
benefits............. 378 1,550 4,444 549 6,558
Marketing............. 326 503 934 231 51
Occupancy............. 42 201 237 42 90
Data processing and
communications....... 50 238 578 150 300
Technology
development.......... 532 511 1,212 51 336
Professional
services............. 283 330 870 94 681
Depreciation and
amortization......... 9 229 897 158 220
Brokerage and
clearance............ 2 6 186 14 261
Other................. 177 (352) 1,440 177 288
--------- ---------- ---------- ---------- ----------
Total expenses...... 1,799 3,216 10,798 1,466 8,785
--------- ---------- ---------- ---------- ----------
Operating Loss........ (1,758) (2,970) (8,760) (1,390) (4,882)
Income tax provision.. 16 23 34 8 18
--------- ---------- ---------- ---------- ----------
Net loss................ $ (1,774) $ (2,993) $ (8,794) $ (1,398) $ (4,900)
========= ========== ========== ========== ==========
Basic and diluted net
loss per share....... (0.23) (0.29) (0.86) (0.14) (0.47)
Weighted averaged
shares outstanding
used in basic and
diluted net loss per
common share
calculation.......... 7,683,096 10,432,876 10,200,176 10,080,136 10,351,270
Pro forma net loss per
share from continuing
operations........... $ (.23) $ (.21) $ (.41) $ (.10) $ (.22)
Shares used in
computing pro forma
basic and diluted net
loss per share....... 7,789,995 14,186,252 21,601,240 14,046,249 22,390,143
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
December 31,
-------------------- Pro Forma
1996 1997 1998 Actual Pro Forma As Adjusted
----- ------ ------- ------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 750 $1,111 $18,110 $41,194 $66,094 $
Working capital......... 490 2,471 17,968 41,902 66,186
Total assets............ 2,655 5,837 22,296 50,292 75,192
Stockholders' equity.... 1,480 4,859 20,608 47,500 71,784
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our financial statements and
the related notes and other financial information included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including but not limited to those listed under "Risk Factors" and included in
other portions of this prospectus.
Overview
Founded in March 1996, we are an Internet investment banking and brokerage
firm. During 1996 and the first nine months of 1997, we engaged in organizing
activities, including the raising of capital to begin our business. We did not
conduct revenue generating activities during this period. During the last
three months of 1997 and the first three months of 1998, we generated only
minimal revenues from our investment banking and brokerage activities. As a
result, comparisons of our results of operations for the three months ended
March 31, 1998 and 1999 and for the years ended December 31, 1996, 1997 and
1998 are not meaningful or indicative of our future operating results. Our
present operations include investment banking and brokerage services, which we
aggregate into one reporting segment. Although revenues are reported by
activity, we do not presently allocate expenses related to the separate
activities.
As an Internet company, we have made a significant investment in our fixed
cost structure, and we will continue to expend substantial resources as we
upgrade our processing capabilities, expand the range of our brokerage
services, complete technical interfaces with our e-Dealers and launch our
digital trading facility. After these initial investments, we expect to
continually maintain and enhance these facilities and technology. As a result
of our investment in automated capabilities and since our customer acquisition
model does not depend on substantial sales and marketing-related costs, we
expect our variable costs in important aspects of our business will be lower
than the variable costs of traditional firms who rely on human brokers and
physical infrastructure, including branch offices.
Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31,
1998 and 1999
Revenues
<TABLE>
<CAPTION>
December 31, March 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
-------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Investment banking.............. $ 0 $43,000 $1,500,000 $ 34,000 $3,100,000
We derive investment banking revenue by underwriting equity offerings,
providing financial advisory services and arranging private equity placements.
Historically, the revenues we generated from underwriting activities were
limited since we received none or negligible portions of the management fees
usually paid to co-managing underwriters and our underwriting and sales
credits reflected our limited allocations of the shares being underwritten.
Recently, we have begun to receive management fees and larger allocations of
the shares in the underwritten offerings in which we are participating. For
financial advisory and private equity placement services, our revenues are
determined as a percentage of the total dollar value associated with the
specific size and type of transaction. In 1998, approximately 36% of this
revenue was generated by one financial advisory assignment in connection with
the sale of a company. For the three months ended March 31, 1999, our
investment banking revenue increased as a result of the continued development
of this business. This revenue came primarily from underwriting equity
offerings and financial advisory services.
<CAPTION>
December 31, March 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
-------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Brokerage....................... $ 0 $10,000 $ 295,000 $ 22,000 $ 434,000
</TABLE>
21
<PAGE>
We also derive revenues from our brokerage operations. We charge a brokerage
commission of $19.95 for limit orders and $14.95 for market orders and earn
execution fees from market makers to whom our customer orders are routed. In
1998, brokerage revenue reflected the increases in the number of our customer
accounts and in customer trading activity. For the three months ended March
31, 1999, our brokerage revenue continued to reflect the increase in the
number of customers accounts which were opened and a corresponding increase in
the number of trades that we executed.
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Interest..................... $ 31,000 $ 34,000 $ 183,000 $ 20,000 $ 192,000
Interest revenue is derived from the investment of cash balances raised
through private financing activities until the funds are used in our business.
The increases in interest revenue reflect the increase in investments our
stockholders made in us.
<CAPTION>
December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Other........................ $ 10,000 $ 139,000 $ 45,000 $ 0 $ 155,000
We had other revenue in 1996 relating to a consulting assignment. In 1997,
we had other revenue consisting of a one-time publishing royalty payment
assigned to us by Mr. Klein. In 1998, we had other revenue consisting of
unrealized gain on an investment. Other revenue for the three months ended
March 31, 1999 was related to an unrealized gain on an equity security
position that we had received as consideration for financial advisory
services.
Expenses
<CAPTION>
December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Compensation................. $378,000 $1,550,000 $4,444,000 $549,000 $6,558,000
Compensation consists of salaries, bonuses and benefits we pay or give to
our employees. In addition to their base salaries, our investment bankers and
other personnel are entitled to incentive compensation consisting of up to 40%
of the revenues generated in each investment banking transaction after
deducting certain deal-related expenses. The increases in compensation expense
reflect the increases in the number of our employees. We had 9, 25 and 66
employees, respectively, at December 31, 1996, 1997 and 1998 and 111 employees
at March 31, 1999. We hired new employees and members of management in all
areas of our business including investment banking and research. As we hire
more investment banking professionals and participate in more transactions, we
expect our compensation expense to grow significantly. In February 1999, we
entered into employment contracts with several professionals which entitled
them to a total of $5.5 million in up front payments. We recognized
compensation expense of $2.6 million related to those portions of the amount
paid for which no future services by the employees are required.
<CAPTION>
December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Marketing.................... $326,000 $ 503,000 $ 934,000 $231,000 $51,000
</TABLE>
Our marketing expenses are associated with promoting our investment banking
business and acquiring new brokerage customers. The increases in our marketing
expense during 1997 and 1998 reflect our increasing efforts to develop our
name brand recognition. Although our marketing expenses during the first
quarter of 1999 were less than in the prior year period, we expect these
expenses to increase significantly in connection with marketing our growing
investment banking capabilities and with the planned roll-out of our digital
trading facility. In 1997 and 1998, we used $750,000 of media credits we had
previously purchased. Our marketing expense decreased from the three months
ended March 31, 1998 to the three months ended March 31, 1999 as we have
focused on acquiring customers simply by offering access to initial public
offerings.
22
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Occupancy........................... $ 42,000 $201,000 $ 237,000 $ 42,000 $90,000
Our occupancy expense includes costs related to our leasing of office space
in New York and San Francisco. The increases in occupancy expense reflect our
growth and need for expanded office facilities. In 1998, we opened our San
Francisco investment banking office. We leased an additional floor in our New
York office during the three months ended March 31, 1999. We expect these
costs to increase as we grow.
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Data processing and communications.. $ 50,000 $238,000 $ 578,000 $150,000 $300,000
Our data processing and communications expense reflects the costs of our
communications equipment and our brokerage operations. The increases in data
processing and communications expense are attributable to an increased number
of customer accounts and trades executed by our customers, as these costs
relate primarily to trade processing and clearance, and communication with our
customers.
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Technology.......................... $ 532,000 $511,000 $1,212,000 $ 51,000 $336,000
Our technology expense includes the costs related to the operation of our
online underwriting and brokerage system and the development of our digital
trading facility. Technology expense was reduced between 1996 and 1997 as we
focused on launching our investment banking operations in 1997. In 1998, our
technology expense reflected the development of our systems and increased
commitment to the digital trading facility. We expect technology costs to
increase with our growth and the roll-out of our digital trading facility. For
the three months ended March 31, 1999, technology expense reflected the
continuing development of our digital trading facility and enhancement of our
Web site and current technology cababilities. We currently estimate that we
will spend up to an additional $1.5 million in 1999 for the technical
development of our digital trading facility.
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Professional services............... $ 283,000 $330,000 $ 870,000 $ 94,000 $681,000
Our professional services expense encompasses legal, accounting, recruiting
and consulting fees associated with all aspects of our business. The increase
in professional services expense from 1996 to 1997 reflected the ordinary
growth of our business. In 1998, our need for professional services increased
due to the expansion of our investment banking operations and the development
of our digital trading facility. For the three months ended March 31, 1999, we
incurred significant professional recruiting expenses.
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Depreciation and amortization....... $ 9,000 $229,000 $ 897,000 $158,000 $220,000
Depreciation and amortization consists primarily of depreciation of property
and equipment and amortization of intangible assets related to software
acquisitions. The increases in depreciation and amortization reflected the
increased investments we made in our equipment and the expansion of our
facilities.
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Brokerage and clearance............. $ 2,000 $ 6,000 $ 186,000 $ 14,000 $261,000
</TABLE>
23
<PAGE>
Brokerage and clearing expense consists mainly of fees paid to our clearing
agent. The increases in our brokerage and clearance expense reflect the growth
of our brokerage operations.
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ -----------------
1996 1997 1998 1998 1999
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Other.......................... $177,000 $(352,000) $1,440,000 $177,000 $288,000
</TABLE>
Other expenses include travel, entertainment and other administrative
expenses. In 1997, other expenses included a credit of $750,000 to reflect a
repurchase of our common stock and a corresponding reduction of other expenses
(see note 5 to our consolidated financial statements). The increase in other
expenses in 1998 includes write-downs of $782,000 related to media credits we
had previously acquired but which we, in view of a revised marketing strategy
in 1998, decided not to use. In 1998 and through the first quarter of 1999, we
experienced an increase in travel and entertainment expenses related to
expanding our business and an increase in administrative expenses.
Liquidity And Capital Resources
Historically, we have satisfied our cash requirements primarily through
private placements of convertible preferred stock and common stock. As of
March 31, 1999, we had $41.2 million in cash and cash equivalents. After
giving effect to the sale of preferred stock to Goldman Sachs, we had $66.1
million in cash and cash equivalents. We believe that the cash proceeds from
this offering, together with our existing cash balances, will be sufficient to
meet anticipated cash requirements for at least the twelve months following
the date of this prospectus. We may, nonetheless, seek additional financing to
support our activities during the next twelve months or thereafter. There can
be no assurance, however, that additional capital will be available to us on
reasonable terms, if at all, when needed or desired.
Net cash used in operating activities was $1.7 million for the three months
ended March 31, 1998 and $8.1 million for the three months ended March 31,
1999. Net cash used in operating activities was $6.8 million for 1998 and $3.9
million for 1997. Cash used in operating activities for 1998 resulted
primarily from a net loss of $8.8 million and a net increase in operating
liabilities of $720,000 and a net increase in operating assets of $1.1
million, offset by depreciation and amortization of $897,000 and non-cash
expenses of $1.5 million. Cash used in operating activities in 1997 was
primarily attributable to a net loss of $3.0 million, plus non-cash expense
reimbursement of $750,000.
Net cash used in investing activities for the three months ended March 31,
1998 was $31,000 and for the three months ended March 31, 1999 was $543,000.
Net cash used in investing activities for 1998 of $558,000 was primarily
attributable to purchases of fixed assets. Net cash used in investing
activities of $828,000 for 1997 was attributable to $240,000 used for the
purchase of fixed assets and $588,000 used in computer software development.
Net cash provided by financing activities was $1.3 million for the three
months ended March 31, 1998 and $31.8 million for the three months ended March
31, 1999. Net cash provided by financing activities was $24.3 million for 1998
and primarily consisted of proceeds from the issuance of preferred stock. Net
cash provided by financing activities was $5.1 million for 1997 and primarily
consisted of proceeds from the issuance of preferred stock. Net cash provided
by financing activities after December 31, 1998 was $31.8 million and
consisted entirely of net proceeds from the issuance of preferred stock.
Year 2000
The Year 2000 issue involves the potential for system and processing
failures of date-related data resulting from computer-controlled systems using
two digits rather than four to define the applicable year. For example,
computer programs that contain time-sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. This
could result in system failure or miscalculations causing disruptions of our
operations, including, among other things, a temporary inability to process
transactions in connection with our investment banking and brokerage
activities.
24
<PAGE>
Because we are dependent, to a very substantial degree, upon the proper
functioning of computer systems, the failure of any computer system to be Year
2000 compliant could materially adversely affect us. Failure of this kind
could, for example, cause settlement of trades to fail, lead to incomplete or
inaccurate accounting, recording or processing of trades in securities, result
in generation of erroneous results or give rise to uncertainty about our
exposure to trading risks and our need for liquidity. If not remedied,
potential risks include business interruption or shutdown, financial loss,
regulatory actions, reputational harm and legal liability.
We have formed a committee, the Y2K steering committee, to investigate and
resolve Year 2000 compliance issues. This committee's mandate is to guide and
coordinate the efforts of the various core business units which are working on
Year 2000 compliance and to manage the assessment, planning, testing and
implementation of Year 2000 compliant systems for the entire company. The Y2K
steering committee created a process for developing an inventory of all
information systems we use. The inventory included all internal and external
systems that were mission critical. To determine whether a mission critical
system posed a potential problem for us, we:
.interviewed vendors;
.analyzed the system with testing software;
.interviewed programmers and developers; and
.reviewed program code.
During the planning stage of the project, we received additional investments
from stockholders which, among other things, permitted us to accelerate our
replacement strategy. Information systems originally in need of remediation
for Year 2000 compliance have or will be replaced. These include:
.telephone switch and all related instruments;
.internal LAN and router environment;
.internal hosted Web site; and
.our servers.
We have completed our internal information technology and non-information
technology assessment, and we believe that our internal software and hardware
systems will function properly with respect to dates in the year 2000 and
thereafter.
In addition, we depend upon the proper functioning of third-party computer
and non-information technology systems. These parties include depositories,
clearing agencies, clearing houses, commercial banks and other vendors. We
have contacted every material vendor with whom we have important financial or
operational relationships to determine the extent to which they are vulnerable
to the Year 2000 issue. We have carefully assessed the responses to the Year
2000 questions we asked these vendors. Each vendor has participated in
and passed the Year 2000 compliance tests formulated by the Securities
Industry Association. These vendors have also provided us written
documentation that they are Year 2000 compliant and confirmed that they have
passed the SIA sponsored industry test. Since we do not require unique
services from any of these vendors, we
believe the SIA testing indicates general Year 2000 compliance. In the event
any of these vendors prove not to be Year 2000 compliant, we believe that we
could find a replacement vendor who is Year 2000 compliant, although not
without significant expense or delay. However, based on management's current
information, we expect to incur no significant costs in the future for Year
2000 problems.
Our management's worst case scenario in connection with Year 2000 issues is
that there will be a failure on the part of one or more of our important
vendors and that we will experience difficulties in finding replacement
vendors. If these vendors are not Year 2000 compliant, despite their internal
and external testing, we, as well as many of their other clients, will face
system and processing failures until these issues can be resolved. We plan to
complete our contingency plan by June 30, 1999. Additionally, any Year 2000
problems experienced by our advertising customers could affect the placement
of advertisements on our online services.
25
<PAGE>
Disruption or suspension of activity in the world's financial markets is
also possible. In addition, uncertainty about the success of remediation
efforts generally may cause many market participants to reduce the level of
their market activities temporarily as they assess the effectiveness of these
efforts during a "phase-in" period beginning in late 1999 and early 2000. This
in turn could result in a general reduction in trading and other market
activities (and lost revenues) as well as reduced funding availability in late
1999 and early 2000. We cannot predict the impact that such reduction would
have on our business.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP
98-1 provided guidance over accounting for computer software developed or
obtained for internal use including the requirement to capitalize specified
costs and amortization of such costs. We do not expect the adoption of this
standard to have a material effect on our capitalization policy.
26
<PAGE>
BUSINESS
Our business comprises Internet investment banking and online brokerage. We
are also developing a Web-based after-hours digital trading facility and, in
the future, we intend to create and manage proprietary Angel Funds primarily
for high net worth individuals.
Investment Banking
Our Internet investment banking services are divided into three revenue
generating categories: public underwriting, financial advisory services and
private equity. We also produce investment research which we believe will
enable us to win investment banking mandates, increase our underwriting share
allocations and provide beneficial information to our individual customers. In
the future, we may engage in proprietary trading to support our investment
banking activities.
Our investment banking activities focus on the Internet sector and, more
generally, on issuers seeking to market their stock offerings to online
investors. Beginning recently, we are focusing as well on other rapidly
growing sectors of the economy that are related to or dependent on Internet
technology.
We believe the Internet will open the equity markets to individual investors
and thereby change the model of capital formation that exists today. In
particular, we believe that the Internet presents the opportunity to align the
interests of individual investors and corporate issuers by making public
offering materials and investment research available to individuals on a
timely basis and by providing individual investors the opportunity to purchase
new issue shares at the offering price. Traditionally, major underwriters have
presented public offerings primarily to select institutional purchasers who,
as a result, have played a dominant role in pricing new issues. Individual
investors, who account for approximately 43% of direct ownership of publicly
traded equity securities, have been largely excluded from these offerings. We
believe that a primary reason for this is the extensive human effort and cost
required to market equity offerings with printed prospectuses and to monitor
and confirm the interest of numerous individuals by person-to-person
communication. By marketing public offerings to individual investors
electronically, we believe underwriters and corporate issuers will be able to
access efficiently the retail market and will have at hand instantaneous
information as to the level of retail interest for their equity offerings.
Information about individual investor interest in public offerings will also
provide valuable indications of secondary market demand for the underwritten
securities, which can be an important factor in pricing the equity securities
of first time issuers.
As the Internet rapidly becomes a critical medium for collecting and
exchanging information and conducting commerce for nearly all businesses, we
believe that corporate clients will gravitate towards those investment banking
firms that leverage their knowledge and expertise about the Internet. The
speed of this development is driven by the Internet's power to reduce costs
related to the sale and delivery of traditionally provided goods and services
and by its capacity to support new forms of business-to-business, business-to-
consumer and consumer-to-consumer relationships. It is also driven by the
increasing awareness of, and the relatively inexpensive access to, the
Internet by individuals. According to Jupiter Communications, the percentage
of households in the United States using the Internet grew from 9.7% in 1994
to 34.2% in 1998.
We have built a team of forty-six investment banking and research
professionals with broad abilities to perform traditional investment banking
functions such as deal selection and origination, due diligence, valuation,
deal structuring and prospectus preparation. Our investment bankers, executive
officers and investors have strong relationships with corporate issuers,
venture capitalists and other influential persons and entities in the
financial services sector. In addition, our senior investment banking and
research professionals have a strong history of working with Internet
companies and developing Internet strategies and businesses. Our chairman and
co-chief executive officer, Robert H. Lessin, was previously a vice chairman
at Salomon Smith Barney and was head of investment banking at Smith Barney
prior to its merger with Salomon Brothers. Prior to that, he was vice
27
<PAGE>
chairman of the investment banking operating committee at Morgan Stanley. Our
director of research, Jonathan Cohen, was previously Merrill Lynch's senior
Internet analyst and for each of the last three years was named to
Institutional Investor's "All American Research Team" for the Internet sector.
Other senior banking personnel also have significant business generating
capabilities and investment banking experience in the Internet sector.
Public Underwriting
We have pioneered the business of online retail distribution of shares in
public offerings. As a result, we have benefited from publicity and word of
mouth exposure which we believe has established Wit Capital as a leading
provider of online investment banking services. Since commencing operations in
September 1997, we have participated in seventy public equity offerings,
including fifty-five initial public offerings, lead managed by established
investment banking firms, including BancBoston Robertson Stephens, Bear
Stearns, BT Alex. Brown, Donaldson Lufkin & Jenrette, Goldman Sachs, Hambrecht
& Quist, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon
Smith Barney and Schroders. As of April 30, 1999, we were participating in
thirteen public offerings that are in registration, including this offering.
The following list reflects the public offerings in which we have played or
are playing a sufficiently significant role such that our name has appeared or
will appear on the cover of the prospectus. In such circumstances, we
characterize our role as e-Manager, a term for which we have a pending
trademark application.
<TABLE>
<CAPTION>
Issuer Lead Manager Date
------ ------------ ----
<S> <C> <C>
EarthWeb Inc. J.P. Morgan & Co. November 10, 1998
MarketWatch.com, Inc. BT Alex. Brown and January 15, 1999
Donaldson, Lufkin & Jenrette
VerticalNet, Inc. Lehman Brothers February 10, 1999
Prodigy Communications
Corporation Bear, Stearns & Co. Inc. February 10, 1999
iVillage Inc. Goldman, Sachs & Co. March 18, 1999
MiningCo.com, Inc. Bear, Stearns & Co. Inc. March 23, 1999
OneMain.com, Inc. BT Alex. Brown March 24, 1999
Globix Corporation Donaldson, Lufkin & Jenrette March 22, 1999
Network Appliance, Inc. Lehman Brothers March 31, 1999
PLX Technology, Inc. Merrill Lynch & Co. April 5, 1999
XOOM.com, Inc. Bear, Stearns & Co. Inc. April 8, 1999
iTurf Inc. BT Alex. Brown and Hambrecht & Quist April 8, 1999
Net Perceptions, Inc. BancBoston Robertson Stephens April 22, 1999
SoftNet Systems, Inc. BT Alex. Brown April 22, 1999
Mpath Interactive, Inc. BancBoston Robertson Stephens April 28, 1999
AppliedTheory Corpora-
tion Bear, Stearns & Co. Inc. April 30, 1999
Audible, Inc. Credit Suisse First Boston In Registration
barnesandnoble.com inc. Goldman, Sachs & Co. and
Merrill Lynch & Co. In Registration
CAIS Internet, Inc. Bear, Stearns & Co. Inc. In Registration
drkoop.com, Inc. Bear, Stearns & Co. Inc. In Registration
EarthWeb Inc. J.P. Morgan & Co. In Registration
Flycast Communications
Corporation BT Alex. Brown In Registration
Mail.com, Inc. Salomon Smith Barney In Registration
MyPoints.com, Inc. BancBoston Robertson Stephens In Registration
theglobe.com, inc. Bear, Stearns & Co. Inc. In Registration
US SEARCH Corp.com Bear, Stearns & Co. Inc. In Registration
Viant Corporation Goldman, Sachs & Co. In Registration
WatchGuard Technologies, Dain Rauscher Wessels
Inc. In Registration
</TABLE>
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In every transaction, we accept underwriting risks and liabilities in the
same manner as do traditional investment banking firms, and we perform the
requisite services, such as assisting in deal structure, due diligence and
prospectus preparation. In contrast to the way securities are offered and sold
by traditional underwriters, however, we offer and sell shares to individual
investors on a first-come, first-served basis. For certain issuers, we also
facilitate special or affinity distributions to online investors having some
existing relationship with the issuer, such as their customers, suppliers and
employees.
We maintain direct access to individual investors who have accounts with us
or who are active members on our electronic mailing list. In addition, we
expect to be able to offer and sell shares to a substantial number of online
investors through exclusive e-Dealer agreements entered into with twenty-two
online discount brokerage firms. These firms include Quick & Reilly,
SureTrade, Waterhouse Investor Services, National Discount Brokers, Datek
Online, Southwest Securities and Wall Street Access. In the aggregate, we
believe these e-Dealers handled approximately 29% of the total number of
online brokerage trades in the fourth quarter of 1998. The e-Dealer agreements
give us the exclusive right to offer the e-Dealers participation as selected
dealers in any public offering in which retail orders from more than one
broker-dealer are aggregated in a central electronic order book. The e-Dealer
agreements do not obligate the e-Dealers to accept our invitation to
participate in any of these offerings. All but two of these agreements have
remaining terms of two to three years; those two agreements expire in August
2000. The exclusivity provisions of the e-Dealer agreements may be terminated
before the end of their respective terms if we are unable to provide specified
share allocations in public offerings or a specified number of offers to
participate in public offerings, and, at the time, we are not the leading
facilitator of online distribution through an electronic network of dealers.
The e-Dealers are in various stages of developing the technical capacity and
interfaces that will enable them to participate in our offerings. See "Risk
Factors." In public offerings in the future, if and when such technical
capacity and interfaces are established, where we act as e-Manager of the
offering, we intend to invite the customers of the e-Dealers, together with
our direct customers, to purchase shares in such public offerings on a first-
come, first-served basis without regard to which brokerage firm has the
investor's account. We expect to share with the e-Dealers selling concessions
from the shares sold to their customers.
We have developed an automated Web-based system to handle securities
offerings. This automated system includes basic brokerage functions through
which investors can view offering documents and enter orders to purchase
securities as well as automated procedures to test, prior to each sale, for
customer suitability (to manage regulatory obligations) and for customer
buying power (to manage risk). The system assists our policy of discouraging
"flipping" of securities. Flipping generally refers to buying shares in an
initial public offering and selling them immediately for a profit. By tracking
our customers' holding and sale of underwritten securities they purchase from
us, our system assists our policy of discouraging our customers' selling of
these securities before 60 days have elapsed. Customers who flip lose priority
to customers who have not flipped in our first-come, first-served selling
process. The system also includes a fully automated electronic order book. We
are developing enhancements to our system, including interfaces and database
management tools, that will enable multiple e-Dealers to send orders to, and
view, modify or cancel orders in, our electronic order book.
Our basic procedures for offering and selling shares to individual investors
in public offerings are as follows:
. The printed preliminary prospectus is finalized and the traditional
roadshow commences.
. We place a digital version of the preliminary prospectus on the Web.
. We send by electronic mail an alert notifying our direct customers and
persons on our e-mail list and, once the e-Dealers are able to
participate, the e-Dealer customers, that a new issue is available. In
some cases, we also send an electronic mail alert to online investors
having an affinity relationship with the issuer.
. Each alert contains a link to the digital version of the preliminary
prospectus.
. Investors interested in the offering are invited by the alert to click on
a hyperlink that takes them directly to the preliminary prospectus. At
this point, investors must submit their e-mail address to gain access to
the preliminary prospectus.
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<PAGE>
. Before placing a conditional offer, investors must open a brokerage
account with us if they do not already have one with us or with one of the
e-Dealers if and when the e-Dealer network becomes operational. Investors
interested in purchasing shares then click to a Web page where they can
place a conditional offer.
. The conditional offers flow through automated brokerage systems to ensure
regulatory compliance and protect against credit risks.
. Validated offers are routed to our electronic order book, where they are
time and date stamped to ensure the integrity of our first-come, first-
served process.
. When the SEC declares the registration statement containing the
prospectus effective, we then obtain affirmative confirmation of each
investor's conditional offer by again sending an e-mail notice with a
hyperlink to a Web page.
. After pricing, the lead underwriter determines the number of shares
allocated for us to sell. We then allocate those shares on a first-come,
first-served basis to investors who have confirmed offers in our
electronic order book, subject to minimum and maximum amounts per
customer. Affinity group allocations are made separately.
. Finally, we confirm each customer's purchase through electronic mail.
We offer issuers contemplating public offerings several capabilities:
. We provide broad dissemination of offerings to online individual
investors, which should result in more demand for shares once they are
publicly traded. For retail-oriented issuers, such broad dissemination
should also result in increased customer awareness for the issuer's
products or services.
. We broaden the investor demand for the issuer's shares by providing a
timely and cost-effective way to access groups having an affinity
relationship with the issuer, such as customers, suppliers or employees.
. We are able to deliver and analyze data about the retail demand for a
proposed offering by collecting conditional offers from online individual
investors in our central electronic order book. This should enable issuers
to negotiate more appropriate prices for their shares as compared to
prices negotiated primarily on the basis of data about institutional
investor interest.
. We offer broad online dissemination to individuals of investment
research, which should result in more interest in and recognition of the
issuer among individual investors in the secondary market.
Although we believe recent transactions demonstrate our ability to win
mandates to facilitate Internet distribution, we have not yet been compensated
fully as a co-manager. We have earned only a negligible share of the
management fee or no management fee at all. Moreover, we have not received
large enough share allocations to satisfy our customers' demand. We believe
that our ability to create and broadly disseminate high quality investment
research will be an important factor in obtaining more significant share
allocations and earning full compensation as co-managers. In addition, while
we do not intend to engage in market making as a separate line of business, we
are considering engaging in limited proprietary trading, that is, the buying
and selling of securities for our own account, to the extent we conclude that
having such a trading capacity will enhance our ability to obtain investment
banking assignments.
We currently focus on originating public offerings of common stock. In the
future, we intend to explore opportunities to extend our investment banking
services to include preferred stock, convertible securities and other debt and
debt-related securities that we believe will appeal to individual investors.
Financial Advisory Services
In addition to our capital raising services, we also advise corporate
clients in connection with developing Internet strategies and businesses and
with mergers and acquisitions. These activities complement our public and
private equity businesses and allow us to offer a mix of investment banking
services to our clients during the course of their development. Senior members
of our management have had advisory relationships with a number of
corporations that are now clients or potential clients.
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Private Equity
We have a private equity group that assists private and public corporate
issuers, as well as investment funds, in raising private capital. The private
equity group is focused on raising equity capital from traditional
institutional and venture capital sources and strategic investors. In these
activities, the private equity group uses the Internet to reduce transaction
costs for the clients and investors. In the future, we plan to offer private
equity to high net worth individual investors online. We may also market to
the same individuals our Angel Funds, which will themselves make investments
on a private placement basis.
Private placements cannot be offered through general solicitation, and thus
our private equity group will not be able to fully leverage the mass
communication potential of the Internet. On the other hand, since private
equity transactions are generally subject to less stringent regulations
regarding the form and content of marketing materials, the private equity
group has greater latitude to use online marketing materials and other means
of efficient dissemination of information as compared to public underwriting
practices.
Investment Research
Our newly formed research department will initially provide investment
research on the Internet industry and Internet companies. To support our
investment banking activities, we intend to extend our research coverage into
other fast growing sectors of the economy that are related to or dependent on
Internet technology, including hardware, software, consumer goods,
telecommunications, education, and healthcare and to issuers who are seeking
access to the online investor base. Building our research capability will
require a substantial investment in qualified personnel. However, we believe
that investment research will enable us to win investment banking mandates,
increase our underwriting share allocations and provide beneficial information
to our individual investor customers.
Recently we hired Jonathan Cohen to become our director of research. Mr.
Cohen is now building a team of junior and mid-level research analysts to work
with him. We have also recently hired a senior editor from BusinessWeek to
design and execute a plan for creating a research platform that uses the
interactive capabilities of the Internet and also speaks to individual
investors in a manner more comprehensible as compared to traditional
investment research.
In contrast to established research practices--where high quality research
is closely held and shared only with a brokerage firm's favored clients--we
intend to disseminate our research for free on our Web site to our customers
and to customers of our e-dealers through their Web sites. We also plan to
disseminate our research through syndication arrangements with other Web
content and portal companies. We will not charge customers, brokerage firms or
Web content or portal sites for our research. We believe that this strategy
will enable us to build brand recognition and exposure rapidly, without the
cost of advertising or marketing. Our e-Dealer relationships are expected to
ensure a broad platform for the dissemination of our research product.
Recent Investment by Goldman Sachs
Goldman Sachs and we have agreed to work together to solicit investment
banking assignments when we both agree that such efforts will be mutually
commercially beneficial. In addition, Goldman Sachs has agreed to support our
participation in public offerings of equity securities when we both agree that
such participation will be similarly beneficial. Goldman Sachs also has
agreed, under certain circumstances, to support us as an investment banking
firm to handle sales of underwritten shares to groups having a preexisting, or
affinity, relationship with the issuer in connection with any public offering
which they lead manage.
We believe our relationship with Goldman Sachs will provide us important
strategic advantages for our investment banking business, including valuable
access to new prospective clients and to large and desirable public offerings
and other transactions and assignments. We further believe our relationship
will enhance our efforts to diversify and expand our investment banking
capabilities beyond our initial Internet focus. Additionally, we expect our
relationship to give us increased acceptance and stature in the investment
banking
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<PAGE>
community and with corporate clients. Our relationship with Goldman Sachs may,
however, make it more difficult for us to develop or maintain relationships
with other investment banking firms. See "Risk Factors."
On April 9, 1999, we issued 16,666,667 shares of Series E Preferred Stock
for a purchase price of $25 million. Goldman Sachs also received 8,053,279
warrants to purchase Series E Preferred Stock. The warrants may be exercised
beginning in October 2000 at an exercise price equal to the average of $1.50
and the price of this offering. Upon consummation of this offering, shares of
Series E Preferred Stock will convert automatically into an equal number of
shares of Class B common stock and the warrants, when exercisable, will be
exercisable for Class B common stock. In addition, Goldman Sachs has the right
to receive up to an additional 218,924 warrants to purchase Class B common
stock depending upon the resolution of the dispute referred to in "--Legal
Matters."
Brokerage
We offer to our direct customers brokerage services such as stock and option
trading, access to more than 3,800 mutual funds, portfolio tracking and record
management as well as cash management services and market information. These
services are provided through the Internet and touch-tone telephone access.
Our ordinary commission rates are $14.95 for market orders and $19.95 for
limit orders. As part of brokerage services, we provide news and other
information services through arrangements with third-party vendors, including
CBS Marketwatch, Big Charts, Zacks, Briefing.com, Free Edgar, Hoovers, IPO
Monitor, Individual Investor, Moneyclub.com, Wired News and Red Herring. As of
April 30, 1999, we had approximately 41,000 customer accounts. As of March 31,
1999, we had approximately 26,000 customer accounts, compared to 10,800 on
December 31, 1998, 7,800 on September 30, 1998, 5,300 on June 30, 1998 and
3,100 on March 31, 1998. The daily average number of secondary market trades
our customers executed through us during April 1999 was 926. The daily average
number of secondary market trades our customers executed through us during the
three-month period ending March 31, 1999 was 405, compared to 106 for the
three-month period ended December 31, 1998, 45 for the three-month period
ended September 30, 1998, 25 for the three-month period ended June 30, 1998
and 12 for the three-month period ended March 31, 1998.
Customer Service and Compliance. We are making a substantial commitment to
provide a high quality of customer service through our call center. We are
expanding our telephone system capacity and additional aspects of our
infrastructure. We are increasing the number of operators in our call center
and the amount of office space they occupy, and we have hired additional
management to supervise our call center. We are also expanding the hours of
operation of our call center in order to better ensure the satisfaction of our
customers. In addition, we are making a substantial investment to ensure that
our operations are adequately structured and supervised to be in compliance
with applicable regulations. The rapidly increasing level of telephone and e-
mail inquiries at times has strained the capacity of our telecommunications
system and our customer service staff. In addition, on occasion we have
experienced temporary disruptions in our Web site service. As a result, our
customers have sometimes been unable to contact us in a timely manner.
Clearing and Settlement. U.S. Clearing, a division of Fleet Securities,
Inc., clears our customer transactions on a fully-disclosed basis. U.S.
Clearing is a registered broker-dealer that provides clearing services to over
300 brokerage firms. Its services for our customers include the confirmation,
receipt, execution, settlement and delivery functions involved in securities
transactions, as well as safekeeping of customers' securities and assets and
certain customer record keeping, data processing and reporting functions. We
are also increasing our trade processing capabilities to better facilitate the
clearing of trades we execute for our customers.
Under our agreement with U.S. Clearing, we pay clearing and execution fees
according to a schedule. In addition, the agreement requires U.S. Clearing to
share with us execution revenues and interest revenue earned in connection
with margin and stock borrowing balances kept by our customers and also
provide us a fee on balances maintained by these customers with selected money
market funds. We must indemnify U.S. Clearing for, among other things, any
loss or expense due to the failure of customers to: (1) pay for securities
purchased by them, (2) promptly deliver securities sold by them, (3) deposit
sufficient collateral to support their borrowing when requested by U.S.
Clearing and (4) remit excessive disbursements of funds or any other valid
charges imposed by U.S. Clearing.
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Digital Trading Facility
We are developing an after-hours Web-based digital trading facility in which
our customers and customers of other participating brokers will be able to
trade Nasdaq and exchange listed securities directly with each other outside
of regular market hours. Through this facility, investors will be able to post
orders to a public limit order book accessible by all other participants in
the facility. Investors can then accept orders posted by others in the limit
order book.
We plan to offer the after-hours digital trading facility later in 1999. To
successfully launch our digital trading facility, we need to complete the core
technology, provide a sound operational environment, secure the participation
of a sufficient number of broker-dealers and complete arrangements for
marketing the facility through Web content and portal companies and otherwise.
We can make no assurances that we will accomplish all required steps in a
timely and cost-effective manner. See "Risk Factors."
We will offer direct access to the digital trading facility to our
customers. In addition, by collaborating with brokerage firms, we plan to
offer access to the digital trading facility to their customers as well.
However, we have no agreements as of yet with any brokerage firms to this
effect. We expect that participating brokerage firms will provide credit in
support of their customers' trades in the digital trading facility as well as
clearing and settlement services. We will provide these firms access to the
proprietary technology and trading interfaces that we have developed. Trades
executed for our direct brokerage customers will be cleared and settled by our
regular clearing firm, U.S. Clearing.
We intend to promote the digital trading facility by disseminating quote and
execution data through arrangements with Web portal and other online media
companies. We do not, however, have arrangements in place with any of these
companies at this time. We expect the digital trading facility to generate per
share execution fees for us as well as revenues from advertising and
sponsorship.
In developing and launching our digital trading facility, we are making
substantial investments. These investments may not prove sufficient to produce
a successful digital trading facility. In particular, we may not be able to
attract enough activity to the trading facility to produce meaningful
liquidity, which means investors may not find buyers or sellers when they seek
to trade. In addition, if there is limited activity in the system for a
particular stock, investors may encounter spreads between bid and ask prices
in our system that are wider than the bid and ask spreads generally maintained
in the day market for the same stock.
Angel Funds
We plan to develop a series of Web-based investment funds designed primarily
for venture capital investing by high net worth individuals. Our funds, which
we plan to call Angel Funds after the term commonly used to define seasoned
business people who invest in early stage private companies, will allow high
net worth individual investors to pool their resources and thus get access to
a quality of deal flow currently available nearly exclusively for proprietary
funds backed by large institutions. Although we plan to market our Angel Funds
primarily to individuals, we may also solicit the participation of
institutional investors.
We also intend to use Internet tools such as electronic mail, bulletin
boards and chat rooms to facilitate on-going relationships between the fund
managers and investors in the funds. This will enable the fund managers to
provide portfolio companies with the collective contacts, experiences and
advice of a wide range of interested parties. Through our Angel Funds, we aim
to preserve the strong benefits of angel investing while reducing the
significant disadvantage investors typically face when competing for the best
deals against large pre-funded pools of capital--the lack of readily
accessible funds and deal flow.
We are currently formulating a strategy to develop and market our Angel
Funds and have hired a senior management employee to be responsible for this
process. Initially, we plan to launch a private venture capital fund by the
end of 1999. Thereafter, we intend to develop additional types of funds. A
portion of the net proceeds from this offering may be used, as appropriate, to
make investments in the Angel Funds we plan to establish. We expect to derive
revenue from our Angel Funds activity through management fees and sharing in
profits realized by the funds.
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Proprietary Trading
We may engage in limited proprietary trading to the extent we conclude that
having such a trading capacity will enhance our ability to obtain investment
banking assignments. Prior to engaging in such proprietary trading activities,
we will have to make a substantial investment in experienced personnel and
technology. We will also need to develop compliance and risk management
procedures. Although as a firm we have not previously engaged or prepared to
engage in these activities, our senior management has had substantial
experience overseeing market making, specialist and other proprietary trading
operations.
International Opportunities
Since the opportunity to reengineer the capital formation process is not
limited to the U.S. marketplace, we want to leverage our technology and
intellectual capital by creating international joint ventures. We have
completed, together with Mitsubishi Corporation (which through a subsidiary
has an investment in us), a study of the feasibility of creating an Internet
investment banking and brokerage firm for the Japanese market. In addition, we
have held preliminary discussions with a number of major European banks
regarding possible relationships. We would like to emerge as a global brand
representing preeminence in online capital raising and Internet investment
banking. We would also like to see our digital trading facility become a
global trading facility.
Information Technology
Technology is fundamental to our business strategy. We are committed to the
ongoing development, maintenance and use of technology throughout our
organization and across all business lines. Where possible, our preference is
to license or purchase software products and to build internally only what we
cannot cost effectively acquire or license. As a result, our systems include a
combination of licensed, purchased and internally developed products.
We have acquired or developed significant proprietary software and systems
over the past three years. We continue to enhance our software and systems.
Our technology initiatives can be categorized into three efforts:
. for our investment banking business, tools that enable and facilitate the
public and private offering of securities to our direct customers and
through our network of e-Dealers;
. a "middleware" system that maintains customer account and other data,
provides for order management, order validation and order routing; and
. for our digital trading facility, processing, matching and communications
engines, as well as customer interfaces, including HTML pages, Java
applets and a Java application for user access.
We have filed patent applications covering concepts and technologies
integral to the digital trading facility. These concepts and technologies,
however, may not be patentable. See "Risk Factors."
While technology in itself does not provide any sustainable competitive
advantage in our business, we believe our software and systems represent a
substantial advantage in that we have the current ability to conduct
activities today which would require others months or years of technological
development to reproduce.
We currently have projects underway to ensure that our technology is Year
2000 compliant. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Year 2000."
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Marketing
We have experienced growth in our customer base and Web site page
impressions with limited marketing expenditures. The number of page
impressions on our Web site has increased from 1.9 million page impressions
during January 1999 to 38 million pages impressions during April 1999. We
acquire brokerage customers primarily by making available public securities
offerings to individuals on a first-come, first-served basis. To date, no
other investment banking firm has offered individual investors the opportunity
to invest in initial public offerings in this manner. In addition, we acquire
brokerage customers when we assist issuers in marketing their stock offerings
to their affinity groups. These affinity marketing programs are particularly
cost effective since they allow us to reach a broad base of prospective
customers at little to no cost as our initial public offering alerts are
distributed by electronic mail to lists provided for free by the issuer. To
purchase shares in any offering through us, investors are required to open a
brokerage account with us, which allows us to offer subsequent transactions or
other services to the investor.
We want to cost effectively build our brand equity by distributing public
offerings and investment research through the Web sites of the e-Dealers and
through arrangements with Web content and portal companies. Following this
offering, we plan to increase our marketing activities. In particular, we want
to promote our expanding investment banking capabilities and to successfully
launch our after-hours digital trading facility. We have not yet developed
specific plans for these additional marketing efforts.
Competition
The financial services industry is highly competitive and we expect
competition to intensify in the near future. We encounter direct competition
primarily from established investment banks, as well as from traditional and
online brokerage firms. We compete with some of these firms on a national
basis and with others on a regional basis. Our competitors include large and
well established Wall Street firms as well as relatively new securities firms,
a growing number of which are rapidly developing firms that are using
technology to win business away from the more traditional firms. General
financial success within the securities industry and the increasing popularity
of the Internet will together attract additional competitors for us, such as
banks, software development companies, insurance companies and providers of
online financial and information services.
In recent years there has been a significant consolidation in the financial
services industry. Commercial banks and other financial institutions have
acquired or established broker-dealer affiliates and begun offering financial
services to individuals traditionally offered by securities firms. These firms
have the ability to offer a wide range of products, including lending, deposit
taking, insurance, brokerage, investment management and investment banking
services. This may enhance their competitive position by attracting and
retaining customers through the convenience of one-stop shopping. They also
have the ability to support investment banking and securities products with
commercial banking, insurance and other financial service revenue in an effort
to gain market share.
Many of our competitors have significantly greater financial, technical,
marketing and other resources than we do. Some of our competitors also offer a
wider range of products and services than we do and have greater name
recognition, more established reputations and more extensive client and
customer bases. These competitors may be able to respond more quickly to new
or changing opportunities, technologies and customer requirements due to
superior systems capabilities. They may also be better able to undertake more
extensive promotional activities, offer more attractive terms to customers,
clients and employees and adopt more aggressive pricing policies compared to
our firm.
Investment Banking. Our principal competitors in connection with our
investment banking business are traditional investment banking firms. These
investment banks may also seek to offer individual investors participation in
offerings through the Internet. We also face competition from recently formed
online investment banking initiatives, such as E*Offering, recently formed by
online broker E*Trade in conjunction with the founder and former chief
executive of BancBoston Robertson Stephens, Sanford Robertson, and W.R.
Hambrecht & Co., recently formed by the founder and former chief executive of
Hambrecht & Quist, William Hambrecht. In the context of online distribution of
public offerings, we are facing growing competition from brokerage firms
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such as Charles Schwab, Fidelity Brokerage Services and E*Trade, among others,
which offer equity securities through the Internet. In addition, we expect
that investment banking firms will create or acquire captive online brokerage
distribution, such as Morgan Stanley has accomplished through its ownership of
Discover Direct and Donaldson, Lufkin & Jenrette has accomplished through the
development of DLJdirect.
Brokerage. In our online brokerage business, we compete with discount
brokerage firms, which generally execute transactions for customers without
offering other services such as research, portfolio valuation and investment
recommendations. We compete directly with the approximately one hundred
discount brokerage firms already operating on the Internet. Our principal
competitors include Charles Schwab, Fidelity Brokerage Services, E*Trade,
Waterhouse Investor Services and Datek Online. Many of these firms execute
transactions for their customers through the Internet. The number of online
discount brokers will likely increase rapidly if the favorable treatment of
these firms by the equity markets continues. The principal competitive factors
in online discount brokerage include price, customer service, system
reliability, quality of trade execution, delivery platform capabilities, ease
of use, graphical user interface, range of products and services, innovation,
branding and reputation. In our brokerage business we also encounter
competition from established full-commission brokerage firms such as Morgan
Stanley Dean Witter, PaineWebber, Donaldson, Lufkin & Jenrette and Merrill
Lynch. Many of these brokerage firms have also begun conducting business
online.
Digital Trading Facility. There is currently no competitor offering
individual investors regular access to after-hours trading services. However,
there are firms, such as Eclipse Trading, which are developing plans and
systems that would directly compete with our digital trading facility. Some of
these firms could have substantially greater resources than we have.
Traditional stock markets, including the New York Stock Exchange and the
Nasdaq-Amex Group, have announced plans to offer individual investors after-
hours trading and/or access to electronic trading facilities. We also expect
competition from the growing number of electronic communication networks, such
as Island or Instinet, which may establish competitive trading facilities.
Personnel. Competition is also intense for the attraction and retention of
qualified employees in the securities industry. Our ability to compete
effectively in our businesses will depend on our ability to attract new
employees and retain and motivate our existing employees.
Regulation
Regulation of the Securities Industry and Broker-Dealers. Our business is
subject to extensive regulation applicable to the securities industry in the
United States and elsewhere. As a matter of public policy, regulatory bodies
in the United States and rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting
the interests of customers participating in those markets. In the United
States, the SEC is the federal agency responsible for the administration of
the federal securities laws. We are registered as a broker-dealer with the SEC
and in all 50 states, the District of Columbia and Puerto Rico. We are also a
member of the NASD, a self regulatory body to which all broker-dealers belong.
Certain self-regulatory organizations, such as the NASD, adopt rules and
examine broker-dealers and require strict compliance with their rules and
regulations. The SEC, self-regulatory organizations and state securities
commissions may conduct administrative proceedings which can result in
censure, fine, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer, its officers or employees. The SEC and self-
regulatory organization rules cover many aspects of a broker-dealer's
business, including capital structure and withdrawals, sales methods, trade
practices among broker-dealers, use and safekeeping of customers' funds and
securities, record-keeping, the financing of customers' purchases, broker-
dealer and employee registration and the conduct of directors, officers and
employees.
Effect of Net Capital Requirements. As a registered broker-dealer and member
of the NASD, we are subject to the Uniform Net Capital Rule under the Exchange
Act. The Uniform Net Capital Rule specifies the
36
<PAGE>
minimum level of net capital a broker-dealer must maintain and also requires
that at least a minimum part of its assets be kept in relatively liquid form.
As of March 31, 1999, our broker-dealer subsidiary was required to maintain
minimum net capital of $100,000 and had total net capital of approximately
$10,769,266, or $10,669,266 in excess of the minimum amount required.
The SEC and the NASD impose rules that require notification when net capital
falls below certain predefined criteria, dictate the ratio of debt to equity
in the regulatory capital composition of a broker-dealer and constrain the
ability of a broker-dealer to expand its business under certain circumstances.
Additionally, the Uniform Net Capital Rule and the NASD rules impose certain
requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to the SEC and
the NASD for certain withdrawals of capital. Because our principal asset will
be the ownership of stock in our broker-dealer subsidiary, these rules
governing net capital and restrictions on withdrawals of funds could operate
to prevent us from meeting our financial obligations on a timely basis.
Application of Securities Act and Exchange Act to Internet Business. The
Securities Act governs the offer and sale of securities. The Exchange Act
governs, among other things, the operation of the securities markets and
broker-dealers. When enacted, the Securities Act and the Exchange Act did not
contemplate the conduct of a securities business through the Internet.
Although the SEC, in releases and no-action letters, has provided guidance on
various issues related to the offer and sale of securities and the conduct of
a securities business through the Internet, the application of the laws to the
conduct of a securities business through the Internet continues to evolve.
Uncertainty regarding these issues may adversely affect the viability and
profitability of our business.
Foreign Securities Authorities. We are actively considering various joint
ventures and other projects for the establishment of a broker-dealer business
in foreign countries. Any such business would be subject to foreign law and
the rules and regulations of foreign governmental and regulatory authorities.
This may include laws, rules and regulations relating to any aspect of the
securities business, including sales methods, trade practices among broker-
dealers, use and safekeeping of customers' funds and securities, capital
structure, record-keeping, the financing of customers' purchases, broker-
dealer and employee registration requirements and the conduct of directors,
officers and employees.
Digital Trading Facility. Securities exchanges must register with the SEC
and comply with various requirements of the Exchange Act. Effective April
1999, new rules expanded the scope of exchange regulation to include many
brokerage matching and execution systems, such as the digital trading facility
which we will operate. The new rules provide an exemption from exchange
registration for systems operating by registered broker-dealers that comply
with Regulation ATS, which imposes various requirements relating to fair
access, capacity, security, recordkeeping and reporting. Our broker-dealer
subsidiary expects to operate the digital trading facility in compliance with
Regulation ATS. Although we do not expect the compliance costs to be
significant, our broker-dealer subsidiary could encounter unforseen expenses
associated with operation of these rules.
Changes in Existing Laws and Rules. Additional legislation or regulation,
changes in existing laws and rules or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect our mode of operation and our profitability.
37
<PAGE>
Employees
We believe that one of our strengths is the quality and dedication of our
people and the shared sense of being part of a team. We strive to maintain a
work environment that fosters professionalism, excellence, diversity and
cooperation among our employees. We also believe that our employees should
have an equity stake in the firm. Following this offering, our employees as a
group will own roughly % of the equity of the company on a fully diluted
basis. As of April 30, 1999, we had 138 employees.
Properties
Our principal executive offices are located in New York City where we lease
20,000 square feet of loft space. The term of the lease expires in November
2006. We also operate a 909-square foot office for our investment banking
group in San Francisco. This lease expires in May 1999.
Legal Matters
We are not a party to any material legal proceedings. A person formerly
associated with us has asserted a right to purchase 800,000 shares of common
stock at $1.00 per share. We believe the assertion is without merit and intend
to contest it if any lawsuit is filed against us. These 800,000 shares of
common stock have not been included in our financial statements or in any of
the share amounts included in this prospectus.
38
<PAGE>
MANAGEMENT
The following table lists our executive officers and key employees. Our
executive officers are Messrs. Lessin, Readmond, Klein, Siegel, Loehr, Diener,
Lieberman and Lang and Ms. Berkowitz.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Robert H. Lessin........ 44 Chairman and co-chief executive officer
Ronald Readmond......... 56 Vice chairman, co-chief executive officer and president
Andrew D. Klein......... 39 Vice chairman, founder and chief strategist
M. Bernard Siegel....... 43 Senior vice president and chief financial officer
Mark Loehr.............. 42 Director of investment banking
Alan Diener............. 46 Senior vice president and director of brokerage
George M. Lieberman..... 55 Senior vice president and chief information officer
Everett F. Lang......... 56 President--digital trading facility
Susan J. Berkowitz...... 34 Senior vice president--marketing
Lloyd H. Feller......... 56 Senior vice president and co-general counsel
Robert C. Mendelson..... 48 Senior vice president and co-general counsel
Jonathan Cohen.......... 34 Director of research
David M. Blumberg....... 40 Managing director--investment banking
Matthew P. Carbone...... 32 Managing director--investment banking
Paul Ezekiel............ 33 Managing director--investment banking
Charles Hall............ 32 Managing director--investment banking
Christopher Mulligan.... 35 Managing director--investment banking
Elliot S. Prince........ 37 Managing director--research
Ronald O. Drake......... 31 Director of private equity
William C. Feeley....... 40 Director of capital markets
Walter Buist............ 54 Director of software development
George Tashie........... 33 Vice president--sales
James Fontanetta........ 30 Vice president--brokerage
Amy Cortese............. 37 Vice president--content
Maureen Brille.......... 36 Vice president--Angel Funds
</TABLE>
Executive Officers and Key Employees
Robert H. Lessin, chairman and co-chief executive officer, joined us in
April 1998. Before joining us, he was a vice chairman of Salomon Smith Barney
until April 1998, having previously been a vice chairman of Smith Barney from
1993 until the merger with Salomon Brothers in November 1997. He served as
head of investment banking at Smith Barney from June 1993 to January 1997.
Prior to joining Salomon Smith Barney, Mr. Lessin spent 16 years with Morgan
Stanley in the position of managing director and was responsible for the
firm's financial entrepreneurs, media and retailing groups. Mr. Lessin was
also vice chairman of Morgan Stanley's investment banking operating committee
and chairman of their strategic planning committee. He is a director of
Marketwatch.com, iParty, MaMaMedia and sixdegrees and a general partner of
Dawntreader Fund I, a venture capital fund. He has an MBA from Harvard
Business School.
Ronald Readmond, vice chairman, co-chief executive officer and president,
joined us in May 1998 and has served as a director since 1997. Before joining
us, he had served as vice chairman of Charles Schwab where he was responsible
for operations, capital markets and trading, international and mutual funds as
well as strategic acquisitions and industry relations. Prior to that, Mr.
Readmond was a managing director at Alex. Brown & Sons. Mr. Readmond has
served as co-chairman of the U.S. Working Committee on Clearance and
Settlement of the Group of 30, as a member of the New York Stock Exchange
operations advisory committee and the nominating committee of the Options
Clearing Corporation. Mr. Readmond is the former chairman of the board of the
National Securities Clearing Corporation and for five years served as a
director. In addition, he served for two
39
<PAGE>
years as a director of NASD Market Services, Inc. Mr. Readmond is currently a
director of ProBusiness, chairman of International Equity Partners and a
director of The American Council for Capital Formation.
Andrew D. Klein, vice chairman, founder and chief strategist, has been with
us since our inception in April 1996. Previously, in January 1993 Mr. Klein
founded microbrewery Spring Street Brewing Company, which two years later
became the first company to complete a public offering over the Internet and,
in March 1996, created the first ever Web-based trading mechanism allowing
investors to buy and sell Spring Street shares. Prior to starting Spring
Street, Mr. Klein practiced corporate and securities law at Cravath, Swaine &
Moore for six years. He has a law degree from Harvard Law School. In 1997 Mr.
Klein was the subject of a civil order of the Commonwealth of Massachusetts
alleging that he and Spring Street used its Web site to gather names of
potential investors and then mailed an unregistered private placement
memorandum to these persons in violation of Massachusetts securities laws.
While neither admitting nor denying that the violations occurred, Mr. Klein
agreed to offer a refund to six investors and paid a fine of $3,000.
M. Bernard Siegel, senior vice president and chief financial officer, joined
us in October 1998. He has more than twenty years experience in the financial
services industry. He served as chief financial officer and director of risk
management of Waterhouse Investor Services from November 1993 to June 1998.
Prior to that, he was chief financial officer and chief operating officer of
Fleet Brokerage Securities. Mr. Siegel is a CPA who spent eight years with
KPMG LLP, last serving as a senior audit manager in the financial services
division.
Mark Loehr, director of investment banking, joined us in March 1999. He
spent a total of eight years with Smith Barney, from 1978 to 1983 and from
1994 to 1997, and two years with Salomon Smith Barney, from 1997 to 1999. He
spent eleven years with CS First Boston, from 1983 to 1994. While at Smith
Barney and, later, Salomon Smith Barney, he served as head of global equity
sales and head of equity capital markets. While at CS First Boston, Mr. Loehr
served as co-head of U.S. equity capital markets.
Alan Diener, senior vice president and director of brokerage, joined us in
April 1999. He spent eight years with Charles Schwab where he held a variety
of vice president level positions in capital markets, strategic planning and
retail management. Prior to working at Charles Schwab, Mr. Diener was employed
by Chemical Bank and also by Citicorp. He has an MBA from the Massachusetts
Institute of Technology.
George M. Lieberman, senior vice president and chief information officer,
joined us in February 1999. He has more than 30 years of information
technology management and development experience across a broad spectrum of
industries. He was first vice president and director of technology strategy
and planning for Merrill Lynch & Co. from June 1991 to December 1998. He holds
two computer-related patents and was formerly on the Merrill Lynch technology
advisory board. Prior to joining Merrill Lynch, he was the chief information
officer for Telerate Inc., the chief information officer for Chargit Inc. and
responsible for the development of major systems projects at many financial
industry companies including Citibank and ADP. He has advanced degrees in
Industrial Engineering and Operations Research.
Everett F. Lang, became president--digital trading facility in February
1999. Dr. Lang was previously chief executive of National Discount Brokers
where he introduced the concept of "Flat Fee" trading to consumers. Prior to
that, he was chairman and chief executive of BT Brokerage Corporation, a New
York Stock Exchange member firm which he helped to organize. In 1995, Dr. Lang
founded the Discount Brokerage Association which was assimilated into the
Securities Industry Association along with twenty-three other member firms. He
currently serves as co-chairman of this entity. Dr. Lang has a doctoral degree
in organizational psychology from the University of Virginia.
Susan J. Berkowitz has served as senior vice president--marketing since
October 1998. She is an Internet industry veteran who most recently ran the
marketing, advertising sales and business development functions at
theglobe.com from 1996 to 1998. Previously, she has held marketing and sales
positions at Spin Magazine from 1994 to 1996, J. Walter Thompson from 1992 to
1994 and Chase Manhattan Bank from 1987 to 1992. Ms. Berkowitz has an MBA from
Duke University.
40
<PAGE>
Lloyd H. Feller, senior vice president and co-general counsel, joined us in
April 1999. Previously, he was a partner at Morgan, Lewis & Bockius LLP.
Before joining Morgan, Lewis & Bockius LLP in 1979, Mr. Feller served at the
SEC as the Associate Director of the Division of Market Regulation, in charge
of the Office of Market Structure and Trading Practices. Mr. Feller has a law
degree from New York University.
Robert C. Mendelson, senior vice president and co-general counsel, joined us
in April 1999. Previously, he was a partner at Morgan, Lewis & Bockius LLP.
Mr. Mendelson was a member of the Legal Advisory Board of the NASD and
formerly chaired the Market Transaction Advisory Committee created by the SEC.
Mr. Mendelson has an MA from Brandeis University and a law degree from Boston
College.
Jonathan Cohen joined us as director of research in 1999, and was previously
head of Merrill Lynch's Internet equity research effort. Mr. Cohen was named
to the 1996, 1997 and 1998 Institutional Investors "All American Research
Team" for the Internet sector. He has been named as one of the 25 Best U.S.
analysts by both Bloomberg and Financial World Magazine. Prior to joining
Merrill Lynch in 1998, Mr. Cohen was a managing director and head of Internet
and PC Software research at UBS Securities from 1997 to 1998. Prior to UBS,
Mr. Cohen was a senior analyst and managing director at Smith Barney from 1993
to 1997, where his coverage focused on information technology companies. Mr.
Cohen has an MBA from Columbia University.
David M. Blumberg has served as managing director--investment banking since
January 1997. Previously he was President of Blumberg Associates, Inc., which
he co-founded in 1993. During an eight-month period in 1994 and 1995, Mr.
Blumberg was a partner of RLM Partners, LP, an investment fund. From 1991 to
1992, Mr. Blumberg was a Managing Director of Merrill Lynch and from 1988 to
1993 he was a senior vice president of Merrill Lynch Interfunding Inc. Mr.
Blumberg has been a director of Norton McNaughton, a public company, since
January of 1994. He has an MBA from New York University's Stern School of
Business.
Matthew P. Carbone has served as managing director--investment banking since
May 1998. He was most recently a senior vice president in Salomon Smith
Barney's investment banking division, focusing on emerging growth companies.
Prior to joining Smith Barney in 1993, he was an investment banker with CS
First Boston and Morgan Stanley. Mr. Carbone has an MBA from Harvard Business
School.
Paul Ezekiel, M.D. joined us in March 1999 as managing director--investment
banking. He previously headed NationsBanc Montgomery Securities' health care
Internet investment banking initiative. Dr. Ezekiel joined Montgomery in 1996
and served as a senior member of the health care services investment banking
team since 1997. Prior to that, Dr. Ezekiel served as an associate at both
Prudential Securities during 1995 and CS First Boston during 1994. Dr. Ezekiel
received his medical degree from the University of Australia and holds an MBA
from Cornell University.
Charles Hall, managing director--investment banking, was formerly head of
Salomon Smith Barney's Education Group until he joined us in 1999. Mr. Hall
founded this group in May 1996. Mr. Hall joined Smith Barney in 1988. He
served as a senior member of Smith Barney's industrial group from 1992 to 1996
and worked in the mergers and acquisitions group from 1990 to 1991. Prior to
that, Mr. Hall worked in London in Smith Barney's European investment banking
division. Mr. Hall has an MS degree in Engineering Science from Oxford
University.
Christopher Mulligan joined us as managing director--investment banking in
1999, and previously headed Salomon Smith Barney's Internet retailing
investment banking effort. Mr. Mulligan joined Smith Barney in 1992 to help
establish that company's consumer sector investment banking effort, where he
focused on direct-to-customer companies and specialty retailers. Mr. Mulligan
has an MBA from the University of Chicago.
Elliot S. Prince, managing director--research, joined us in February 1999
after spending more than twelve years in the research departments of major
Wall Street firms. Prior to joining us, he spent five years at Salomon Smith
Barney where he was responsible for macroeconomic research on Israel and
research on Israeli companies, including various technology sector and
telecommunications equipment companies, and companies spanning such industries
as broadband access technologies and products and various Internet
infrastructure technologies. Prior to that, Mr. Prince spent six years
researching the computer software industry, covering such companies as
Microsoft, Oracle and Adobe. He has been a Chartered Financial Analyst since
1989. Mr. Prince has an MBA from the Columbia University Graduate School of
Business.
41
<PAGE>
Ronald O. Drake joined us in June 1998 in our private equity practice and
has served as director of private equity since April 1999. Previously he was a
vice president at McKinley Capital Partners, Limited, a merchant banking firm,
where he focused on raising and investing private equity for Internet-related
and media and communications companies. Prior to joining McKinley Capital
Partners in 1993, he was an associate portfolio manager at Sanford C.
Bernstein & Co., Inc.
William C. Feeley has served as director of capital markets since October
1997. He has 19 years of experience in new issue investment banking. Prior to
joining us, he was managing director of equity capital markets at Bankers
Trust from 1996 to 1997. Prior to that, he was president of Quintessence
Capital Partners LTD in 1995. Previously, he was the director of equity
capital markets at First Albany Corporation from 1993 to 1995. From 1980 to
1993, Mr. Feeley worked at Kemper Securities, most recently as director of
corporate finance and syndicate services. He has an MBA from Loyola
University.
Walter D. Buist has led our software development since August 1996 and
became director of software development in 1999. Previously, he was head of
applications development at Global Trade since 1992. Prior to that, he was
responsible for several floor automation projects as a consultant to the New
York Stock Exchange. He has also developed a back-office system for the J.J.
Kenney, municipal securities brokers. He was also responsible for all software
applications at M.S. Wien, a large over-the-counter dealer.
George Tashie has served as vice president--sales since June 1998. He was
employed previously by Dreyfus Service Corporation from 1989 until 1998. Most
recently, he held the position of vice president and director of investor
communications at Dreyfus. Previously, he was a vice president of national
sales and sales operations manager for Dreyfus.
James Fontanetta joined us in August 1997 and has served as vice president--
brokerage since 1998. He was most recently an operations manager with
Tradewell Discount Investing from 1996 to 1997. Prior to that, he was employed
by National Discount Brokers from 1995 to 1996 and Waterhouse Securities from
1993 to 1994.
Amy Cortese has served as vice president--content since November 1998.
Previously she was a journalist for ten years, covering the technology
industry from both coasts. For the past four years, she was an editor at
BusinessWeek, where she directed the magazine's coverage of software and the
Internet and wrote many high profile and award winning articles. Prior to her
career in journalism, Ms. Cortese was a research analyst with International
Data Corporation.
Maureen Brille joined us as vice president--Angel Funds in 1999, and was
previously with J.P. Morgan in the private client group from January 1995 to
December 1998, where she advised high net worth individuals on all aspects of
their personal finances, including asset allocation, discretionary investment
management, securities brokerage, private equity investments and trust and
estate planning. Prior to that, Ms. Brille spent eight years at Chemical Bank
from 1986 to 1994, both as principal of Chemical Venture Partners-Northeast
where she originated and executed growth capital and leveraged buyout
investments, and as advisor to middle market companies on a wide variety of
investment banking transactions. Ms. Brille has an MBA from the College of
William and Mary.
42
<PAGE>
Directors
Our Board of Directors currently consists of nine directors. Messrs. Lessin,
Readmond and Klein are described above as executive officers. Our Board of
Directors is divided into three classes of directors serving staggered three-
year terms: Class A directors, Class B directors and Class C directors will
serve until our annual meetings of stockholders held in 2000, 2001 and 2002,
respectively. The following table lists our directors:
<TABLE>
<CAPTION>
Name Age Class
---- --- -----
<S> <C> <C>
John H.N. Fisher................................................... 40 B
Edward H. Fleischman............................................... 66 C
Steven M. Gluckstern............................................... 47 C
Joseph R. Hardiman................................................. 61 A
Andrew D. Klein.................................................... 39 A
Robert H. Lessin................................................... 44 C
Gilbert C. Maurer.................................................. 70 B
Adam Mizel......................................................... 29 A
Ronald Readmond.................................................... 56 B
</TABLE>
John H.N. Fisher is a managing director of Draper Fisher Jurvetson, a
Redwood City, California venture capital firm providing start-up and early
stage financing. On behalf of Draper Fisher Jurvetson, Mr. Fisher serves on
the boards of various Internet and technology companies, including Centraal,
Convoy, Entegrity Solutions, Praxon, Selectica, Sonnet Financial Transactor
Networks and Webline Communications. Previously, Mr. Fisher was a venture
capitalist at ABS Ventures. Prior to that, he was an investment banker at
Alex. Brown & Sons and an account executive in the capital markets group at
Bank of America. Mr. Fisher has an MBA from Harvard Business School.
Edward H. Fleischman is senior counsel to the London based international law
firm of Linklaters & Paines, where he specializes in securities and financing
law and related areas. Mr. Fleischman served as a Commissioner of the
Securities and Exchange Commission from 1986 to 1992. Previously, he practiced
law for 27 years at Beekman & Bogue in New York. Mr. Fleischman has a law
degree from Columbia University.
Steven M. Gluckstern is a founding partner of Capital Z Partners, a manager
of alternative investment pools, including Capital Z Financial Services Fund
II, L.P., a $1.8 billion private equity fund. Mr. Gluckstern also currently
serves as non-executive Chairman of both Zurich Re, the global reinsurance
network of Zurich Financial Services, and of Zurich Centre Group/Centre
Solutions. Previously, he served as chief executive officer of both Zurich Re
and Centre Re from 1988 to 1998, and, prior to that, as general manager of
reinsurance operations of the Berkshire Hathaway Insurance Group. Mr.
Gluckstern also serves on the boards of Aames Financial Corporation, Zurich
Payroll Solutions, United Payors and United Providers Inc. Mr. Gluckstern has
an MBA from Stanford University.
Joseph R. Hardiman was president and chief executive officer of the National
Association of Securities Dealers, Inc. and its wholly owned subsidiary, the
Nasdaq Stock Market, Inc., from September 1987 through January 1997.
Previously, he was managing director, chief operating officer and a member of
the board of directors of Alex. Brown & Sons.
Gilbert C. Maurer had been employed since 1973 by The Hearst Corporation,
one of the nation's largest private companies engaged in a broad range of
publishing, broadcasting, cable networking and diversified communications
activities. Most recently, he held the position of chief operating officer
from 1990 until his retirement in 1998. Previously, Mr. Maurer served as
president of Hearst's magazines division for 14 years. Prior to joining
Hearst, Mr. Maurer worked for 19 years with Cowles Communications, Inc.
Adam Mizel is also a founding partner of Capital Z Partners. Previously, he
was a managing director of Zurich Centre Investments, Inc., where he oversaw
U.S. private equity investing activities between April 1994 and July 1998.
Currently, Mr. Mizel serves as a director on a number of boards, including
Aames Financial Corporation, Caliber Holdings, Inc., ZC Sterling Holdings and
Channelpoint Inc.
43
<PAGE>
Committees of the Board
The Board of Directors has established an Audit Committee, the members of
which are Edward H. Fleischman, Joseph R. Hardiman and Adam Mizel, all of whom
are non-employee directors, and a Compensation Committee, the members of which
are John H.N. Fisher, Steven M. Gluckstern, Gilbert C. Maurer and Ronald
Readmond.
The Audit Committee is responsible for recommending to the Board of
Directors the engagement of our independent auditors and reviewing with our
independent auditors the scope and results of the audits, our internal
accounting controls, audit practices and the professional services furnished
by our independent auditors.
The Compensation Committee is responsible for reviewing and approving all
compensation arrangements for our officers, and is also responsible for
administering the Stock Incentive Plan.
Special Advisory Board
To complement our Board of Directors, we are also developing a special
advisory board consisting of accomplished professionals and entrepreneurs from
the fields of technology, new media, finance and law. The first members of
this advisory board are Joseph Flom of Skadden, Arps, Slate, Meagher & Flom
and Edward Mathias of The Carlyle Group. Members of our special advisory board
attend, but do not vote at, meetings of our Board of Directors. They also
provide our management with strategic advice and other assistance with the
planning and development of our business.
Compensation of Directors and Special Advisory Board Members
We do not currently pay directors cash compensation. However, we have
granted certain non-employee directors as well as the members of the advisory
board options to purchase common stock. The non-employee directors designated
by our venture capital investors do not receive any compensation from us.
The following non-employee members of our Board of Directors and of our
special advisory board have received the respective numbers of stock options
indicated below.
<TABLE>
<CAPTION>
Number of Securities
Underlying Options
Name Granted Exercise Price Expiration Date
- ---- -------------------- -------------- ---------------
<S> <C> <C> <C>
Edward H. Fleischman........ 50,000 $1.00 11/11/08
25,000 $1.50 3/17/09
Joseph R. Hardiman.......... 50,000 $1.00 11/11/08
25,000 $1.50 3/17/09
Gilbert C. Maurer........... 50,000 $1.00 11/11/08
25,000 $1.50 3/17/09
Joseph Flom................. 50,000 $1.00 11/11/08
Edward Mathias.............. 50,000 $1.00 11/11/08
</TABLE>
Compensation Committee Interlocks and Insider Participation
None of our executive officers:
(1) has served as a member of the compensation committee of another entity,
one of whose executive officers has served on our Compensation
Committee;
(2) has served as a director of another entity, one of whose executive
officers has served on our Compensation Committee; and
(3) has served as a member of the compensation committee of another entity,
one of whose executive officers has served as one of our directors.
44
<PAGE>
Executive Compensation
Since we employed a majority of our executive officers at different times in
1998, the compensation they earned from the various dates of their hire is not
meaningful or indicative of their future compensation. The following table
sets forth the salaries, and to the extent determinable, the bonuses that we
intend to pay our co-chief executive officers and the other four executive
officers whom we presently expect will be our most highly compensated
executive officers during 1999. We have also indicated, where applicable, the
compensation paid to these persons during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Lessin......... 1999 $250,000 (1) -- -- --
Co-chief executive offi-
cer 1998 0 $135,685 -- -- --
Ronald Readmond.......... 1999 $250,000 $250,000(1) -- -- --
Co-chief executive offi- 1998 $146,000 -- -- 2,500,000 $116,000(3)
cer and president
Andrew D. Klein.......... 1999 $250,000 (1) -- -- --
Founder and chief strat-
egist 1998 $120,000 -- -- -- --
Mark Loehr............... 1999 $200,000 (2) -- -- --
Director of investment
banking 1998 -- -- -- -- --
Everett Lang............. 1999 $200,000 $ 50,000(1) -- 525,000 $ 50,000(4)
President--digital trad-
ing 1998 -- -- -- -- --
facility
George Lieberman......... 1999 $200,000 (1) -- 400,000 --
Senior vice president 1998 -- -- -- -- --
and
chief information offi-
cer
</TABLE>
- --------
(1) Participates in the Annual Bonus Plan for Executives. Mr. Readmond is
guaranteed to receive at least $250,000 under the Annual Bonus Plan for
Executives. Mr. Lang is guaranteed to receive at least $50,000 under the
Annual Bonus Plan for Executives.
(2) Participates in the Annual Bonus Plan for the Investment Banking Group.
(3)Represents expense reimbursement in connection with commencement of his
employment.
(4)Represents compensation in connection with commencement of his employment.
45
<PAGE>
Stock Options
Option Grants. The following table sets forth information regarding stock
options granted under our stock option plans between January 1, 1998 and April
30, 1999 to the co-chief executive officers and the other four most highly
compensated executive officers. We have never granted stock appreciation
rights.
<TABLE>
<CAPTION>
Option Grants in Period Beginning January 1, 1998 and Ended April 30, 1999
---------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------------------------
Percentage of Potential
Total Options Realizable Value at
Granted to Employees Assumed Annual
(net of forfeitures) Rates of
Number of in the period Stock Price
Securities Beginning Appreciation for
Underlying January 1, 1998 Exercise or Option Terms(4)
Options and Ended April 30, Base Price Expiration -------------------
Name Granted(1) 1999(2) ($/Share)(3) Date 5% 10%
---- ---------- -------------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Lessin........ -- -- -- -- -- --
Ronald Readmond......... 2,500,000 14.9% 1.00 9/17/08 3,927,955 6,048,940
Andrew D. Klein......... -- -- -- -- -- --
Mark Loehr.............. -- -- -- -- -- --
Everett Lang............ 525,000 3.1 1.50 2/12/09 814,595 1,238,783
George Lieberman........ 400,000 2.4 1.50 1/1/09 655,032 1,037,497
</TABLE>
- --------
(1) Such options were granted pursuant to and in accordance with our Stock
Incentive Plan.
(2) Based on an aggregate of 16,800,000 options granted (net of forfeitures)
to employees in the period beginning January 1, 1998 and ended April 30,
1999, including options granted to the other four most highly compensated
executive officers.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of the grant as determined by the
Board of Directors. The Board of Directors determined fair market value of
the common stock on the date of the grant based upon the most recent price
paid by a third party for our preferred stock discounted to reflect the
preferred stock having a liquidation preference, the right to board
representation and a cumulative preferred dividend.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based on the market price of the underlying
securities on the date of the grant. These assumptions are not intended to
forecast future appreciation of our stock price. The potential realizable
value computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock.
Option Values. Messrs. Readmond, Lang and Lieberman accepted the opportunity
from us to exercise on April 30, 1999 all their existing stock options, other
than incentive stock options, whether or not vested, with funds we loaned to
them. The shares they purchased by exercising those of their options which
were not vested at the time can be repurchased by us at their respective
option exercise prices, unless they remain in our employ through the
respective periods when these options would originally have vested. They are
personally liable for all interest due on their loans and are similarly liable
for up to one-half of the principal amounts of their loans. Each loan is
secured by the shares purchased with the proceeds of that loan. Each loan
becomes due and payable on March 31, 2003 or earlier if the individual's
employment is terminated or he no longer owns the shares. The respective total
number of shares purchased by, and the amounts we loaned to, Messrs. Readmond,
Lang and Lieberman are set forth in the table below. The following table also
sets forth information concerning the value at April 30, 1999 of exercisable
and unexercisable options held by the co-chief executive officers and the
other four most highly compensated executive officers. The values of
unexercised in-the-money options represent the positive spread between the
respective exercise prices of outstanding stock options and an assumed initial
public offering price of $ per share.
46
<PAGE>
Aggregated Option Exercises in Period Beginning January 1,
1998 and Ended April 30, 1999 and Period End Option Values
<TABLE>
<CAPTION>
From January 1, 1998 to April 30, 1999 Option Values at April 30, 1999
------------------------------------------ ---------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options the-Money Options
------------------------- -------------------------
Number of
Shares
Acquired Value Loan
Name On Exercise Received Amount Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert H. Lessin........ -- -- $ -- -- --
Ronald Readmond......... 2,230,000 -- 2,787,500 -- 400,000
Andrew D. Klein......... -- -- -- -- --
Mark Loehr.............. -- -- -- -- --
Everett Lang............ 225,520 -- 338,281 -- 299,480
George Lieberman........ 133,333 -- 200,000 -- 241,667
</TABLE>
Employment Agreements
Robert H. Lessin. Mr. Lessin has an employment agreement with us to serve as
co-chief executive officer. The agreement is for a term of two years,
beginning January 1, 1999, with an automatic one-year extension, unless either
party elects not to extend the term of the agreement. During the term of this
agreement, Mr. Lessin will receive a minimum annual base salary of $250,000,
subject to increases based on annual reviews by the Board. Mr. Lessin is
entitled to participate in our Annual Bonus Plan for Executives and Long-Term
Incentive Plan on the same terms as are applicable to senior executives
generally. Mr. Lessin is entitled to participation in our 401(k) Plan, Stock
Incentive Plan and such other employee benefits as provided to other senior
executives.
We have extended to Mr. Lessin an interest-bearing loan in the amount of
$5,750,000 with which he has purchased 5,750,000 shares of common stock at
$1.00 per share. He is personally liable for all interest due on his loan and
is similarly liable for up to one-half of the principal amount of his loan.
This loan is secured by the shares purchased with the proceeds of this loan.
In the event Mr. Lessin ceases to be employed by us, we have the right to
repurchase his unvested shares at the lower of their fair market value or
$1.00 per share. These shares vest as follows: 1,916,667 shares on June 8,
1998 and the remainder quarterly beginning July 1, 1998, at the rate of
319,445 per quarter until April 1, 2001. Our right to repurchase the unvested
shares terminates on April 1, 2001. In addition, Mr. Lessin's loan becomes due
and payable in the event that his employment terminates or in the event that
he no longer owns the shares. Mr. Lessin also has "piggyback" and demand
registration rights relating to the shares.
In addition to the other compensation due under his employment agreement,
upon the twelve-month anniversary, the twenty-four month anniversary and the
thirty-month anniversary of our initial public offering, Mr. Lessin will be
entitled to cash payments of $2 million, $2 million and $1 million,
respectively. Upon a sale of Wit Capital, Mr. Lessin will be entitled to a
payment of up to $5 million less any payments he has received on any
applicable anniversary of an initial public offering. He will not, however, be
entitled to these payments if he violates his non-competition covenants and
fails to cure the violation within thirty days or if he is no longer employed
by us for a reason other than his termination for "cause," his disability or
death or for "good reason."
Mr. Lessin has agreed, during the term of his employment or until April 1,
2001 not to own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be connected as a director,
officer, employee, or lender with, or be compensated by an entity that is an
NASD registered broker-dealer, or that provides financial advisory services or
engages in capital raising activities. Mr. Lessin has the right to engage in
financial advisory or capital raising activities only through an entity in
which he is an investor or director, so long as any fee payable in connection
with such activities is pursuant to an arrangement for which registration as a
broker-dealer is not required. He may participate in certain venture capital
activities so long as
47
<PAGE>
they do not violate the other terms of his employment agreement. The
restrictive covenants contained in his employment agreement will not apply if
Mr. Lessin is terminated other than for "cause" or quits for "good reason."
Mr. Lessin is also a party to a non-disclosure and assignment of inventions
agreement. He has agreed not to reveal any confidential information belonging
to us, except as may be required in the course of performing his duties as our
employee. He has also agreed to assign to us any rights which he may have with
respect to inventions, software programs, data or other developments created
or discovered during his employment term.
Ronald Readmond. Mr. Readmond has an employment agreement with us to serve
as co-chief executive officer. The agreement is for a term of two years,
beginning January 1, 1999, with an automatic one-year extension, unless the
agreement has been previously terminated (which either party has the right to
do upon 90 days' notice). Under the agreement, Mr. Readmond is entitled to a
minimum annual base salary of $250,000, subject to increases based on annual
reviews by the Board, and an annual guaranteed bonus of $250,000. If Mr.
Readmond's employment is terminated by us without "cause" or by him for "good
reason," he is entitled to a lump sum cash payment equal to the sum of the
amount of his base salary through the end of the three-year period of his
agreement, bonus amounts accrued through the date of termination and a portion
of his annual guaranteed bonus prorated through the date of termination. He is
also entitled to participate in our Annual Bonus Plan for Executives and Long-
Term Incentive Plan on the same terms as are applicable to senior executives
generally. Mr. Readmond is entitled to participation in our 401(k) Plan, Stock
Incentive Plan and such other employee benefits as are provided to other
senior executives.
We have extended to Mr. Readmond an interest-bearing loan in the amount of
$2,787,500 with which he has purchased 2,230,000 shares of common stock by
exercising all vested and non-vested options, other than incentive stock
options, previously held by him. The shares Mr. Readmond purchased by
exercising those options which were not vested at the time can be repurchased
by us at $1.00 per share, unless he remains employed by us through the period
when these options would originally have vested. He is personally liable for
all interest due on his loan and is similarly liable for up to one-half of the
principal amount of his loan. This loan is secured by the shares purchased
with the proceeds of this loan. Mr. Readmond's loan becomes due and payable
March 31, 2003 or earlier in the event his employment terminates or in the
event that he no longer owns the shares.
Mr. Readmond is also a party to our Employee Non-Disclosure, Non-Competition
and Assignment of Inventions Agreement. Mr. Readmond has agreed not to reveal
any confidential information belonging to us, except as may be required in the
course of performing his duties as our employee. He has also agreed to assign
to us any rights which he may have with respect to inventions, software
programs, data or other developments created or discovered during his
employment term. Mr. Readmond agrees that while he is employed by us he will
not compete with any business we conduct and, for one year after his
termination, he will not solicit any of our employees, customers or suppliers.
Andrew D. Klein. Mr. Klein has an employment agreement with us to serve as
chief strategist. The agreement is for a term of two years, beginning January
1, 1999, with an automatic one-year extension, unless the agreement has been
previously terminated (which either party has the right to do upon 90 days'
notice). Under the agreement, he is entitled to a minimum annual base salary
of $250,000, subject to increases based on annual reviews by the Board. If Mr.
Klein's employment is terminated by us without "cause" or by him for "good
reason," he is entitled to a lump sum cash payment equal to the sum of the
amount of his base salary through the end of the three-year period of his
agreement and bonus amounts accrued through the date of termination. He is
also entitled to participate in our Annual Bonus Plan for Executives and Long-
Term Incentive Plan on the same terms as are applicable to senior executives
generally. Mr. Klein is entitled to participation in our 401(k) Plan, Stock
Incentive Plan and such other employee benefits as provided to other senior
executives.
Mr. Klein is also a party to our Employee Non-Disclosure, Non-Competition
and Assignment of Inventions Agreement. He has agreed not to reveal any
confidential information belonging to us, except as may be required in the
course of performing his duties as our employee. He has also agreed to assign
to us any rights which he
48
<PAGE>
may have with respect to inventions, software programs, data or other
developments created or discovered during his employment term. Mr. Klein
agrees that while he is employed by us he will not compete with any business
we conduct and, for one year after his termination, he will not solicit any of
our employees, customers or suppliers.
Mark Loehr. Mr. Loehr has an employment agreement with us for a term of
three years, beginning March 8, 1999, subject to the right of each party to
terminate the agreement upon 90 days' notice. Under the agreement, Mr. Loehr
is entitled to a minimum annual base salary of $200,000, subject to increases
based on annual reviews by the Board. If his employment is terminated by us
without "cause," excluding a termination due to his death or disability, or by
him for "good reason," we will continue to pay him his base salary through the
end of the three-year period of his agreement and bonus amounts accrued
through the date of termination. He is also entitled to participate in our
Investment Banking Bonus Pool and Long-Term Incentive Plan on the same terms
as are applicable to senior executives generally. Mr. Loehr is entitled to
participation in our 401(k) Plan, Stock Incentive Plan and such other employee
benefits as provided to other senior executives.
We have extended to Mr. Loehr an interest-bearing loan in the amount of
$1,875,000 with which he has purchased 1,250,000 shares of common stock at
$1.50 per share. He is personally liable for all interest due on his loan and
is similarly liable for one-half of the principal amounts of his loan. This
loan is secured by the shares purchased with the proceeds of this loan. In the
event Mr. Loehr violates his non-competition restrictions or ceases to be
employed by us (except for termination other than for "cause" or for "good
reason"), we have the right to repurchase his unvested shares at the lower of
their fair market value or $1.50 per share. If Mr. Loehr is terminated other
than for "cause," for death or disability or for "good reason," we will not
have the right to purchase these shares on these terms. These shares vest
quarterly, beginning June 30, 1999, at the rate of 78,125 shares per quarter
until March 31, 2003. Our right to repurchase the unvested shares terminates
on March 31, 2003. In addition, Mr. Loehr's loan becomes due and payable in
the event that his employment terminates or in the event that he no longer
owns the shares. Mr. Loehr also has "piggyback" and demand registration rights
relating to the shares.
Mr. Loehr is also a party to our Employee Non-Disclosure, Non-Competition
and Assignment of Inventions Agreement. He has agreed not to reveal any
confidential information belonging to us, except as may be required in the
course of performing his duties as our employee. He has also agreed to assign
to us any rights which he may have with respect to inventions, software
programs, data or other developments created or discovered during his
employment term. Mr. Loehr agrees that while he is employed by us and for one
year after his termination, he will neither compete with any business we
conduct nor solicit any of our employees, customers or suppliers.
Everett F. Lang. Mr. Lang has an employment agreement which terminates on
December 31, 2002. Mr. Lang's agreement provides for an annual base salary of
$200,000 and a guaranteed bonus equal to at least $50,000 in 1999 and 2000,
and thereafter provides for an annual base salary of $200,000 and a bonus
based on the performance of our digital trading facility.
We have to extended to Mr. Lang an interest-bearing loan in the amount of
$338,281 with which he has purchased 225,520 shares of common stock by
exercising all vested and non-vested options, other than incentive stock
options, previously held by him. The shares Mr. Lang purchased by exercising
those options which were not vested at the time can be repurchased by us at
$1.50 per share, unless he remains employed by us through the period when
these options would originally have vested. He is personally liable for all
interest due on his loan and is similarly liable for up to one-half of the
principal amount of his loan. This loan is secured by the shares purchased
with the proceeds of this loan. Mr. Lang's loan becomes due and payable March
31, 2003 or earlier in the event that his employment terminates or in the
event he no longer owns the shares.
49
<PAGE>
Management Benefit Plans
Stock Incentive Plan
We have a Stock Incentive Plan which permits us to grant stock and stock-
based awards to our employees, officers, directors and consultants, including
stock options, stock appreciation rights, restricted and unrestricted stock,
phantom stock awards, performance awards, convertible debentures and other
stock and cash awards. The purpose of the plan is to promote our long-term
growth and profitability by providing our people with incentives to improve
stockholder value and contribute to our growth and financial success. The
awards also enable us to attract, retain and reward the best available people
for positions of substantial responsibility.
Up to 30,000,000 shares of our common stock may be issued under the Stock
Incentive Plan. This limit includes shares issued with respect to awards
granted before, and awards that will be granted after, the 1999 amendment to
the plan. The limit is subject to adjustment to reflect any stock dividends,
split-ups, recapitalizations, mergers, consolidations, business combinations,
exchanges of shares and the like. If any award expires, becomes unexercisable,
or is forfeited or surrendered, or if any shares of our common stock are
surrendered to us as payment or settlement in connection with any award, the
shares subject to the award and the surrendered shares will become available
for issuance under the plan. A total of 199 current and former employees and
key consultants currently holds options to purchase 13,892,852 shares of our
common stock, of which the options are vested with respect to 3,942,174
shares.
A committee appointed by the Board or the Board itself will administer the
plan. The administrator will have the authority to take all actions necessary
to carry out the purpose of the plan, including the authority to select the
participants, to determine the sizes and types of the awards to grant, to
establish the terms and conditions of the awards and to modify outstanding
awards.
Annual Bonus Plans
We adopted the Annual Bonus Plan for Executives. The plan will pay
performance-based bonuses to executive officers and key executives as
incentive for the participants to contribute to our profitability. A committee
appointed by the Board will administer the plan. Each year, the committee will
determine the amount of the bonus pool from which the bonuses will be paid.
The bonus pool will be determined based on a formula, as adopted at the
committee's discretion, which will taken into account one or more of the
following measures of our financial performance: (a) pre-tax or after-tax
return on equity; (b) earnings per share; (c) pre-tax or after-tax net income;
(d) pre-tax operating income; (e) net revenues; (f) profits before taxes; (g)
book value per share; (h) market price per share and (i) earnings available to
common stockholders. The committee will determine the percentage of the bonus
pool payable to each participant, subject to adjustment based on achievement
of individual, group or corporate performance goals. We will pay the bonuses
in cash, in stock or stock-based awards under the Stock Incentive Plan or in
any combination of methods. Subject to the terms of the Deferred Compensation
Plan, a participant may elect to defer payment of his bonus and receive the
payment under the Deferred Compensation Plan.
To foster the same motivation among our investment bankers and analysts (the
"Investment Banking Group") to contribute to our profitability, we also
adopted the Annual Bonus Plan for the Investment Banking Group. The bonuses
under this plan will be paid on a quarterly basis from a bonus pool which will
consist of 40% of the net cash and securities generated quarterly by the
Investment Banking Group. A committee, as appointed by the Board to administer
the plan, will annually in advance select the participants and determine the
formula for allocating the bonus pool among the participants. The bonus of a
participant may be increased or decreased by up to 20% based on the
participant's performance or other factors as determined by the committee. We
will pay the bonuses in cash, in securities generated by the Investment
Banking Group, in stock or stock-based awards under the Stock Incentive Plan
or in any combination of those methods. Subject to the terms of the Deferred
Compensation Plan, a participant may elect to defer payment of his bonus and
receive the payment under the Deferred Compensation Plan. A portion of the
Annual Bonus Plan for the Investment Banking Group pool may be allocated to
the Annual Bonus Plan for Executives.
50
<PAGE>
Long-Term Incentive Plan
To attract and retain employees who contribute to our continued growth,
development and financial success, we adopted the Long-Term Incentive Plan
(the "LTIP"). A committee appointed by the Board will administer the LTIP and
will select those executives and key employees who are eligible to participate
in the LTIP. The LTIP provides for the payment of performance awards if
certain objective performance goals are met over a three-year performance
period. Performance goals and corresponding performance awards are set by the
committee at the beginning of the three-year period and are based on one or
more of the following measures of our financial performance: (1) net revenue
or income; (2) stock price; (3) return on equity; (4) earnings per share; (5)
profits before taxes; (6) operating income and (7) any other factors as
determined by the administrator. The administrator reserves the right to
adjust the amount of a performance award payable to any participant based on
additional factors such as individual performance and contributions to our
success. Performance awards are paid only to participants who are employed by
us at the end of the three-year performance period. Performance awards will be
paid in cash, stock or a combination thereof. Subject to the terms of the
Deferred Compensation Plan, a participant may elect to defer payment of a
performance award and receive the payment under the Deferred Compensation
Plan.
Deferred Compensation Plan
We adopted the Deferred Compensation Plan for the employees participating in
the three bonus plans (the Long-Term Incentive Plan, the Annual Bonus Plan for
Executives and the Annual Bonus Plan for the Investment Banking Group).
Participation in the Deferred Compensation Plan will be limited to those bonus
plan participants who would represent a "select group of management and highly
compensated employees" under applicable federal law governing employee benefit
plans. The plan permits the participants to make annual elections to defer all
or a portion of the bonuses they might earn under the bonus plans. The
deferred amounts will be credited to the participants' accounts, which will be
maintained for recordkeeping purposes and will not hold assets. The cash
bonuses deferred under the plan will be credited with gains and losses as if
actually invested in the investment alternatives selected by the participants
from a menu available under the plan. The bonuses in shares of our common
stock that are deferred under the plan will be credited with gains and losses
based on the value of the stock and any stock dividends. If there will be cash
dividends and distributions on the shares credited to the accounts, those
amounts will be credited with earnings at a fixed annual percentage rate. The
participants' interest in their accounts will be vested and non-forfeitable.
Each account will be paid out at the time and in the manner and form as
selected by the participant from a menu of alternatives available under the
plan.
401(k) Plan
We maintain a 401(k) retirement savings plan. All of our employees meeting
certain minimum eligibility requirements are eligible to participate in the
401(k) plan. Under the 401(k) plan, an employee may contribute up to 15% of
his or her pre-tax gross compensation. The contribution cannot exceed a
statutorily prescribed annual limit. The 401(k) plan permits us, but does not
require us, to make additional contributions to the 401(k) plan. All amounts
contributed by the employee participants in conformance with plan requirements
and earnings on such contributions are fully vested at all times. For the
years ended December 31, 1997 and 1998, we did not contribute to the 401(k)
Plan.
51
<PAGE>
CERTAIN TRANSACTIONS
Except as described below, none of our directors, officers or principal
security holders has or has had a direct or indirect material interest in any
transaction to which we are or have been a party. We believe that the terms of
each of the transactions described below were no less favorable to us than
could have been obtained from unaffiliated third parties. In addition, we will
not enter into additional transactions or agreements with directors, officers,
principal security holders or other affiliated parties unless the terms
thereof are no less favorable to us than could be obtained from unaffiliated
third parties. In any event, we will not enter into any transaction with
directors, officers or principal security holders without the affirmative vote
of a majority of disinterested directors.
Loans to Officers
Messrs. Lessin and Loehr were given loans by us to purchase shares of common
stock pursuant to their respective employment agreements as described under
"Management--Employment Agreements." In addition, Messrs. Readmond, Lang and
Lieberman and Ms. Berkowitz accepted the opportunity we offered them to
exercise all their vested and non-vested stock options on April 30, 1999,
other than incentive stock options, with funds we loaned to them. The shares
they purchased by exercising those of their options which were not vested at
the time can be repurchased by us at their respective option exercise prices,
unless they remain in our employ through the respective periods when these
options would originally have vested. The individuals are personally liable
for all interest due on their loans and are similarly liable for one-half of
the principal amounts of their loans. Each loan is secured by the shares
purchased with the proceeds of that loan. Each loan becomes due and payable on
March 31, 2003 or earlier if the individual's employment is terminated or he
or she no longer owns the shares. The respective total number of shares
purchased and the amounts loaned are set forth in the table below.
<TABLE>
<CAPTION>
Number of Shares
Acquired on Exercise Loan Amount
-------------------- -----------
<S> <C> <C> <C> <C>
Ronald
Readmond..... 2,230,000 $2,787,500
Everett F.
Lang......... 225,520 338,281
George M.
Lieberman.... 133,333 200,000
Susan J.
Berkowitz.... 75,000 93,750
</TABLE>
Stock Issuances to Executive Officers, Directors and Our Largest Stockholders
The following table sets forth issuances of our capital stock to our
executive officers, directors and our largest stockholders. All purchases
during April 1999 by officers were pursuant to the exercise of their
outstanding options. All shares of Series A, B, C and D Preferred Stock will
convert automatically into an equal number of shares of common stock upon
consummation of this offering. All shares of Series E Preferred Stock will
convert into an equal number of shares of Class B common stock upon
consummation of this offering.
<TABLE>
<CAPTION>
Price Share
Stockholder Capital Stock Per Share Amounts Issuance Date
- ----------- ------------- --------- ------- -------------
<S> <C> <C> <C> <C>
The Goldman Sachs Group,
L.P.(1)................ Series E Preferred $1.50 16,666,667 April 8, 1999
Capital Z Partners(2)... Series D Preferred 1.50 16,666,667 February 23, 1999
Draper Fisher
Jurvetson(3)........... Series D Preferred 1.50 1,333,333 March 8, 1999
Series D Preferred 1.50 333,333 December 8, 1998
Series C Preferred 1.00 5,000,000 September 17, 1998
Andrew D. Klein......... Common Stock 0.01 8,000,000 April 4, 1996
Robert H. Lessin........ Series D Preferred 1.50 130,000 December 8, 1998
Common Stock 1.00 50,000 April 13, 1998
Common Stock 1.00 5,750,000 August 3, 1998
Ronald Readmond......... Series A Preferred 1.00 100,000 January 29, 1998
Series A Preferred 1.00 30,000 April 30, 1997
Common Stock 1.00 2,230,000 April 30, 1999
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Price Share
Stockholder Capital Stock Per Share Amount Issuance Date
- ----------- ------------- --------- ------ -------------
<S> <C> <C> <C> <C>
Edward H. Fleischman.... Series D Preferred 1.50 33,333 December 8, 1998
Joseph R. Hardiman...... Series A Preferred 1.00 50,000 December 9, 1997
Mark Loehr.............. Common Stock 1.50 1,250,000 March 5, 1999
M. Bernard Siegel....... Common Stock 1.00 50,000 April 5, 1999
Everett F. Lang......... Common Stock 1.50 225,520 April 30, 1999
George M. Lieberman..... Common Stock 1.50 133,333 April 30, 1999
Common Stock 1.50 25,000 April 14, 1999
Susan J. Berkowitz...... Common Stock 1.00 75,000 April 30, 1999
Common Stock 1.00 62,500 April 5, 1999
</TABLE>
- --------
(1) The Goldman Sachs Group, L.P. owns warrants to purchase up to 8,053,279
shares of Class B common stock. Goldman Sachs also has the right to
receive warrants to purchase an additional 218,924 shares of Class B
common stock in certain circumstances after September 25, 1999. All
warrants issued to Goldman Sachs become exercisable in October 2000.
(2) Steven Gluckstern and Adam Mizel, two of our directors, are general
partners of Capital Z Partners.
(3) John H.N. Fisher, one of our directors, is a managing director of Draper
Fisher Jurvetson. Draper Fisher Jurvetson owns warrants to purchase
690,030 shares of Series C Preferred Stock. These warrants will be
exercisable for common stock after this offering.
Agreement with Stockholders
Capital Z Partners and Draper Fisher Jurvetson, who are the beneficial
owners of 16,666,667 and 7,356,696 shares, respectively, of our common stock
that will be issued upon conversion of their preferred stock when this
offering is consummated, Goldman Sachs, who is the beneficial owner of
16,666,667 shares of Class B common stock that will be issued upon conversion
of their preferred stock upon consummation of this offering, and Messrs.
Readmond and Lessin, the holders of 2,360,000 and 6,630,000 shares,
respectively, of our common stock, are entitled to certain rights and subject
to certain obligations in connection with the ownership of these shares. The
rights and obligations that will survive this offering are as follows:
. Capital Z Partners may not to attempt to acquire beneficial ownership of
greater than 25% of our common stock and Class B common stock
(calculated as if all outstanding options and rights to acquire our
common stock are exercised and the related common stock is issued,
including any Class B common stock). This restriction will terminate
three years after completion of this offering or earlier if any other
person acquires or intends to acquire at least 25% of our common stock
(calculated in a similar manner).
. Goldman Sachs and its affiliates may not acquire, with certain
exceptions, beneficial ownership of more than 25% of our common stock
and Class B common stock (calculated as if all outstanding options and
rights to acquire our common stock are exercised and the related common
stock is issued, including any Class B common stock). This restriction
will terminate three years after completion of this offering or earlier
if any other person acquires or intends to acquire at least 25% of our
common stock (calculated in a similar manner).
. If we intend to offer shares of our common stock, or other securities
convertible into our common stock, representing more than 5% of our
common stock and Class B common stock (again calculated as if all
outstanding options and rights to acquire our common stock are exercised
and the related common stock is issued, including any Class B common
stock) to any of a number of designated competitors of Goldman Sachs,
Goldman Sachs will have a first right to buy all of the offered shares
on the same terms as those offered to the competitor. This right of
first refusal will terminate in April 2009 or earlier if Goldman Sachs
and its affiliates cease to own at least 10% of our common stock
(calculated, again, in a similar manner).
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. In any year after this offering, Messrs. Lessin and Readmond cannot
transfer more than the sum of half of the total number of shares each is
permitted to transfer under Rule 144 under the Securities Act, plus a
percentage of any share amount transferred by Capital Z Partners in that
year, plus any allowable transfer amount carried over from a previous
year without the consent of Capital Z Partners.
Spring Street
We are a party with Spring Street Brewing Company to a license and
reciprocal marketing agreement dated April 4, 1996. Pursuant to this
agreement, we issued to Spring Street 1,000,000 shares of common stock valued
at the time at $10,000. At the time, Mr. Klein was a director of Spring
Street. In 1998, Spring Street transferred all of its assets to Long Shore
Brewing Company and its affiliate MMB Properties LLC as part of a merger.
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STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 1999 (assuming the conversion of
all of our outstanding preferred stock) by: (1) each person or entity that we
know beneficially owns 5% or more of our common stock; (2) our co-chief
executive officers and the other four most highly compensated executive
officers as of April 30, 1999; (3) each of our directors; and (4) all our
current directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Percentage of Common
Shares Stock Beneficially
Beneficially Owned
Owned --------------------
Prior to Prior to After
Name of Beneficial Owner Offering(1) Offering Offering(2)
- ------------------------ ------------ -------- -----------
<S> <C> <C> <C>
Capital Z Financial Services Fund II, L.P... 16,666,667 18.7%
One Chase Manhattan Plaza, 44th Floor
New York, NY 10005
Draper Fisher Jurvetson(3).................. 7,356,696 8.2
400 Seaport Court
Redwood City, CA 94063
John H.N. Fisher(4)......................... -- *
400 Seaport Court
Redwood City, CA 94063
Edward H. Fleischman(5)..................... 36,458 *
Steven Gluckstern(6)........................ -- *
One Chase Manhattan Plaza, 44th Floor
New York, NY 10005
The Goldman Sachs Group, L.P.(7) ........... 16,666,667 18.7
85 Broad Street
New York, NY 10004
Joseph R. Hardiman(5)...................... 56,250 *
Andrew D. Klein(8).......................... 6,254,768 7.0
Everett Lang(9)............................. 244,237 *
Robert H. Lessin(10)........................ 6,630,000 7.4
George Lieberman (11)....................... 174,444 *
Mark Loehr.................................. 1,250,000 1.4
Gilbert C. Maurer(5)........................ 6,250 *
Adam Mizel(6)............................... -- *
One Chase Manhattan Plaza 44th Floor
New York, NY 10005
Ronald Readmond(12)......................... 2,393,333 2.7
All executive officers and directors as a 18,599,757 20.8
group (17 persons)(13).....................
</TABLE>
55
<PAGE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. In general, a person who has voting power and/or investment power
with respect to securities is treated as a beneficial owner of those
securities. Shares subject to options, warrants or rights currently
exercisable or exercisable within 60 days of the date of this prospectus
are considered as beneficially owned by the person holding such options,
warrants or rights. Unless indicated otherwise, we believe that the
persons named in this table have sole voting and investment power with
respect to the shares shown. The amounts and percentages are based upon
72,407,977 shares of common stock and 16,666,667 shares of Class B common
stock outstanding as of April 30, 1999.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes warrants to purchase 690,030 shares of Series C Preferred Stock.
These warrants will be exercisable for an equal number of shares of common
stock after this offering.
(4) Mr. Fisher is a managing director of Draper Fisher Jurvetson and therefore
may be deemed to beneficially own shares held by Draper Fisher Jurvetson.
(5) Includes 3,125 shares issuable upon exercise of options exercisable within
60 days. Also has an additional 43,750 options exercisable after 60 days.
(6) General partner of Capital Z Partners and therefore may be deemed to
beneficially own shares held by Capital Z Financial Services Fund II, L.P.
(7) Excludes warrants to purchase 8,053,279 shares of Series E Preferred
Stock, none of which is exercisable within 60 days. These warrants will be
exercisable into Class B common stock after this offering. Also has the
right to receive up to an additional 218,924 similar warrants in certain
circumstances after September 25, 1999. Class B common stock is not
entitled to vote for the election of directors, but is automatically
converted into shares of common stock when transferred to a non-affiliate
of Goldman Sachs.
(8) Does not include 30,018 shares owned by MMB Properties LLC of which Mr.
Klein is a director.
(9) Includes 18,717 which are exercisable within 60 days and excludes 280,763
which are exercisable after 60 days.
(10) In addition to his purchases from us, Mr. Lessin purchased shares from
two of our stockholders.
(11) Includes 16,111 shares issuable upon exercise of options exercisable
within 60 days. Also has an additional 225,556 options exercisable after
60 days.
(12) Includes 33,333 shares issuable upon exercise of options exercisable
within 60 days. Also has an additional 366,667 options exercisable after
60 days.
(13) If we include shares beneficially owned by Capital Z Financial Services
Fund II, L.P. and Draper Fisher Jurvetson, each of which has designated
one or more members of our Board of Directors, then the number of shares
and percentages would be 42,623,120, 47.8% and .
Venture capital funds that have invested in our company but are not listed
on the table above include Highland Capital Partners, MC Capital (a subsidiary
of Mitsubishi Corporation), Media One Interactive Services and Comcast
Interactive Investments.
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DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 159,000,000 shares of common stock,
$.01 par value, 25,000,000 shares of Class B common stock, $.01 par value, and
30,000,000 shares of preferred stock, $.001 par value. Upon consummation of
this offering, (1) there will be 72,407,977 shares of common stock and
16,666,667 shares of Class B common stock outstanding (assuming no exercise of
outstanding stock options and warrants and giving effect to the issuance of
48,539,018 shares of common stock and 16,666,667 shares of Class B common
stock upon the conversion of all outstanding preferred stock), (2) there will
be the conversion of all outstanding preferred stock into common stock and
Class B common stock and (3) there will be outstanding options to purchase
13,892,852 shares of common stock and outstanding warrants to purchase
1,576,330 shares of common stock and 8,053,279 shares of Class B common stock.
The following summary of the terms and provisions of our capital stock does
not purport to be complete. Reference should be made to our Amended and
Restated Certificate of Incorporation and our By-Laws, and to applicable law,
for the complete description of the terms and provisions of our capital stock.
Common Stock
The holders of common stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. The
holders of the common stock are entitled to such dividends as may be declared
in the discretion of the Board of Directors out of funds legally available
therefor, subject to the preferential dividend rights of any shares of
preferred stock. See "Dividend Policy." Upon liquidation, holders of common
stock are entitled to share ratably in the remaining assets upon liquidation
after payment or provision for all liabilities and any preferential
liquidation rights of any preferred stock. The holders of common stock have no
preemptive rights to purchase shares of our stock. Shares of common stock are
not subject to any redemption provisions and are not convertible into any
other securities. All outstanding shares of common stock are fully paid and
nonassessable. The shares of our common stock we will sell in this offering
will also be fully paid and nonassessable when we receive payment for the
shares.
Class B Common Stock
The holders of Class B common stock are generally not entitled to vote
except as required by law. The holders of the Class B common stock are
entitled to any dividends declared by our Board of Directors which are payable
to holders of common stock on the same terms and in the same form as those
dividends paid to holders of common stock. Upon liquidation, holders of Class
B common stock are entitled to share ratably in the remaining assets after
payment or provision for all liabilities and any preferential liquidation
rights of any preferred stock. The Class B common stock will be treated in an
identical manner as the common stock with respect to any reclassification,
recapitalization, stock split or similar transaction and in any merger,
consolidation or share exchange. The holders of Class B common stock have no
preemptive rights to purchase shares of our stock. If any person or entity
other than Goldman Sachs or any of its affiliates becomes the beneficial owner
of shares of Class B common stock, these shares will automatically convert
into an equal number of shares of common stock. Shares of Class B common stock
are not subject to any redemption provisions. All outstanding shares of Class
B common stock are fully paid and non-assessable.
Preferred Stock
Our Amended and Restated Certificate of Incorporation provides for 30
million authorized shares of preferred stock, of which none is outstanding.
The existence of authorized but unissued preferred stock may enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest or otherwise.
For example, if in the due exercise of its fiduciary
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<PAGE>
obligations, the Board of Directors were to determine that a takeover proposal
is not in our best interests, the Board of Directors could cause shares of
preferred stock to be issued without stockholder approval in one or more
private offerings or other transactions that might dilute the voting or other
rights of the proposed acquiror or insurgent stockholder group. In this
regard, the Amended and Restated Certificate of Incorporation grants the Board
of Directors broad power to establish the rights and preferences of authorized
and unissued preferred stock. The issuance of shares of preferred stock
pursuant to the Board of Directors' authority described above could decrease
the amount of earnings and assets available for distribution to holders of
shares of common stock and adversely affect the rights and powers, including
voting rights, of such holders and may have the effect of delaying, deterring
or preventing a change in control of us. The Board of Directors currently does
not intend to seek stockholder approval prior to any issuance of preferred
stock, unless otherwise required by law.
Registration Rights
After this offering, Goldman Sachs, Capital Z Partners, Draper Fisher
Jurvetson and certain other stockholders, or their respective transferees,
will be entitled to certain registration rights with respect to the
registrable securities. These rights are provided under the terms of the
registrable securities and agreement between us and the holders of these
registrable securities. This agreement provides demand registration rights
under the Securities Act beginning six months after this offering. These
stockholders may require that we file up to an aggregate of five registration
statements, subject to certain conditions. In addition, the holders are
entitled to require us to include their registrable securities in future
registration statements we file under the Securities Act, often referred to as
"piggyback" registration rights. The holders are also entitled to require us
to register their registrable securities on a registration statement on Form
S-3 once we are eligible to use a Form S-3 in connection with such
registrations. However, holders of these shares will be restricted from
exercising such rights until six months after the date of this prospectus, and
within six months after the filing of any subsequent registration statement.
Registration of shares of common stock pursuant to the exercise of demand
registration rights, piggyback registration rights or S-3 registration rights
would result in such shares becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of such registration
subject to any lock-up agreements we have with these stockholders. We are
required to bear substantially all registration and selling expenses in
connection with the above-described registrations, except for underwriting
discounts, income and transfer taxes (if any), selling expenses and the fees
and expenses of more than one counsel representing the holders of the
registrable securities. These registration rights are transferable in certain
circumstances and may be amended or waived only with our written consent and
the consent of a specified number of holders of the registrable securities.
See "Risk Factors," "Shares Eligible for Future Sale" and "Certain
Transactions."
Stockholder Rights Plan
Each share of common stock offered hereby includes one right ("Right") to
purchase from us a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Junior Participating Preferred Stock"), at a
purchase price of per Fractional Share, subject to adjustment in certain
events (the "Purchase Price").
Initially, the Rights will attach to all certificates representing
outstanding shares of our common stock, including the shares of common stock
being sold in this offering, and no separate certificates for the Rights
("Rights Certificates") will be distributed. The Rights will separate from the
common stock and a "Distribution Date" will, with certain exceptions, occur on
the earlier of (1) 10 days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding shares of common stock (the date of the announcement
being the "Stock Acquisition Date") or (2) 10 business days following the
commencement of a tender or exchange offer that would result in a person's
becoming an Acquiring Person. Notwithstanding the foregoing, so long as Draper
Fisher Jurvetson (including, for purposes of the Rights Agreement, its wholly
owned subsidiaries), Mr. Andrew Klein or Mr. Robert Lessin together with all
their respective affiliates and associates,
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<PAGE>
remain the beneficial owners of 15% or more of the outstanding shares of our
common stock, neither Mr. Klein, Mr. Lessin nor Draper Fisher Jurvetson shall
be or become an Acquiring Person. Goldman Sachs will not be an Acquiring
Person so long as it does not beneficially own more than 25% of our common
stock and Class B common stock (calculated as if all outstanding options and
rights to acquire our common stock are exercised and the related common stock
is issued, including any Class B common stock). In certain circumstances, the
Distribution Date may be deferred by the Board of Directors. Certain
inadvertent acquisitions will not result in a person's becoming an Acquiring
Person if the person promptly divests itself of sufficient shares of our
common stock. Until the Distribution Date, (1) the Rights will be evidenced by
the common stock certificates and will be transferred with and only with those
certificates, (2) common stock certificates will contain a notation
incorporating the Rights Agreement by reference and (3) the surrender for
transfer of any certificate for our common stock also will constitute the
transfer of the Rights associated with the stock represented by such
certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on September 30, 2009, unless earlier redeemed or
exchanged by us as described below.
As soon as practicable after the Distribution Date, Rights Certificates will
be mailed to holder of record of our common stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the
separate Rights Certificates alone will represent the Rights. All shares of
our common stock issued prior to the Distribution Date will be issued with
Rights. Shares of common stock issued after the Distribution Date in
connection with certain employee benefit plans or upon conversion of certain
securities will be issued with Rights. Except as otherwise determined by the
Board of Directors, no other shares of our common stock issued after the
Distribution Date will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
common stock at a price and on terms that a majority of the independent
members of the Board of Directors determines to be fair to and otherwise in
our best interests and in the best interests of our stockholders (a "Permitted
Offer")), each holder of a Right will thereafter have the right to receive, on
exercise of that Right, a number of shares of common stock (or, in certain
circumstances, cash, property or other securities from us) having a Current
Market Price (as defined in the Rights Agreement) equal to two times the
exercise price of the Right. Notwithstanding the foregoing, following the
occurrence of any Triggering Event (as defined below), all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by an Acquiring Person (or by certain related parties) will
be null and void in the circumstances set forth in the Rights Agreement.
Rights are not exercisable following the occurrence of any Flip-In Event until
such time as the Rights are no longer redeemable by us as set forth below.
In the Event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (1) we are acquired in a merger or other
business combination transaction (other than certain mergers that follow a
Permitted Offer) or (2) 50% or more of our assets or earning power is sold or
transferred, each holder of a Right (except Rights that previously have been
voided as set forth above) shall thereafter have the right to receive, on
exercise of such Right, a number of shares of common stock of the acquiring
company having a Current Market Price equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
The number of outstanding Rights associated with a share of our common
stock, or the number of Fractional Shares of Junior Participating Preferred
Stock issuable upon exercise of a Right and the Purchase Price, are subject to
adjustment in the event of a stock dividend on, or a subdivision, combination
or reclassification of, our common stock occurring prior to the Distribution
Date. The Purchase Price payable, and the number of Fractional Shares of
Junior Participating Preferred Stock or other securities or property issuable,
upon exercise of the Rights are subject to adjustment from time to time to
prevent dilution in the event of certain transactions affecting the Junior
Participating Preferred Stock.
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With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Junior Participating Preferred Stock that are
not integral multiples of a Fractional Share are required to be issued and, in
lieu thereof, an adjustment in cash will be made based on the market price of
the Junior Participating Preferred Stock on the last trading date prior to the
date of exercise. Pursuant to the Rights Agreement, we reserve the right to
require prior to the occurrence of a Triggering Event that, on any exercise of
Rights, a number of Rights be exercised so that only whole shares of Junior
Participating Preferred Stock will be issued.
At any time until 10 days following the first date of public announcement of
the occurrence of a Flip-In Event, we may redeem the Rights in whole, but not
in part, at a price of $.001 per Right, payable, at the option of us, in cash,
shares of our common stock or such other consideration as the Board of
Directors may determine. Immediately on the effectiveness of the action of the
Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.001 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of common stock
then outstanding or the occurrence of a Flip-Over Event, we may, at our
option, exchange the Rights (other than Rights owned by an Acquiring Person or
an affiliate or an associate of an Acquiring Person, which will have become
void), in whole or in part, at an exchange ratio of one share of common stock,
and/or other equity securities deemed to have the same value as one share of
common stock, per Right, subject to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors only in order to
cure any ambiguity, defect or inconsistency, to make changes that do not
materially adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any time period
under the Rights Agreement; provided, however, that no amendment to lengthen
the time period governing redemption shall be made at such time as the Rights
are not redeemable. Until a Right is exercised, the holder thereof, as such,
will have no rights to vote or receive dividends or any other rights as one of
our stockholders.
The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire us
without the approval of the Board. As a result, the overall effect of the
Rights may be to render more difficult or discourage any attempt to acquire
us, even if such acquisition may be favorable to the interests of our
stockholders. Because the Board of Directors can redeem the Rights or approve
a Permitted Offer, the Rights should not interfere with a merger or other
business combination approved by the Board. The Rights are being issued to
protect our stockholders from coercive or abusive takeover tactics and to
afford the Board of Directors more negotiating leverage in dealing with
prospective acquirers.
Limitation On Directors' Liabilities
Our Amended and Restated Certificate of Incorporation limits, to the maximum
extent permitted under Delaware law, the personal liability of directors and
officers for monetary damages for breach of their fiduciary duties as
directors and officers, except in certain circumstances involving certain
wrongful acts, such as a breach of the director's duty of loyalty or acts of
omission which involve intentional misconduct or a knowing violation of law.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits us
to indemnify officers, directors or employees against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement in
connection with legal proceedings if the officer, director or employee acted
in good faith and in a manner he reasonably believed to be in or not opposed
to our best interests, and, with respect to any criminal act or proceeding, he
had no reasonable cause to believe his conduct was unlawful. Indemnification
is not permitted as to any matter as to which the person is adjudged to be
liable unless, and only to the extent that, the court in which such action or
suit was brought upon application that, despite the adjudication of liability,
but in view of
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all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. Individuals
who successfully defend such an action are entitled to indemnification against
expenses reasonably incurred in connection therewith.
Our By-Laws require us to indemnify directors and officers against, to the
fullest extent permitted by law, liabilities which they may incur under the
circumstances described in the preceding paragraph.
We plan to maintain standard policies of insurance under which coverage is
provided (1) to our directors and officers against loss arising from claims
made by reason of breach of duty or other wrongful act and (2) to us with
respect to payments which may be made by us to such officers and directors
pursuant to the above indemnification provision or otherwise as a matter of
law.
In addition, we have entered into indemnification agreements with our
directors and executive officers. Under these agreements, we agree to
indemnify each director and officer to the fullest extent permitted by law for
any acts performed, or for failures to act, on our behalf or on behalf of
another person or entity for which that director or officer is performing
services at our request. We will not indemnify a director or officer for any
breach of loyalty to us or to our stockholders, or if the director or officer
does not act in good faith or for acts involving intentional misconduct, or
for acts or omissions falling under Section 174 of the DGCL, or for any
transaction for which the director or officer derives an improper benefit. We
agree to indemnify for expenses related to indemnifiable events, and to pay
for these expenses in advance. Our obligation to indemnify and to provide
advances for expenses are subject to the approval of a review process with a
reviewer to be determined by the Board. The rights of directors and officers
will not exclude any rights to indemnification otherwise available under law
or under the Amended and Restated Certificate of Incorporation.
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ANTI-TAKEOVER PROVISIONS
General
Certain provisions of the DGCL and our Amended and Restated Certificate of
Incorporation and By-Laws may delay, discourage or prevent a change in control
of us unless such takeover or change in control is approved by our Board of
Directors. Such provisions also may render the removal of directors and
management more difficult. Such provisions may discourage bids for common
stock at a premium over the market price and may adversely affect the market
price and voting and other rights of the holders of common stock.
Amended and Restated Certificate of Incorporation and By-Laws
Our Amended and Restated Certificate of Incorporation provides that the
Board of Directors is divided into three classes of directors, serving
staggered three-year terms. With a classified Board of Directors, at least two
annual meetings of stockholders, instead of one, will generally be required to
effect a change in the majority of the Board of Directors. As a result, a
classified Board of Directors, as well as the inability of stockholders to
remove directors without cause and to fill vacancies on the Board, may
discourage proxy contests for the election of directors or purchases of a
substantial block of the common stock because such provision could operate to
prevent obtaining control of us in a relatively short period of time. This
classification provision also could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
us. In addition, the stockholders may only remove a director from office for
cause and only with the affirmative vote of at least two-thirds of the total
voting power of all of our outstanding stock and only the Board of Directors
may fill vacancies on the Board. We believe, however, that a classified Board
of Directors will help to assure the continuity and stability of the Board of
Directors and our business strategies and policies as determined by the Board
of Directors, since a majority of the directors at any given time will have
had prior experience as our directors. We believe that this, in turn, will
permit the Board of Directors to more effectively represent the interest of
stockholders.
Our Amended and Restated Certificate of Incorporation provides that
stockholders may act only at an annual or special meeting of stockholders and
may not act by written consent. Our By-Laws provide that special meetings of
stockholders may be called only by the Chairman of the Board of Directors, the
President or the Board of Directors. The By-Laws require advance written
notice, which generally must be received by our Secretary not less than 30
days nor more than 60 days prior to a meeting of stockholders (subject to
certain exceptions) of a proposal or director nomination which a stockholder
desires to present at such a meeting.
All amendments to the provisions of our Amended and Restated Certificate of
Incorporation relating to the classified Board must be approved by the holders
of two-thirds of the outstanding capital stock entitled to vote and all
amendments to the By-Laws must be approved by either the holders of two-thirds
of the outstanding capital stock entitled to vote or by a majority of the
Board of Directors.
These provisions reduce our vulnerability to an unsolicited acquisition
proposal and to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for shares of common stock and, as a consequence, they
also may inhibit fluctuations in the market price of our common stock that
could result from actual or rumored takeover attempts. These provisions also
may have the effect of preventing changes in our management. See "Risk
Factors."
Delaware Anti-Takeover Law
We are subject to Section 203 of the DGCL. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the
date the person became an interested stockholder, unless (with certain
exceptions) the "business combination" or the transaction in which the person
became an "interested stockholder" is approved
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in a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale or other transaction resulting in a financial benefit to
the "interested stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns 15% or more of a corporation's
outstanding voting stock, or was the owner of 15% or more of a corporation's
outstanding voting stock at any time within the prior three years, other than
"interested stockholders" prior to the time our common stock is quoted on
Nasdaq. The existence of this provision would be expected to have an anti-
takeover effect with respect to transactions not approved in advance by the
Board of Directors, including discouraging takeover attempts that might result
in a premium over the market price for the shares of common stock held by
stockholders.
Listing
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "WITC."
Transfer Agent and Registrar
American Stock Transfer will serve as transfer agent and registrar for the
common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock. Sales of substantial amounts of common stock in the public market, or
the perception that such sales could occur, could adversely affect the market
price of the common stock and could impair our future ability to raise capital
through the sale of equity securities.
Upon the closing of this offering, there will be an aggregate of shares
of common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Of the
outstanding shares, the shares being sold in this offering will be freely
tradable, except that any shares held by our "affiliates" may only be sold in
compliance with the limitations described below. Those shares of common
stock held by our affiliates will be deemed "restricted securities" that may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 or 701 under the Securities Act.
These rules are summarized below.
Subject to the lock-up agreements described elsewhere in this prospectus and
the provisions of Rules 144 and 701, shares in addition to those being offered
by this prospectus will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ---------------------------------------------------------
<C> <S>
Immediately after the date of this prospectus
Upon the filing of a registration statement to register
shares of common stock issuable upon the exercise of
options granted under our Stock Incentive Plan
After 180 days from the date of this prospectus (subject,
in some cases, to limitations in volume and manner of
sale)
At various times after 180 days from the date of this
prospectus
</TABLE>
In general, under Rule 144, as currently in effect, a person who owns shares
that were acquired from the issuer or an affiliate of the issuer at least one
year prior to the proposed sale is entitled to sell, within any three-month
period commencing 90 days after the date of this prospectus, a number of
shares that does not exceed the
63
<PAGE>
greater of (1) 1% of the then outstanding shares of common stock
(approximately shares immediately after this offering) or (2) the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of that sale is filed, subject to certain
additional public information and notification requirements. In addition, if
the shares were acquired from the issuer or an affiliate of the issuer at
least two years prior to the proposed sale, a person who has not been an
affiliate of the issuer during the preceding three months is entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above.
In addition, any of our employees, directors, consultants or officers who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701 of the Securities Act,
which permits non-affiliates to sell their Rule 701 shares without having to
comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 and permits affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case, commencing 90 days after the date of this prospectus.
As of the date of this prospectus, options to purchase a total of
shares of common stock are outstanding, of which options to purchase
shares are currently exercisable. Upon the closing of this offering, we intend
to file a registration statement to register the 30,000,000 shares of common
stock reserved for issuance under our Stock Incentive Plan. That registration
statement will automatically become effective upon filing. Accordingly, shares
issued upon the exercise of stock options granted under our Stock Incentive
Plan will be eligible for resale in the public market from time to time,
subject to vesting restrictions and, in the case of some of the options, to
lock-up agreements. See "Underwriting." Upon the closing of this offering,
shares of common stock will be issuable upon the exercise of outstanding
warrants.
Following this offering, some holders of shares of common stock will have
rights to have their shares of common stock registered for resale under the
Securities Act. See "Description of Capital Stock--Registration Rights."
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among us and the underwriters, each of the underwriters named below, for whom
Bear, Stearns & Co. Inc., Wit Capital Corporation (as e-Manager) and Thomas
Weisel Partners LLC are acting as representatives, has severally agreed to
purchase from us the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Wit Capital Corporation............................................
Thomas Weisel Partners LLC.........................................
---
Total............................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions. The nature of the underwriters' obligations is that
they are committed to purchase and pay for all of the above shares of common
stock if any are purchased.
Public Offering Price and Dealers Concession. The underwriters propose
initially to offer the shares of common stock offered by this prospectus to
the public at the initial public offering price per share set forth on the
cover page of this prospectus and to certain dealers at that price less a
concession not in excess of $ per share. The underwriters may allow, and
these dealers may reallow, concessions not in excess of $ per share on
sales to certain other dealers. After commencement of this offering, the
offering price, concessions and other selling terms may be changed by the
underwriters. No such change will alter the amount of proceeds to be received
by us as set forth on the cover page of this prospectus.
Over-Allotment Option. We have granted the underwriters an option, which may
be exercised within 30 days after the date of this prospectus, to purchase up
to additional shares of common stock to cover over-allotments, if any, at
the initial public offering price less the underwriting discount, each as set
forth on the cover page of this prospectus. If the underwriters exercise this
option in whole or in part, each of the underwriters will be severally
committed, subject to certain conditions, to purchase these additional shares
of common stock in proportion to their respective purchase commitments as
indicated in the preceding table and we will be obligated to sell these
additional shares to the underwriters. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
shares of common stock offered by this prospectus. These additional shares
will be sold by the underwriters on the same terms as those on which the
shares offered by this prospectus are being sold.
Underwriting Compensation. The following table summarizes the compensation
to be paid to the underwriters by us in connection with this offering:
<TABLE>
<CAPTION>
Total
-------------------------------------------
Without Exercise With Exercise
of the Over-Allotment of the Over-Allotment
Per Share Option Option
--------- --------------------- ---------------------
<S> <C> <C> <C>
Underwriting discounts..
</TABLE>
Prospectus in Electronic Format. Wit Capital Corporation, as e-Manager, is
making an electronic version of this prospectus available on a special Web
site located at http://www.witcapital.com/stok3/stok/WITCb.html. In addition,
pursuant to our agreement with the e-Dealers, those e-Dealers participating in
this offering have also agreed to make an electronic version of this
prospectus available on Web sites maintained by them. Other than the
electronic version of this prospectus, neither the information on Web sites
maintained by the e-Dealers nor the information on our Web sites is a part of
this prospectus or the registration statement of which this prospectus forms a
part, and none of this information has been approved or endorsed by us or any
underwriter in such capacity. Accordingly, this information should not be
relied on by prospective investors in making a decision whether to buy our
common stock.
65
<PAGE>
Indemnification of Underwriters. In the underwriting agreement, we have
agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in connection with these liabilities.
Discretionary Accounts. The underwriters have informed us that they do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Lock-Up Agreements. Each of our directors, officers, existing stockholders
and option holders has entered into "lock-up" arrangements under which they
have agreed that they will not sell, directly or indirectly, any shares of our
common stock without the prior written consent of Bear, Stearns & Co. Inc. for
a period of 180 days after the date of this prospectus. In the underwriting
agreement, we have agreed to a similar "lock-up" arrangement. We have agreed
that for a period of 180 days after the date of this prospectus we will not,
without the prior written consent of Bear, Stearns & Co. Inc., offer, sell or
otherwise dispose of, directly or indirectly, any shares of our common stock
except for the shares of common stock offered by this prospectus, shares of
common stock issuable upon exercise of outstanding warrants and shares issued
and options granted pursuant to our Stock Incentive Plan.
NASD Matters. The provisions of Rule 2720 of the NASD's Conduct Rules apply
to this offering because Wit Capital Corporation, a representative of the
underwriters and e-Manager of this offering, is our affiliate. When an NASD
member participates in the underwriting of an affiliate's securities, the
NASD's Conduct Rules provide that the public offering price per share can be
no higher than that recommended by a "qualified independent underwriter"
meeting specified standards. In accordance with this requirement, Bear,
Stearns & Co. Inc. has assumed the responsibilities of acting as a qualified
independent underwriter and will recommend a public offering price for shares
of our common stock in compliance with the requirements of Rule 2720 of the
NASD's Conduct Rules. Both in its role as lead manager of this offering and in
its role as a qualified independent underwriter, Bear, Stearns & Co. Inc. has
performed due diligence investigations and reviewed and participated in the
preparation of this prospectus and the registration statement of which this
prospectus forms a part. Bear, Stearns & Co. Inc. will not receive any
additional compensation in connection with acting as a qualified independent
underwriter with respect to this offering. We have agreed to indemnify Bear,
Stearns & Co. Inc. against certain liabilities it may incur in connection with
its responsibilities as a qualified independent underwriter, or to contribute
to payments Bear, Stearns & Co. Inc. may be required to make in connection
with those liabilities.
Thomas Weisel Partners LLC. Thomas Weisel Partners LLC, one of the
representatives of the underwriters, was organized and registered as a broker-
dealer in December 1998. Since December 1998, Thomas Weisel Partners has been
named as a lead or co-manager on twenty-four filed public offerings of equity
securities, of which eight have been completed, and has acted as a syndicate
member in an additional ten public offerings of equity securities. Thomas
Weisel Partners does not have any material relationship with us or any of our
officers, directors or other controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement
entered into in connection with this offering.
Determination of Offering Price. Prior to this offering, there has been no
market for our common stock. Accordingly, the initial public offering price
for the common stock will be determined by negotiation between us and Bear,
Stearns & Co. Inc. Among the factors to be considered in these negotiations
will be:
. the results of our operations in recent periods;
. our financial condition;
. estimates of our future prospects and of the prospects for the industry
in which we compete;
. an assessment of our management;
. the general state of the securities markets at the time of this offering;
and
. the prices of similar securities of companies considered comparable to
us.
66
<PAGE>
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "WITC". There can be no assurance,
however, that an active or orderly trading market will develop for our common
stock or that our common stock will trade in the public markets after this
offering at or above the initial offering price.
Stabilization and Other Transactions. In order to facilitate this offering,
persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during
and after this offering, including over-allotment, stabilizing and short-
covering transactions and the imposition of penalty bids. Persons
participating in this offering may also engage in passive market-making
transactions in the common stock on the Nasdaq National Market. Specifically,
the underwriters may over-allot or otherwise create a short position in the
common stock for their own account by selling more shares of common stock than
have been sold to them by us. The underwriters may elect to cover this short
position by purchasing shares of common stock in the open market or by
exercising the over-allotment option granted to the underwriters. In addition,
the underwriters may stabilize or maintain the price of the common stock by
bidding for or purchasing shares of common stock in the open market and may
impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in this offering are reclaimed
if shares of common stock previously distributed in this offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price
at a level above that which might otherwise prevail in the open market. The
imposition of a penalty bid may also affect the price of the common stock to
the extent that it discourages resales. No representation is made as to the
magnitude or effect of these stabilization transactions. These transactions
may be effected on the Nasdaq National Market or otherwise and, if commenced,
may be discontinued at any time.
LEGAL OPINIONS
The validity of common stock offered by this prospectus will be passed upon
by Morgan, Lewis & Bockius LLP, New York, New York. Certain legal matters
related to this offering will be passed upon for the underwriters by Cravath,
Swaine & Moore, New York, New York.
EXPERTS
Our financial statements and schedule included in this prospectus and
elsewhere in the registration statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in the prospectus in reliance upon the authority of
this firm as experts in giving this report.
67
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) on Form S-1 with respect to
the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
the shares of common stock offered hereby, reference is made to the
registration statement, including the exhibits and schedules thereto.
Statements contained in this prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, where such
contract is an exhibit to the registration statement, each such statement is
qualified in all respects by the provisions of such exhibit, to which such
reference is hereby made. You may read and copy any document we file at the
Public Reference Section of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and the Securities and
Exchange Commission's Regional Offices located at 500 West Madison Street,
Suite 1400, Chicago, IL 60661, and 7 World Trade Center, 13th Floor, New York,
NY 10048.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Upon approval of the
common stock for quotation on the Nasdaq National Market, such reports, proxy
and information statements and other information may also be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Securities and Exchange Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and
Exchange Commission. The address of the Securities and Exchange Commission's
Web site is http://www.sec.gov.
In addition, an electronic version of this prospectus is available on a
special Web site (http://www.witcapital.com/stok3/stok/WITCb.html) being
maintained by our broker-dealer subsidiary. Other than the electronic version
of this prospectus that is available on this special Web site, none of the
information on our Web sites is part of this prospectus.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................ F-2
Consolidated Statements of Financial Condition as of March 31, 1999,
December 31, 1998 and 1997............................................. F-3
Consolidated Statements of Operations for the periods ended March 31,
1999 and 1998 (unaudited) and the years ended December 31, 1998 and
1997 and for the period from March 27, 1996 (inception) to December 31,
1996................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
period ended March 31, 1999 and the years ended December 31, 1998 and
1997 and for the period from March 27, 1996 (inception) to December 31,
1996................................................................... F-5
Consolidated Statements of Cash Flows for the periods ended March 31,
1999 and 1998 (unaudited) and the years ended December 31, 1998 and
1997 and for the period from March 27, 1996 (inception) to December 31,
1996................................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule to Consolidated Financial Statements........................... F-15
Note to Condensed Financial Statements.................................. F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Wit Capital Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Wit Capital Group, Inc. (a Delaware corporation) and subsidiaries
as of March 31, 1999, December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the period ended March 31, 1999, the years ended December 31, 1998 and 1997
and for the period from March 27, 1996 (inception) to December 31, 1996. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wit Capital Group, Inc. and
subsidiaries as of March 31, 1999, December 31, 1998 and 1997, and the results
of their operations and their cash flows for the period ended March 31, 1999,
the years ended December 31, 1998 and 1997 and for the period from March 27,
1996 (inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index on
page F-1 is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not a part of the basic financial
statements. Such schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as whole.
/s/ Arthur Andersen LLP
New York, New York
April 23, 1999
F-2
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS............ $ 41,193,606 $ 18,110,146 $ 1,110,787
RECEIVABLE FROM CLEARING BROKER...... 477,215 119,312 136,364
SECURITIES OWNED, at market or fair
value............................... 781,627 758,293 540,504
PREPAID EXPENSES..................... 368,492 144,430 1,582,657
INVESTMENT BANKING FEES RECEIVABLE... 1,440,127 512,952 --
FURNITURE, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net of accumulated
depreciation and amortization of
$328,782, $243,527 and $98,757 at
March 31, 1999, December 31, 1998
and 1997, respectively.............. 1,065,192 615,181 335,044
COMPUTER SOFTWARE, net of accumulated
amortization of $685,642, $560,277
and $127,050 at March 31, 1999,
December 31, 1998 and 1997,
respectively........................ 1,497,164 1,614,735 2,026,420
OTHER ASSETS......................... 3,468,785 421,357 104,870
------------ ------------ -----------
Total assets......................... $ 50,292,208 $ 22,296,406 $ 5,836,646
============ ============ ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
<S> <C> <C> <C>
Accounts payable and accrued
expenses.......................... $ 2,358,604 $ 1,032,463 $ 875,871
Deferred advisory fees............. 377,526 595,486 --
Other liabilities.................. 56,420 60,203 101,500
------------ ------------ -----------
Total liabilities.................... 2,792,550 1,688,152 977,371
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.01 par
value, 9,000,000 shares
authorized; 8,997,952, 8,997,952
and 7,720,002 shares issued and
outstanding at March 31, 1999,
December 31, 1998 and 1997,
respectively...................... 89,980 89,980 77,200
Series B Preferred Stock, $.01 par
value, 3,000,000 shares
authorized; 2,304,982 shares
issued and outstanding at March
31, 1999 and December 31, 1998.... 23,050 23,050 --
Series C Preferred Stock, $.01 par
value, 7,445,000 shares
authorized; 5,902,750 shares
issued and outstanding at March
31, 1999 and December 31, 1998.... 59,028 59,028 --
Series D Preferred Stock, $.01 par
value, 31,333,334 and 10,000,000
shares authorized; 31,333,334 and
9,933,334 shares issued and
outstanding at March 31, 1999 and
December 31, 1998, respectively... 313,334 99,333 --
Common Stock, $.01 par value,
120,000,000, 60,000,000 and
25,000,000 shares authorized;
18,823,525, 16,092,286 and
10,080,136 shares issued and
outstanding at March 31, 1999,
December 31, 1998 and 1997,
respectively...................... 188,235 160,923 100,801
Additional paid-in capital......... 74,861,638 39,486,381 9,755,825
Notes receivable from
stockholders...................... (9,575,000) (5,750,000) --
Series A Preferred Stock
subscriptions receivable.......... -- -- (308,000)
Accumulated deficit................ (18,460,607) (13,560,441) (4,766,551)
------------ ------------ -----------
Total stockholders' equity....... 47,499,658 20,608,254 4,859,275
------------ ------------ -----------
Total liabilities and
stockholders' equity............ $ 50,292,208 $ 22,296,406 $ 5,836,646
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM MARCH 27, 1996
(INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Periods Ended March 31, Periods Ended December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Investment banking.... $ 3,122,420 $ 33,868 $ 1,515,105 $ 42,567 $ --
Brokerage............. 434,207 22,501 294,454 10,403 --
Interest.............. 191,670 19,687 182,880 53,821 31,172
Other................. 154,824 -- 45,370 138,750 10,000
----------- ----------- ----------- ----------- -----------
Total revenues........ 3,903,121 76,056 2,037,809 245,541 41,172
----------- ----------- ----------- ----------- -----------
EXPENSES:
Compensation and
benefits............. 6,558,126 549,135 4,444,271 1,549,958 378,337
Professional
services............. 681,509 93,573 870,322 329,334 282,806
Technology
development.......... 335,795 50,900 1,211,799 511,076 532,265
Data processing and
communications....... 299,611 150,303 577,257 237,608 49,599
Brokerage and
clearance............ 260,628 14,154 186,322 5,563 1,750
Depreciation and
amortization......... 220,495 158,030 896,652 229,209 9,438
Occupancy............. 90,007 42,400 237,334 200,673 41,889
Marketing............. 51,006 230,880 933,541 503,379 326,114
Other................. 288,110 176,740 1,440,120 (351,729) 177,444
----------- ----------- ----------- ----------- -----------
Total expenses...... 8,785,287 1,466,115 10,797,618 3,215,071 1,799,642
----------- ----------- ----------- ----------- -----------
Loss before income
tax provision...... (4,882,166) (1,390,059) (8,759,809) (2,969,530) (1,758,470)
INCOME TAX PROVISION.... 18,000 8,029 34,081 23,051 15,500
----------- ----------- ----------- ----------- -----------
Net loss............ $(4,900,166) $(1,398,088) $(8,793,890) $(2,992,581) $(1,773,970)
=========== =========== =========== =========== ===========
NET LOSS PER SHARE:
Basic................. $ (0.47) $ (0.14) $ (.86) $ (.29) $ (.23)
Diluted............... (0.47) (0.14) (.86) (.29) (.23)
WEIGHTED AVERAGE SHARES
USED IN THE COMPUTATION
OF NET LOSS PER SHARE:
Basic................. 10,351,270 10,080,136 10,200,176 10,432,876 7,683,096
Diluted............... 10,351,270 10,080,136 10,200,176 10,432,876 7,683,096
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD ENDED MARCH 31, 1999,
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD
FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Notes
Additional Receivable
Preferred Common Paid-in Accumulated from Subscriptions
Stock Stock Capital Deficit Stockholders Receivable Total
--------- -------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY,
March 27, 1996......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................. -- 113,301 3,140,573 -- -- -- 3,253,874
Issuance of Series A
Preferred Stock....... 2,500 -- 497,500 -- -- -- 500,000
Repurchase and
retirement of common
stock................. -- (5,000) (495,000) -- -- -- (500,000)
Net loss............... -- -- -- (1,773,970) -- -- (1,773,970)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1996...... 2,500 108,301 3,143,073 (1,773,970) -- -- 1,479,904
Issuance of Series A
Preferred Stock....... 69,700 -- 6,860,252 -- -- (308,000) 6,621,952
Conversion of common
stock to Series A
Preferred Stock....... 5,000 (5,000) -- -- -- -- --
Repurchase and
retirement of common
stock................. -- (2,500) (247,500) -- -- -- (250,000)
Net loss............... -- -- -- (2,992,581) -- -- (2,992,581)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1997...... 77,200 100,801 9,755,825 (4,766,551) -- (308,000) 4,859,275
Issuance of common
stock................. -- 2,622 261,329 -- -- -- 263,951
Issuance of common
stock for note
receivable............ -- 57,500 5,692,500 -- (5,750,000) -- --
Issuance of Series A
Preferred Stock....... 12,780 -- 1,286,600 -- -- 308,000 1,607,380
Issuance of Series B
Preferred Stock....... 23,050 -- 2,251,932 -- -- -- 2,274,982
Issuance of Series C
Preferred Stock....... 59,028 -- 5,782,184 -- -- -- 5,841,212
Issuance of Series D
Preferred Stock....... 99,333 -- 14,456,011 -- -- -- 14,555,344
Net loss............... -- -- -- (8,793,890) -- -- (8,793,890)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1998...... 271,391 160,923 39,486,381 (13,560,441) (5,750,000) -- 20,608,254
Issuance of common
stock................. -- 1,812 213,229 -- -- -- 215,041
Issuance of common
stock for notes
receivable............ -- 25,500 3,799,500 -- (3,825,000) -- --
Issuance of Series D
Preferred Stock....... 214,001 -- 31,362,528 -- -- -- 31,576,529
Net loss............... -- -- -- (4,900,166) -- -- (4,900,166)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
March 31, 1999......... $485,392 $188,235 $74,861,638 $(18,460,607) $(9,575,000) $ -- $47,499,658
======== ======== =========== ============ =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED),
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE PERIOD FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Period Ended March 31, December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(4,900,166) $(1,398,088) $(8,793,890) $(2,992,581) $(1,773,970)
Adjustments to
reconcile net loss to
net cash used in
operating
activities--
Non-cash expenses.... -- 46,750 1,522,901 -- --
Non-cash expense
reimbursement....... -- -- -- (750,000) --
Depreciation and
amortization........ 220,495 158,030 896,652 229,209 9,438
(Increase) decrease in
operating assets--
Receivable from
clearing broker..... (357,903) 21,521 17,052 (35,753) (100,611)
Securities owned..... (23,334) (218,727) (217,789) (540,504) --
Prepaid expenses..... (224,062) 87,748 (188,343) (132,659) --
Investment banking
fees receivable..... (927,175) -- (512,952) -- --
Other assets......... (3,016,693) 28,550 (316,487) 45,848 (185,127)
Increase (decrease) in
operating
liabilities--
Accounts payable and
accrued expenses.... 1,326,144 (396,841) 156,592 207,445 659,996
Deferred advisory
fees................ (217,960) -- 595,486 -- --
Other liabilities.... (3,783) (7,505) (41,297) 86,000 15,500
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities........ (8,124,437) (1,678,562) (6,882,075) (3,882,995) (1,374,774)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Computer software
purchased............. (7,794) (777) (21,542) (588,470) --
Payments for purchases
of furniture,
equipment and
leasehold
improvements.......... (535,266) (30,189) (436,243) (239,568) (194,233)
----------- ----------- ----------- ----------- -----------
Cash used in
investing
activities........ (543,060) (30,966) (457,785) (828,038) (194,233)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock....... 174,428 -- 60,301 -- 1,818,875
Proceeds from issuance
of preferred stock.... 31,576,529 1,276,436 24,278,918 5,071,952 500,000
----------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities........ 31,750,957 1,276,436 24,339,219 5,071,952 2,318,875
----------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents....... 23,083,460 (433,092) 16,999,359 360,919 749,868
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 18,110,146 1,110,787 1,110,787 749,868 --
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $41,193,606 $ 677,695 $18,110,146 $ 1,110,787 $ 749,868
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for--
Interest............ $ -- $ -- $ 7,211 $ 4,362 $ --
Taxes............... 18,000 -- 43,181 19,337 --
NON-CASH TRANSACTIONS:
Issuance of common and
preferred stock for
computer software.... $ -- $ -- $ -- $ 400,000 $ 1,125,000
Issuance of common
stock for web site
development.......... -- -- 203,650 -- --
Issuance of common and
preferred stock for
advertising credits.. -- -- -- 1,150,000 300,000
Series A Preferred
Stock subscriptions
receivable........... -- -- -- 308,000 --
Issuance of common
stock to stockholders
for notes
receivable........... 3,825,000 -- 5,750,000 -- --
Repurchase of common
stock................ -- -- -- 250,000 500,000
Conversion of common
stock to preferred
stock................ -- -- -- 5,000 --
Issuance of common
stock for consulting
services............. 40,613 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
1. ORGANIZATION AND BUSINESS
Wit Capital Group, Inc. ("WCG" or the "Company") was incorporated on March
27, 1996 and commenced operations in September 1997. The consolidated
financial statements include the accounts of WCG and its wholly owned
subsidiaries, Wit Capital Corporation ("WCC") and BidPlus Corporation
("BidPlus"). Through September 1997, WCG also held a 55% investment in Brat
Incorporated ("Brat"), which was incorporated in December 1996.
The Company was formed as an investment banking and brokerage firm
arranging the offering and trading of securities through the Internet and the
World Wide Web. The Company provides retail investors access to stock
offerings and electronic brokerage facilities. The Company has developed an
electronic broker-dealer operated trading system for WCC. (Note 5).
During 1997 and 1996, the Company had yet to generate significant revenues
from sales of its services.
WCC has an agreement with U.S. Clearing (a division of Fleet Securities,
Inc.), pursuant to which U.S. Clearing clears securities transactions, carries
customers' accounts on a fully disclosed basis, and performs record-keeping
functions for WCC. Either party upon 90 days written notice can cancel the
agreement. The agreement states that WCC will assume customer obligations
should a customer of WCC default. U.S. Clearing controls credit risk of
customers by requiring maintenance of margin collateral in compliance with
various regulatory and internal guidelines.
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
The audited interim consolidated financial statements and the unaudited
interim consolidated financial information as of March 31, 1999 and March 31,
1998, respectively are presented in the accompanying financial statements. The
unaudited interim consolidated financial information reflects all adjustments,
which are, in the opinion of management, necessary for a fair presentation of
the results for such period. Results of the interim periods are not
necessarily indicative of results to be obtained for a full fiscal year.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The preparation of consolidated 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 at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management does not believe
that actual results will differ materially from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, WCC and BidPlus. Material intercompany
balances and transactions have been eliminated in consolidation.
F-7
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
Cash and cash equivalents include amounts that are readily convertible into
cash and highly liquid investments with a maturity of three months or less
when acquired.
Securities Owned
Securities transactions and the related expenses are recorded on a trade
date basis and are valued at market or fair value.
Computer Software
Costs capitalized related to the purchase of computer software are being
amortized over a period of three years.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful lives of the
assets, ranging from two and three years for furniture and computer hardware,
respectively, to ten years for leasehold improvements.
Fair Value of Financial Instruments
Substantially all assets and liabilities carried at historical cost or
contract value approximate fair value due to their relatively short-term
nature.
Revenue Recognition
The Company derives revenues from commissions and other brokerage fees
related to customer transactions which are recorded on a settlement date basis
which is not materially different from trade date. The Company records
investment banking fees as earned. Investment banking retainer fees are
initially deferred and are recognized as income over the contracted period.
Reportable Operating Segment
The Company considers its present operations to be one reportable segment
for purposes of presenting financial information and for evaluating its
performance. The financial statement information presented in the accompanying
financial statements is consistent with the preparation of financial
information for the purpose of internal use.
4. SECURITIES OWNED
As of March 31, 1999 and December 31, 1998 and 1997, securities owned
consist of restricted equity securities of $671,964, $430,560 and $0; United
States Treasury bills of $0, $218,865 and $436,985; and certificates of
deposit of $109,663, $108,868 and $103,519, respectively.
F-8
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. RELATED PARTY TRANSACTIONS
In 1996, WCG acquired from Global Trade, Inc. ("GTI") all outstanding
shares of BidPlus, the sole asset of which was a proprietary electronic
brokerage and trading system, in exchange for 750,000 shares of common stock.
The software was recorded at $1,125,000 representing management's estimate of
the fair value of the 750,000 shares of common stock at $1.50 per share.
Effective December 31, 1996, the founder of GTI agreed to exchange 500,000 of
the shares of the common stock of WCG for a 45% equity interest in Brat, a
newly formed subsidiary of WCG. In consideration for the exchange, WCG agreed
to contribute certain rights to Brat to use the proprietary electronic
brokerage and trading system software, as well as providing technology,
general and administrative support on behalf of Brat. In 1997, GTI's founder
sought greater control over the development of Brat and in September 1997,
exchanged the remaining 250,000 shares of WCG common stock and the rights to
the use of the software for all of WCG's shares of Brat. The aforementioned
exchange of the 750,000 shares of common stock of WCG has been accounted for
as a stock repurchase at $1.00 per share, which represents the fair value of
the common stock on the date of the exchange and corresponding $750,000
reduction of other expenses related to the cost of services provided to Brat.
6. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred tax liabilities and assets
at tax rates expected to be in effect when these balances reverse. Future tax
benefits attributable to temporary differences are recognized to the extent
that realization of such benefits is more likely than not.
WCG files consolidated Federal and combined New York State and New York
City income tax returns with WCC and BidPlus. The income tax provisions
included in the consolidated statements of operations are calculated based on
state and local minimum and alternative methods.
At March 31, 1999, December 31, 1998 and 1997, WCG had deferred tax assets
of approximately $8,000,000, $5,200,000 and $2,300,000 which were generated by
net operating losses of approximately $20,000,000, $13,000,000 and $5,300,000,
respectively. The deferred tax assets are fully offset by valuation
allowances.
7. STOCKHOLDERS' EQUITY
Common Stock
In 1996, the Company issued 300,000 shares of common stock at $1.00 per
share in exchange for $300,000 of media credits. These credits could be used
to offset future expenditures including, among other things, communications,
travel and advertising. The Company used $18,000 of these credits in 1997, and
accordingly, prepaid expenses include $282,000 of these credits as of December
31, 1997. This remaining balance of $282,000 was expensed as unused by the
Company in 1998.
The Chairman and Co-Chief Executive Officer has been extended a partial
recourse, interest bearing loan in the amount of $5,750,000 with which
5,750,000 shares of common stock at $1.00 per share were purchased. Interest
on the loan is recourse, nonrefundable and payable annually on June 30. In the
event this employee ceases to be employed by the Company, the Company has the
right to repurchase two thirds of such shares at the lower of fair market
value or $1.00 per share. Such repurchase rights terminate on April 1, 2001.
In addition, the loan may be prepaid at any time by the employee and
accelerates in the event of employment termination. The loan is collateralized
by the Company's stock and will be reflected as a note receivable in
stockholders' equity until repaid.
F-9
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other employees have also been extended partial recourse, interest bearing
loans, totaling $3,825,000 with which 2,550,000 shares of common stock at
$1.50 were purchased. Interest on the loans is recourse and nonrefundable. In
the event the employees cease to be employed by the Company, the Company has
the right to purchase the unvested portion of such shares at the lower of the
fair market value or $1.50 per share. Such repurchase rights terminate on
March 31, 2003. In addition, the loans may be repaid at any time by the
employees and accelerate in the event of employment termination. The loans are
collateralized by the Company's stock and will be reflected as notes
receivable in stockholders' equity until repaid.
Preferred Stock
As of March 31, 1999, the Company has authorized 60,000,000 shares of
preferred stock of which 50,778,334 have been designated to four series as
shown on the accompanying consolidated statements of financial condition.
As of December 31, 1998, the Company has authorized 30,000,000 shares of
preferred stock of which 29,445,000 shares have been designated to four series
as shown in the accompanying consolidated statements of financial condition.
The preferred stock has voting and dividend rights equal to the rights of
common stock and has liquidation preference. The holder of a share of any
series of preferred stock is entitled to convert such share into a share of
common stock at any time. In addition, each share of preferred stock will
automatically convert into a share of common stock in the event WCG completes
an initial public offering of shares of common stock in which the aggregate
net proceeds are at least $5 million for each Series A and B; $25 million for
each Series C and D and the per share price to the public is at least $3.00
per share for each Series A and B and $4.50 per share for each Series C and D.
In 1997, WCG issued 500,000 shares of Series A Preferred Stock at $1.00 per
share in exchange for $500,000 of media credits. Prepaid expenses include
$500,000 of these credits as of December 31, 1997. The balance of $500,000 was
expensed as unused by the Company in 1998.
In 1997, WCG issued a total of 650,000 shares of Series A Preferred Stock at
$1.00 per share to three separate investors in exchange for advertising in
print and on-line media and access to and usage of on-line and print
subscriber lists. Related total cash consideration for such services was
$100,000. Prepaid expenses include $719,000 of these credits as of December
31, 1997. During 1997 and 1998, the Company used $31,000 and $719,000 of these
advertising credits, respectively, which was recorded as marketing expense on
the accompanying statement of operations.
In 1996, WCG entered into a service bureau, software development and
licensing agreement with Kingland Systems Corporation ("Kingland"). As part of
this agreement, WCG and Kingland negotiated an optional purchase license price
of $400,000 for the Kingland software. In April 1997, Kingland contributed the
license to WCG in exchange for 400,000 shares of Series A Preferred Stock
valued at $1.00 per share.
F-10
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. NET LOSS PER SHARE
The following table sets forth the calculation of shares used in the
computation of basic and diluted net loss per share:
<TABLE>
<CAPTION>
Periods Ended March
31, Periods Ended December 31,
---------------------- -------------------------------
1999 1998 1998 1997 1996
---------- ----------- ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Shares used in
computations:
Weighted average
common shares used
in computation of
basic net loss per
share............... 10,351,270 10,080,136 10,200,176 10,432,876 7,683,096
Dilutive effect of
common stock
equivalents......... -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Weighted average
shares used in
computation of
diluted net loss
per share......... 10,351,270 10,080,136 10,200,176 10,432,876 7,683,096
========== ========== ========== ========== =========
</TABLE>
Because the Company reported a net loss in each of the periods above, the
calculation of diluted earnings per share does not include convertible
preferred stock, options, warrants and common stock collateralizing the notes
receivable from stockholders, as they are anti-dilutive and would result in a
reduction of net loss per share. If the Company had reported net income, there
would have been an additional 17,583,828, 4,052,800, 11,924,318, 3,865,877 and
330,769 shares as of March 31, 1999 and 1998, December 31, 1998, 1997 and
1996, respectively, included in the calculation of diluted earnings per share.
9. EMPLOYEE BENEFIT PLANS AND OTHER COMPENSATION
Health Care
WCG provides certain health care benefits for its full-time employees by
contract with a health care insurer.
Other Compensation
In February 1999, the Company entered into employment contracts with several
employees which entitled the employees to a total of $5,450,000 in upfront
payments. The Company recognized compensation expense of $2,550,000 related to
amounts paid for which no future service by the employee is required. The
Company recorded advances of $2,900,000 which are being expensed over the two-
year employment contract periods for amounts for which the employee is
required to provide service and is obligated to repay any unearned
compensation in the event of termination or resignation prior to completing
the contract term. As of March 31, 1999, advances to employees of
approximately $2,712,000 related to these contracts are included in other
assets on the accompanying consolidated statements of financial condition.
Stock Option Plan
WCG has adopted a stock option plan and restricted stock purchase plan (the
"Plan"). Under the Plan, key employees, directors and certain consultants of
WCG are eligible to receive grants of stock options intended to qualify as
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended), or which are nonqualified stock options. An
aggregate of 20,000,000 and 13,000,000 shares of common stock has been
reserved for issuance under the Plan as of March 31, 1999 and December 31,
1998, respectively. The exercise price of any share covered by an option
granted to a person owning more than 10% of the voting power of all classes of
stock of WCG cannot be less than 110% of the fair market value on the day of
the grant. The exercise price of any share covered by an option granted to any
person cannot be less than 85% of the fair value on the day of the grant.
Options expire five or ten years from the date of grant, with the majority of
the options expiring in the year 2008.
F-11
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") WCG has accounted
for options granted to employees using the intrinsic value method prescribed
by Accounting Practice Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." WCG has granted options with exercise prices that are
equal to or greater than management's estimate of the fair value of such
common stock at the date of grant, and accordingly, the Company has recorded
no related compensation expense. This estimate is based upon share issuances
to independent third party investors. As required by SFAS No. 123, the Company
has presented pro forma disclosures of net income and earnings per share as if
the Company had adopted the method of accounting prescribed by SFAS No. 123.
The following table summarizes the status of the Company's stock options as
of March 31, 1999, December 31, 1998 and 1997 and for the period from March
27, 1996 to December 31, 1996 and the changes during these periods:
<TABLE>
<CAPTION>
March 31, December 31,
------------------- ---------------------------------------------------------
1999 1998 1997 1996
------------------- ------------------- ------------------ ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------- -------- ---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period.............. 11,649,745 $1.03 4,668,246 $1.16 2,155,996 $1.15 -- $ --
Granted................ 7,225,000 1.50 8,335,000 1.04 2,721,000 1.11 2,155,996 1.15
Exercised.............. 23,833 1.00 8,500 1.20 --
Forfeited.............. 595,000 1.01 1,345,001 1.09 208,750 2.48 --
Outstanding, end of
period................. 18,255,912 1.22 11,649,745 1.03 4,668,246 1.16 2,155,996 1.15
Options exercisable, end
of period.............. 5,424,751 1.04 4,910,764 1.00 2,574,093 1.15 527,766 1.29
</TABLE>
The range of exercisable prices for the options outstanding and the options
exercisable is $.25--$2.50 and the weighted average is $1.22. The weighted
average contractual lives for outstanding and exercisable options are 8.81 and
6.82 as of March 31, 1999, and 8.89 and 8.03 years as of December 31, 1998,
respectively.
The fair value of each option granted during 1998, 1997 and 1996 was
estimated on the date of the grant using the minimum value method prescribed
by SFAS No. 123, assuming a dividend yield of zero and a risk-free interest
rate of 6%. If the Company had recorded compensation expense for its stock
options granted during the three months ended March 31, 1999 and 1998 and for
the periods ended December 31, 1998, 1997 and 1996, in accordance with SFAS
No. 123, the Company's pro forma net loss and pro forma net loss per share
would be as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------
1999 1998 (unaudited)
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss.......... $(4,900,166) $(5,864,249) $(1,398,088) $(1,473,386)
Net loss per
common share:
Basic........... $ (.47) $ (.57) $ (.14) $ (.15)
Diluted......... $ (.47) $ (.57) $ (.14) $ (.15)
<CAPTION>
December 31,
------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss.......... $(8,793,890) $(9,268 ,941) $(2,992,581) $(3,294,797) $(1,773,970) $(1,854,453)
Net loss per
common share:
Basic........... $ (.86) $ (.91) $ (.29) $ (.32) $ (.23) $ (.24)
Diluted......... $ (.86) $ (.91) $ (.29) $ (.32) $ (.23) $ (.24)
</TABLE>
F-12
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. WARRANTS OUTSTANDING
The Company has 1,888,830 outstanding warrants as of March 31, 1999 and
December 31, 1998, respectively. Warrants were issued to be convertible to
either common or preferred shares of WCG stock. The following table summarizes
the status of the Company's warrants as of March 31, 1999, December 31, 1998
and 1997 and for the period March 27, 1996 to December 31, 1996 and the
changes during these periods:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------------ ----------------------------------------------------
1999 1998 1997 1996
------------------ ------------------ ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period.............. 1,888,830 $1.05 317,000 $1.29 212,000 $1.44 -- $ --
Granted............... 150,000 1.00 1,571,830 1.00 105,000 1.00 212,000 1.44
Exercised............. 50,000 1.00 -- -- -- -- -- --
Forfeited............. 100,000 0.25 -- -- -- -- -- --
Outstanding, end of
period................. 1,888,830 1.09 1,888,830 1.05 317,000 1.29 212,000 1.44
Warrants exercisable,
end of period.......... 1,867,997 1.09 1,860,497 1.05 256,336 1.34 204,000 1.40
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
WCG has a noncancelable operating lease covering office space that includes
scheduled rent increases every two years commencing November 1998 and an
initial free rent period. Additionally, the Company has a one-year
noncancelable operating lease for office space located in California, which
expires in May 1999. Rent expense for the periods ended March 31, 1999 and
1998 (unaudited) and for the years ended December 31, 1998 and 1997 and the
period ended December 31, 1996 is $90,000, $42,400, $137,454, $122,500 and
$41,889, respectively. Future lease commitments are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE
OBLIGATION
-------------
<S> <C>
Year ending December 31:
1999 $237,491
2000 255,938
2001 297,250
2002 266,438
2003 268,640
Thereafter 819,829
</TABLE>
The Company is currently subject to claims and legal proceedings arising in
the normal course of its business. In the opinion of management, based on
discussions with legal counsel, the resolution of such legal proceedings will
not have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
Additionally, a person formerly associated with the Company has asserted a
right to purchase 800,000 shares of common stock at $1.00 per share. In the
opinion of management, such assertion is without merit, and the Company
intends to contest any lawsuit filed against it. These 800,000 shares of
common stock have been reported as forfeited stock options in 1998.
F-13
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. CAPITAL REQUIREMENTS
WCC is subject to the SEC's Uniform Net Capital Rule 15c3-1. WCC's net
capital, as defined, shall be required to be the greater of $100,000 or the
minimum net capital required based on aggregate indebtedness. As of March 31,
1999 and December 31, 1998, WCC's ratio of aggregate indebtedness to net
capital was .12 to 1 and .09 to 1 and its net capital was $10,769,266 and
$8,446,190 which was $10,669,266 and $8,346,190 in excess of the minimum net
capital requirement of $100,000, respectively.
13. SUBSEQUENT EVENTS
In April 1999, the Company authorized an additional 64,000,000 shares of
common stock, increasing the number of authorized common shares to 184,000,000
of which 159,000,000 represent shares of common stock and 25,000,000 represent
shares of Class B Common Stock. Additionally, the Company authorized an
additional 44,000,000 shares of preferred stock, increasing the number of
authorized preferred shares to 104,000,000 of which 16,666,667 were designated
to Series E Preferred Stock and 8,272,203 were reserved for issuance upon
exercise of warrants to purchase Series E Preferred Stock.
In April 1999, the Company issued 16,666,667 shares of Series E Preferred
Stock to a third party for $25,000,000. This third party also received warrants
to purchase 8,053,279 shares of Series E Preferred Stock.
F-14
<PAGE>
WIT CAPITAL GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ------------ -----------
CASH AND CASH EQUIVALENTS............................. $ 9,180,804 $ 549,640
<S> <C> <C>
PREPAID EXPENSES...................................... 95,671 1,582,657
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net
of accumulated depreciation and amortization of
$240,747 and $97,856 at December 31, 1998 and 1997,
respectively......................................... 611,953 331,307
COMPUTER SOFTWARE, net of accumulated amortization of
$254,973 and $64,768 at December 31, 1998 and 1997,
respectively......................................... 286,687 354,976
INVESTMENT IN SUBSIDIARIES............................ 10,716,505 2,686,012
OTHER ASSETS.......................................... 110,760 116,985
------------ -----------
Total assets...................................... $ 21,002,380 $ 5,621,577
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses............... $ 333,923 $ 684,685
Other liabilities................................... 60,203 77,617
------------ -----------
Total liabilities................................. 394,126 762,302
------------ -----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A Preferred Stock, $.01 par value, 9,000,000
shares authorized; 8,997,952 and 7,720,002 shares
issued and outstanding at December 31, 1998 and
1997, respectively.................................. 89,980 77,200
Series B Preferred Stock, $.01 par value, 3,000,000
shares authorized; 2,304,982 shares issued and
outstanding at December 31, 1998.................... 23,050 --
Series C Preferred Stock, $.01 par value, 7,445,000
shares authorized; 5,902,750 shares issued and
outstanding at December 31, 1998.................... 59,028 --
Series D Preferred Stock, $.01 par value, 10,000,000
shares authorized; 9,933,334 shares issued and
outstanding at December 31, 1998.................... 99,333 --
Common Stock, $.01 par value, 60,000,000 and
25,000,000 shares authorized; 16,092,286 and
10,080,136 shares issued and outstanding at December
31, 1998 and 1997, respectively..................... 160,923 100,801
Additional paid-in capital........................... 39,486,381 9,755,825
Note receivable from stockholder..................... (5,750,000) --
Series A Preferred Stock subscriptions receivable.... -- (308,000)
Accumulated deficit.................................. (13,560,441) (4,766,551)
------------ -----------
Total stockholders' equity........................ 20,608,254 4,859,275
------------ -----------
Total liabilities and stockholders' equity........ $ 21,002,380 $ 5,621,577
============ ===========
</TABLE>
See Note to Condensed Financial Statements
F-15
<PAGE>
WIT CAPITAL GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD
FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Consulting fees........................ $ -- $ 22,500 $ --
Interest............................... 77,117 21,372 20,568
Other.................................. -- 138,750 10,000
----------- ----------- -----------
Total revenues...................... 77,117 182,622 30,568
----------- ----------- -----------
EXPENSES:
Compensation and benefits.............. 3,969,604 1,549,958 376,897
Technology development................. 922,036 385,095 534,311
Marketing.............................. 795,051 503,379 326,114
Depreciation and amortization.......... 651,759 153,184 9,438
Data processing and communications..... 414,181 186,940 49,599
Professional services.................. 407,943 86,478 255,574
Occupancy.............................. 237,334 200,673 41,889
Other.................................. 1,328,913 (446,618) 169,016
----------- ----------- -----------
Total expenses...................... 8,726,821 2,619,089 1,762,838
----------- ----------- -----------
Loss before income tax provision and
equity in net
loss of subsidiaries............... (8,649,704) (2,436,467) (1,732,270)
INCOME TAX PROVISION.................... 27,081 9,051 15,000
----------- ----------- -----------
Loss before equity in loss of
subsidiaries....................... (8,676,785) (2,445,518) (1,747,270)
----------- ----------- -----------
Equity in net loss of subsidiaries..... (117,105) (547,063) (26,700)
----------- ----------- -----------
Net loss............................ $(8,793,890) $(2,992,581) $(1,773,970)
=========== =========== ===========
</TABLE>
See Note to Condensed Financial Statements
F-16
<PAGE>
WIT CAPITAL GROUP, INC.
(Parent Company Only)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD
FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Note
Additional Receivable
Preferred Common Paid-in Accumulated from Subscriptions
Stock Stock Capital Deficit Stockholder Receivable Total
--------- --------- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY,
March 27, 1996......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................. -- 113,301 3,140,573 -- -- -- 3,253,874
Issuance of Series A
Preferred Stock....... 2,500 -- 497,500 -- -- -- 500,000
Repurchase and
retirement of
common stock.......... -- (5,000) (495,000) -- -- -- (500,000)
Net loss............... -- -- -- (1,773,970) -- -- (1,773,970)
-------- --------- ----------- ------------ ----------- ----------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1996...... 2,500 108,301 3,143,073 (1,773,970) -- -- 1,479,904
Issuance of Series A
Preferred Stock....... 69,700 -- 6,860,252 -- -- (308,000) 6,621,952
Conversion of common
stock to Series A
Preferred Stock....... 5,000 (5,000) -- -- -- -- --
Repurchase and
retirement of
common stock.......... -- (2,500) (247,500) -- -- -- (250,000)
Net loss............... -- -- -- (2,992,581) -- -- (2,992,581)
-------- --------- ----------- ------------ ----------- ----------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1997...... 77,200 100,801 9,755,825 (4,766,551) -- (308,000) 4,859,275
Issuance of common
stock................. -- 2,622 261,329 -- -- -- 263,951
Issuance of common
stock for
note receivable....... -- 57,500 5,692,500 -- (5,750,000) -- --
Issuance of Series A
Preferred Stock....... 12,780 -- 1,286,600 -- -- 308,000 1,607,380
Issuance of Series B
Preferred Stock....... 23,050 -- 2,251,932 -- -- -- 2,274,982
Issuance of Series C
Preferred Stock....... 59,028 -- 5,782,184 -- -- -- 5,841,212
Issuance of Series D
Preferred Stock....... 99,333 -- 14,456,011 -- -- -- 14,555,344
Net loss............... -- -- -- (8,793,890) -- -- (8,793,890)
-------- --------- ----------- ------------ ----------- ----------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1998...... $271,391 $ 160,923 $39,486,381 $(13,560,441) $(5,750,000) $ -- $20,608,254
======== ========= =========== ============ =========== =========== ===========
</TABLE>
See Note to Condensed Financial Statements
F-17
<PAGE>
WIT CAPITAL GROUP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD
FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(8,793,890) $(2,992,581) $(1,773,970)
Adjustments to reconcile net loss to
net cash used
in operating activities-
Equity in net losses of
subsidiaries.......................... 117,105 547,063 26,700
Non-cash expenses.................. 1,522,901 -- --
Non-cash expense reimbursement..... -- (750,000) --
Depreciation and amortization...... 651,759 153,184 9,438
(Increase) decrease in operating
assets-
Prepaid expenses................... (139,584) (132,659) --
Other assets....................... (93,775) 30,141 (137,126)
Increase (decrease) in operating
liabilities-
Accounts payable and accrued
expenses.............................. (350,762) (76,383) 761,068
Other liabilities.................. (17,414) 62,617 15,000
----------- ----------- -----------
Net cash used in operating
activities............................ (7,103,660) (3,158,618) (1,098,890)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries.......... (8,147,598) (1,434,775) (700,000)
Computer software purchased.......... (21,917) (19,742) --
Payments for purchases of furniture,
equipment and
leasehold improvements.............. (434,880) (234,929) (194,233)
----------- ----------- -----------
Cash used in investing
activities............................ (8,604,395) (1,689,446) (894,233)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock................................. 60,301 -- 1,818,875
Proceeds from issuance of preferred
stock................................. 24,278,918 5,071,952 500,000
----------- ----------- -----------
Net cash provided by financing
activities............................ 24,339,219 5,071,952 2,318,875
----------- ----------- -----------
Net increase in cash and cash
equivalents........................... 8,631,164 223,888 325,752
CASH AND CASH EQUIVALENTS, beginning of
period................................ 549,640 325,752 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 9,180,804 $ 549,640 $ 325,752
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for--
Interest........................... $ 7,211 $ 4,362 $ --
Taxes.............................. 43,181 19,337 --
NON-CASH TRANSACTIONS:
Issuance of common stock for
investments in subsidiaries........... $ -- $ -- $ 1,125,000
Issuance of common stock for computer
software.............................. -- 400,000 --
Issuance of common stock for web site
development........................... 203,650 -- --
Issuance of common and preferred
stock for advertising credits....... -- 1,150,000 300,000
Series A Preferred Stock
subscriptions receivable.............. -- 308,000 --
Issuance of common stock to
stockholder for note receivable....... 5,750,000 -- --
Repurchase of common stock.......... -- 250,000 500,000
Conversion of common stock to
preferred stock....................... -- 5,000 --
</TABLE>
See Note to Condensed Financial Statements
F-18
<PAGE>
WIT CAPITAL GROUP, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM MARCH 27, 1996 (INCEPTION) TO DECEMBER 31, 1996
1.NOTE TO CONDENSED FINANCIAL INFORMATION
The condensed financial information of Wit Capital Group, Inc. (parent
company only) should be read in conjunction with the consolidated financial
statements of Wit Capital Group, Inc. and Subsidiaries and the notes
thereto contained elsewhere in this prospectus.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. Neither
Wit Capital Group, Inc. nor any underwriter has authorized anyone to provide
prospective investors with any different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted. The
information contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of these securities.
Until , 1999 (25 days after the date of this prospectus), 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
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 18
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Historical Financial Data....................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 28
Management............................................................... 40
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Opinions........................................................... 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 68
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Wit Capital Group, Inc.
Shares
Common Stock
-----------------
PROSPECTUS
-----------------
Bear, Stearns & Co. Inc.
Wit Capital Corporation
Thomas Weisel Partners LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
compensation expected to be incurred) in connection with this offering. All of
such amounts (except the SEC registration fee and the NASD filing fee) are
estimated.
<TABLE>
<S> <C>
SEC registration fee................................................ $22,240
NASDAQ listing fee.................................................. *
NASD filing fee..................................................... 8,500
Blue Sky fees and expenses.......................................... *
Printing and Engraving Costs........................................ *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Transfer Agent and Registrar fees and expenses...................... *
Miscellaneous....................................................... 0
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
Our By-Laws provide that we shall, subject to the limitations contained in
the Delaware General Corporation Law, as amended from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
Section of the Underwriting Agreement, to be filed as Exhibit 1, provides
that the Underwriters named therein will indemnify us and hold us harmless and
each of our directors, officers or controlling persons from and against
certain liabilities, including liabilities under the Securities Act. Section
of the Underwriting Agreement also provides that such Underwriters will
contribute to certain liabilities of such persons under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
The Registrant has sold and issued the following securities since March 27,
1996 (inception):
(1) On April 4, 1996, we issued 8,000,000 shares of common stock to
Andrew D. Klein for an aggregate purchase price of $80,000.
(2) On April 4, 1996, we issued Spring Street Brewing Company, Inc.
1,000,000 shares of common stock for a purchase price of $10,000.
(3) On September 30, 1996, we issued 750,000 shares of our common stock
to Global Trade, Inc. in exchange for 900,000 shares of common stock of its
wholly owned subsidiary, BidPlus Corporation, representing all of the
outstanding shares of common stock of BidPlus.
(4) From May 1996 to December 1996, we issued 1,334,377 shares of common
stock to accredited investors, including one of our directors, for $1.00
per share.
(5) On December 31, 1996, we executed a Stock Swap Agreement with Global
Trade, Inc., pursuant to which we exchanged 450,000 shares of common stock
of our wholly owned subsidiary, Brat Incorporated, for 500,000 shares of
our common stock held by Global Trade. On September 7, 1997, we exchanged
our remaining 550,000 shares of common stock of Brat for 250,000 shares of
our common stock held by Global Trade.
(6) From April 30, 1997 to April 24, 1998, we issued a total of
7,447,952 shares of Series A Convertible Preferred Stock to accredited
investors, including two of our directors, for $1.00 per share. These
shares will be converted into 7,447,952 shares of common stock upon
consummation of this offering.
II-1
<PAGE>
(7) In April 1997, pursuant to a service bureau, software development and
licensing agreement, we issued 400,000 shares of Series A Preferred Stock
to Kingland Systems Corporation in exchange for the license to the Kingland
software. These shares will be converted into 400,000 shares of common
stock upon consummation of this offering.
(8) In July 1997, we issued a total of 650,000 shares of Series A
Preferred Stock to three different investors in exchange for advertising
products and services valued at $650,000. These shares will be converted
into 650,000 shares of common stock upon consummation of this offering.
(9) On April 23, 1996 and May 12, 1997, we executed agreements with Icon
International, Inc., pursuant to which Icon granted us $935,000 of trade
credits for media-related products and services in exchange for 300,000
shares of our common stock and 500,000 shares of our Series A Convertible
Preferred Stock, which we issued to Growth Capital Partners Media Fund, an
entity jointly owned by Growth Capital Partners, LLC and Icon. The
preferred shares will be converted into 500,000 shares of common stock upon
consummation of this offering.
(10) On April 9, 1998, we signed an employment agreement with Robert H.
Lessin covering Mr. Lessin's employment as co-chief executive officer. We
have extended to Mr. Lessin an interest-bearing loan in the amount of
$5,750,000 with which he has purchased 5,750,000 shares of common stock at
$1.00 per share. The principal portion of this loan is partial recourse and
the interest portion is full recourse. In the event Mr. Lessin ceases to be
employed by us, we have the right to repurchase two-thirds of these shares
at the lower of their fair market value or $1.00 per share. These
repurchase rights terminate on April 1, 2001. Mr. Lessin's loan becomes due
and payable in the event that his employment terminates. On April 13, 1998,
Mr. Lessin also purchased 50,000 shares of common stock for $1.00 per
share.
(11) From May 18, 1998 to September 23, 1998, we issued a total of
2,304,982 shares of Series B Convertible Preferred Stock to accredited
investors for $1.00 per share. These shares will be converted into
2,304,982 shares of common stock upon consummation of this offering.
(12) From April 1998 to September 1998, we issued 203,650 shares of
common stock to Mauro/Mauro Design, Inc. in exchange for $203,650 of Web
site design services.
(13) From October 30, 1998 to December 8, 1998, we issued a total of
5,902,750 shares of Series C Convertible Preferred Stock and 690,030
warrants to accredited investors for $1.00 per share. These shares will be
converted into 5,902,750 shares of common stock upon consummation of this
offering.
(14) From December 8, 1998 through March 8, 1999, we issued 31,333,334
shares of Series D Convertible Preferred Stock to accredited investors,
including two of our directors, for $1.50 per share. These shares will be
converted into 31,333,334 shares of common stock upon the consummation of
this offering.
(15) On April 8, 1999, we issued 16,666,667 shares of Series E
Convertible Preferred Stock and 8,053,279 warrants to The Goldman Sachs
Group, L.P. for $1.50 per share. Goldman Sachs has the right to receive up
to an additional 218,924 similar warrants in certain circumstances after
September 25, 1999. The shares of preferred stock will be converted into
16,666,667 shares of Class B common stock upon the consummation of this
offering.
(16) On March 5, 1999, we signed an employment agreement with Mark Loehr.
We have extended to Mr. Loehr a 50% recourse promissory note which he may
use to purchase 1,250,000 shares of common stock subject to incremental
vesting. The shares will vest as follows: 78,125 shares will vest on June
30, 1999, 78,125 shares will vest on the last day of each fiscal quarter
until March 31, 2003, upon which day the remainder will vest. We may
purchase the shares at the lower of $1.50 per share or the fair market
value for the shares (as determined by our Board of Directors) before the
final vesting date if Mr. Loehr violates the non-competition restrictions
contained in his employment agreement or if he is no longer employed by us.
If he is terminated other than for cause, or for death or disability, or if
he leaves his position for good reason, he will still be entitled to these
shares.
II-2
<PAGE>
(17) On October 15, 1998, we issued warrants to purchase 125,000 shares
of common stock at $1.00 per share to a former employee in exchange for
125,000 options to purchase common stock previously granted to the
employee.
(18) From April 1996 to March 1999, we issued 1,123,800 warrants to
purchase common stock to nine investors for prices between $1.00-$2.50 per
share for providing consulting services.
(19) From January 1, 1999 to April 30, 1999, we issued a total of 407,405
shares of common stock to accredited investors, including one of our
directors, for $1.50 per share.
(20) From January 1, 1999 to April 30, 1999, we issued a total of 819,998
shares of common stock to 46 of our employees for exercise of their stock
options for $1.00 and $1.50 per share.
(21) On April 15, 1999, we extended Robert Mendelson and Lloyd Feller
interest-bearing loans totaling $1,950,000 with which they purchased
1,300,000 shares of common stock at $1.50 per share. The principal portion
of these loans is partial recourse and the interest portion is full
recourse. In the event that Mr. Mendelson or Mr. Feller ceases to be
employed by us, we have the right to purchase the unvested portion of their
respective shares at the lower of their fair market value or $1.50 per
share. These repurchase rights terminate on March 31, 2003. In addition,
the loans may be repaid at any time by Mr. Mendelson and Mr. Feller and
become due and payable in the event of termination of employment.
(22) On April 30, 1999, we issued a total of 4,249,269 shares of common
stock to four of our executive officers and five of our key employees for
exercise of their stock options for $1.00 and $1.50 per share. The exercise
prices were paid with the proceeds of loans we made to these executive
officers and key employees.
(23) From March 1999 to April 30, 1999, we issued a total of 362,500
shares of common stock to four investors for exercise of their warrants to
purchase common stock for $1.00 to $2.50 per share.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or, with respect to issuances to
employees, directors and consultants, Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the instruments representing such securities issued in such transactions.
All recipients either received adequate information about us or had adequate
access, through their relationships with the us, to such information.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Underwriting Agreement*
3.1 --Certificate of Incorporation of Wit Capital Group, Inc.
3.2 --Form of Amended and Restated Certificate of Incorporation of Wit
Capital Group, Inc.*
3.3 --Bylaws of Wit Capital Group, Inc.**
3.4 --Form of Amended and Restated Bylaws of Wit Capital Group, Inc.*
5.1 --Opinion of Morgan, Lewis & Bockius LLP*
10.1 --Stock Incentive Plan**
10.2 --Annual Bonus Plan**
10.3 --Investment Banking Bonus Pool**
10.4 --Long-Term Incentive Plan**
10.5 --Deferred Compensation Plan**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.6 --Employment Agreement between Wit Capital Group, Inc. and Robert H.
Lessin
10.7 --Employment Agreement between Wit Capital Group, Inc. and Ronald
Readmond**
10.8 --Employment Agreement between Wit Capital Group, Inc. and Andrew D.
Klein**
10.9 --Employment Agreement between Wit Capital Group, Inc. and Mark Loehr
10.10 --Employment Agreement between Wit Capital Group, Inc. and Everett
Lang**
10.11 --Second Amended and Restated Stockholders Agreement dated February
23, 1999 between Wit Capital Group, Inc. and Stockholders Named
Therein**
10.12 --Form of e-Dealer Agreement+
10.13 --Third Amended and Restated Stockholders Agreement dated April 8,
1999 between Wit Capital Group, Inc. and Stockholders Named Therein
10.14 --Third Amended and Restated Registration Rights Agreement dated April
8, 1999 between Wit Capital Group, Inc. and Stockholders Named
Therein
10.15 --Purchase Agreement dated as of March 29, 1999 by and between Wit
Capital Group, Inc. and The Goldman Sachs Group, L.P.
21.1 --List of subsidiaries of Wit Capital Group, Inc.**
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)*
24.1 --Powers of Attorney (included on signature page)**
27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
**Previously filed
+Confidential treatment has been requested with respect to certain portions of
this document.
(b) Financial Statement Schedules
The financial statement schedules are omitted because they are inapplicable
or the requested information is shown in the consolidated financial statements
of Wit Capital or related notes thereto.
Item 17. Undertakings.
The undersigned registrant hereby undertakes as follows:
(1) The undersigned will provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(2) 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 on Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
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 provisions described in Item 14 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
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, the State of
New York, on the 4th day of May, 1999.
Wit Capital Group, Inc.
/s/ Robert H. Lessin
By: _________________________________
Name: Robert H. Lessin
Title: Chairman of the Board and
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
Signature Title Date
/s/ Robert H. Lessin Co-Chief Executive Officer May 4th, 1999
- --------------------------------- and Director
Robert H. Lessin
/s/ Ronald Readmond Co-Chief Executive Officer May 4th, 1999
- --------------------------------- and Director
Ronald Readmond
Director May , 1999
- ---------------------------------
Andrew D. Klein
Director May , 1999
- ---------------------------------
John Fisher
Director May , 1999
- ---------------------------------
Edward H. Fleischman
Director May , 1999
- ---------------------------------
Steven M. Gluckstern
Director May , 1999
- ---------------------------------
Joseph R. Hardiman
Director May , 1999
- ---------------------------------
Gilbert C. Maurer
Director May , 1999
- ---------------------------------
Adam Mizel
Chief Financial Officer May , 1999
- ---------------------------------
M. Bernard Siegel
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Underwriting Agreement*
3.1 --Certificate of Incorporation of Wit Capital Group, Inc.
3.2 --Form of Amended and Restated Certificate of Incorporation of Wit
Capital Group, Inc.*
3.3 --By-Laws of Wit Capital Group, Inc.**
3.4 --Form of Amended and Restated By-Laws of Wit Capital Group, Inc.*
5.1 --Opinion of Morgan, Lewis & Bockius LLP*
10.1 --Stock Incentive Plan**
10.2 --Annual Bonus Plan**
10.3 --Investment Banking Bonus Pool**
10.4 --Long-Term Incentive Plan**
10.5 --Deferred Compensation Plan**
10.6 --Employment Agreement between Wit Capital Group, Inc. and Robert H.
Lessin
10.7 --Employment Agreement between Wit Capital Group, Inc. and Ronald
Readmond**
10.8 --Employment Agreement between Wit Capital Group, Inc. and Andrew D.
Klein**
10.9 --Employment Agreement between Wit Capital Group, Inc. and Mark Loehr
10.10 --Employment Agreement between Wit Capital Group, Inc. and Everett
Lang**
10.11 --Second Amended and Restated Stockholders Agreement dated February
23, 1999 between Wit Capital Group, Inc. and Stockholders Named
Therein**
10.12 --Form of e-Dealer Agreement+
10.13 --Third Amended and Restated Stockholders Agreement dated April 8,
1999 between Wit Capital Group, Inc. and Stockholders Named Therein
10.14 --Third Amended and Restated Registration Rights Agreement dated April
8, 1999 between Wit Capital Group, Inc. and Stockholders Named
Therein
10.15 --Purchase Agreement dated as of March 29, 1999 by and between Wit
Capital Group, Inc. and The Goldman Sachs Group, L.P.
21.1 --List of subsidiaries of Wit Capital Group, Inc.**
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Morgan, Lewis & Bockius LLP (contained in Exhibit 5)*
24.1 --Powers of Attorney (included on signature page)**
27.1 --Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
+Confidential treatment has been requested with respect to certain portions of
this document.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WIT CAPITAL GROUP, INC.
________________________
FIRST: The name of the Corporation is
WIT CAPITAL GROUP, INC.
SECOND: The address of the registered office of the Corporation in
the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of
New Castle. The name of the Corporation's registered agent at such address is
Corporation Service Company.
THIRD: The purposes for which the Corporation is formed are to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 90,000,000 shares, consisting of
(a) 60,000,000 shares of Common Stock, $.01 par value ("Common Stock"), and (b)
30,000,000 shares of Preferred Stock, $.01 par value ("Preferred Stock"). The
Preferred Stock may be issued from time to time in one or more series of any
number of shares, provided that the aggregate number of shares issued and not
canceled of any and all such series shall not exceed 30,000,000. The Board of
Directors of the Corporation is authorized to establish by resolution each
series of Preferred Stock, and to determine the powers, designations,
preferences and relative, participating, optional or other rights, if any, and
the qualifications, limitations or restrictions thereof, if any, from time to
time.
<PAGE>
FIFTH: The name and mailing address of the sole incorporator of the
Corporation are as follows:
Morri Weinberg
45 Rockefeller Plaza
New York, N.Y. 10111
SIXTH: In furtherance and not in limitation of the powers conferred
by the laws of the State of Delaware, the Board of Directors of the Corporation
is expressly authorized and empowered to make, alter or repeal the By-laws of
the Corporation, subject to the power of the stockholders of the Corporation to
alter or repeal any By-law made by the Board of Directors.
SEVENTH: The Corporation reserves the right at any time and from time
to time to amend, alter, change or repeal any provisions contained in this
Certificate of Incorporation; and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the right reserved in this
Article.
EIGHTH: (a) The Corporation shall, to the fullest extent permitted
by Section 145 of the Delaware General Corporation Law, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities and other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
2
<PAGE>
(b) No person shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided, however, that the foregoing shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware or (iv) for
any transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is subsequently amended
to further eliminate or limit the liability of a director, then a director of
the Corporation, in addition to the circumstances in which a director is not
personally liable as set forth in the preceding sentence, shall not be liable to
the fullest extent permitted by the amended General Corporation Law of the State
of Delaware. For purposes of this Article EIGHTH, "fiduciary duty as a
director" shall include any fiduciary duty arising out of serving at the
Corporation's request as a director of another corporation, partnership, joint
venture or other enterprise, and "personal liability to the Corporation or its
stockholder"" shall include any liability to such other corporation,
partnership, joint venture, trust or other enterprise, and any liability to the
Corporation in its capacity as a security holder, joint venturer, partner,
beneficiary, creditor or investor of or in any such other corporation,
partnership, joint venture, trust or other enterprise.
IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinabove named, for the purpose of forming a corporation pursuant to the
General Corporation Law of the State of Delaware, does make this Certificate,
hereby declaring, certifying and acknowledging under penalties of perjury that
the facts herein stated are true and that this Certificate is his act and deed,
and accordingly has hereunto set his hand, this 2nd day of July 1998.
/s/ Morri Weinberg
------------------------------
Morri Weinberg
Incorporator
3
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A PREFERRED STOCK
OF
WIT CAPITAL GROUP, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
___________________________________________
WIT CAPITAL GROUP, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to authority vested in the Board of Directors of the Corporation by
Article Fourth of the Certificate of Incorporation of the Corporation, the
following resolution was adopted as of July 2, 1998 by the Board of Directors of
the Corporation pursuant to Section 141 of the Delaware General Corpora tion
Law:
"RESOLVED that, pursuant to authority vested in the Board of Directors
of the Corporation by Article Fourth of the Corporation's Certificate of
Incorporation of the total authorized number of 30,000,000 shares of Preferred
Stock, par value $.01 per share, of the Corporation, there shall be designated a
series of 9,000,000 shares which shall be issued in and constitute a single
series to be known as "Series A Preferred Stock" (hereinafter called the "Series
A Preferred Stock"). The shares of Series A Preferred Stock shall have the
voting powers, designations, preferences and other special rights, and
qualifications, limitations and re strictions thereof set forth below:
1. Dividends. The holders of Series A Preferred Stock shall not be
---------
entitled to receive dividends in any fixed amount, provided, however, that
-------- -------
in the event that the Corporation shall at any time pay a dividend on the
Common Stock (other than a dividend payable solely in shares of Common
Stock), it shall, at the same time, pay to each holder of Series A
Preferred Stock a dividend equal to the dividend that would have been
payable to such holder if the shares of Series A Preferred Stock held by
such holder had been converted into Common Stock on the date of
determination of holders of Common Stock entitled to receive such
dividends.
<PAGE>
2. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, the holders of the
shares of Series A Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock, to be paid an amount
equal to $1.00 per share, and the holders of the Series A Preferred Stock
shall not be entitled to any further payment, such amounts being herein
sometimes referred to as the "Liquidation Payments." If upon such
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series A Preferred Stock of the Corporation shall be insufficient to permit
payment to the holders of Series A Preferred Stock of the full amount of
the Liquidation Payments, then the entire assets of the Corporation to be
so distributed shall be distributed ratably per share among the holders of
Series A Preferred Stock in proportion to the amounts to which they
respectively are entitled. Upon any such liquidation, dissolution or
winding up of the Corporation, after the holders of the Series A Preferred
Stock shall have been paid in full the amounts to which they shall be
entitled, the remaining net assets of the Corporation shall be distributed
ratably to the holders of Common Stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount
of the Liquidation Payment and the place where said sums shall be payable
shall be given by mail, postage prepaid, not less than 30 or more than 60
days prior to the payment date stated therein, to the holders of record of
the Series A Preferred Stock and the Common Stock, such notice to be
addressed to each shareholder at his post office address as shown by the
records of the Corporation. Neither the consolidation or merger of the
Corporation into or with any other corporation or corporations, nor the
sale or transfer by the Corporation of all or any part of its assets, shall
be deemed to be a liqui dation, dissolution or winding up of the
Corporation within the meaning of any of the provisions of this paragraph
2.
3. Conversion.
----------
3A Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 3, the holder of any share or shares of Series A Preferred Stock
shall have the right, at its option at any time, to convert any such shares
of Series A Preferred Stock into such number of fully paid and
nonassessable whole shares of Common Stock as is obtained by multiplying
the number of shares of Series A Preferred Stock so to be converted by
$1.00 and dividing the result by the conversion price of $1.00 per share
or, if there has been an adjustment of the conversion price, by the
conversion price as last adjusted and in effect at the date any share or
shares of Series A Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to herein as the
"Conversion Price"). Such rights of conversion shall be exercised by the
holder thereof by giving written notice that the holder elects to convert a
stated number of shares of Series A Pre ferred Stock into Common Stock and
by surrender of a certificate or certificates for the shares so to be
converted to the Corporation at its principal office (or such other office
or agency of the Corporation as the Corporation may designate by notice in
writing to the holder or holders of the Series A Preferred Stock) at any
time during its usual business
2
<PAGE>
hours on the date set forth in such notice, together with a statement of
the name or names (with address), subject to compliance with applicable
laws to the extent such designation shall involve a transfer, in which the
certificate or certificates for shares of Common Stock shall be issued.
3B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt by the Corporation of the written notice referred to in
subparagraph 3A and surrender of the certificate or certificates for the
share or shares of the Series A Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct,
subject to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series A Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price
shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the
certificate or certifi cates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of such
share or shares of Series A Preferred Stock shall cease, and the person or
persons in whose name or names any certificate or certificates for shares
of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
thereby.
3C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of the Series A Preferred Stock into
Common Stock and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share, and no payment or adjustment shall be
made upon any conversion on account of any cash dividends on the Series A
Preferred Stock so converted or the Common Stock issued upon such
conversion. In case the number of shares of Series A Preferred Stock
represented by the certificate or certificates surrendered pursuant to
subparagraph 3A exceeds the number of shares converted, the Corporation
shall, upon such conversion, execute and deliver to the holder thereof, at
the expense of the Corporation, a new certificate or certificates for the
number of shares of Series A Preferred Stock, represented by the
certificate or certificates surrendered which are not to be converted.
3D. Adjustment of Price Upon Issuance of Common Shares. Except as
--------------------------------------------------
provided in subparagraph 3E hereof, if and whenever the Corporation shall
issue or sell, or is, in accordance with subparagraphs 3D(1) through 3D(7),
deemed to have issued or sold, any shares ("Additional Common Shares") of
its Common Stock without consider ation or for a consideration per share
less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then, the Conversion Price shall be reduced,
concurrently with such issue or sale, to a price (calculated to the nearest
cent) determined by dividing (x) an amount equal to the aggregate
consideration received by the Corpora tion upon such issue or sale, by (y)
the total number of Additional Common Shares so
3
<PAGE>
issued or sold. In the event that any Additional Common Shares are issued
or sold without consideration, then the consideration per share shall be
deemed to be $.01.
No adjustment of the Conversion Price, however, shall be made in an
amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per share or more.
For purposes of this subparagraph 3D, the following subparagraphs
3D(1) to 3D(7) shall also be applicable:
3D(1). Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consider ation for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convert ible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon the conversion or
exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Conversion Price in effect immediately
prior to the time of the granting of such Options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such Options
or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of
granting of such Options and thereafter shall be deemed to be outstanding.
Except as otherwise provided in subparagraph 3D(3), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common Stock
or of such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
3D(2). Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert thereunder are
4
<PAGE>
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (i) the
total amount received or receivable by the Corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the
Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed
to have been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in subparagraph
3D(3) below, no adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and (b) if any such issue or sale of such
Convertible Securities is made upon exercise of any Option to purchase any
such Convertible Securities for which adjustments of the Conversion Price
have been or are to be made pursuant to other provisions of this
subparagraph 3D, no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.
3D(3). Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided for
in any Option referred to in subparagraph 3D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 3D(1) or 3D(2), or the
rate at which any Convertible Securities referred to in subparagraph 3D(1)
or 3D(2) are convertible into or exchangeable for Common Stock shall change
at any time (in each case other than under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at
the time of such event shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such Options or Con
vertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold; and on the expiration of any
such Option or the termination of any such right to convert or exchange
such Convertible Securities, the Conversion Price then in effect hereunder
shall forthwith be increased to the Conversion Price which would have been
in effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the purchase
price provided for in any such Option referred to in subparagraph 3D(1) or
the rate at which any Convertible Securities referred to in subpara graph
3D(1) or 3D(2) are convertible into or exchangeable for Common Stock shall
be reduced at any time under or by reason of provisions with respect
thereto designed to protect against dilution, then, in case of the delivery
of Common Stock upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be adjusted to such respec-
5
<PAGE>
tive amount as would have been obtained had such Option or Convertible
Securities never been issued as to such Common Stock and had adjustments
been made upon the issuance of the shares of Common Stock delivered as
aforesaid, but only if as a result of such adjustment the Conversion Price
then in effect hereunder is thereby reduced.
3D(4). Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration and the Conversion Price then in
effect immediately prior to such dividend declaration or distribution shall
be reduced as if the Corporation had subdivided its outstanding shares of
Common Stock into a greater number of shares as provided in subparagraph
3D(5).
3D(5). Subdivision or Combination of Stock. In case the Corporation
-----------------------------------
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares or shall declare or pay a dividend on its
outstanding shares of Common Stock payable in shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
3D(6). Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors of
the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. The amount of consideration deemed to be received
by the Corporation pursuant to the foregoing provisions of this
subparagraph 3D(6) upon any issuance and/or sale of shares of Common Stock,
Options or Convertible Securities, pursuant to an established compensation
plan of the Corporation, to directors, officers or employees of the
Corporation in connection with their employment shall be increased by the
amount of any tax benefit realized by the Corporation as a result of such
issuance and/or sale, the amount of such tax benefit being the amount by
which the Federal and/or state income or other tax liability of the
Corporation shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Options shall be issued
in connection with the issue and sale of other securities of the
Corporation, to-
6
<PAGE>
gether comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such
Options shall be deemed to have been issued without consideration.
3D(7). Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities, or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
3E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not make any adjustment of
the Conver sion Price in the case of (i) the issuance of shares of Common
Stock upon conversion of Series A Preferred Stock and (ii) the issuance of
up to 2,500,000 shares of Common Stock reserved for issuance to employees,
officers, directors and consultants of the Corporation pursuant to stock
options granted pursuant to a plan approved by the Board of Directors of
the Corporation.
3F. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way (including, without limitation, by way of
consolidation or merger) that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provision (in form satisfactory to
the holders of at least 66-2/3% of the outstanding shares of Series A
Preferred Stock) shall be made whereby each holder of a share or shares of
Series A Preferred Stock shall thereafter have the right to receive, upon
the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock of the Corporation immediately theretofore
receivable upon the conver sion of such share or shares of the Series A
Preferred Stock, such shares of stock, securi ties or assets as may be
issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of
such stock immediately theretofore so receivable had such reorganization or
reclassification not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of such
holder to the end that the provisions hereof (including without limita
tion provisions for adjustments of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliver able upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such
reorganization or reclassification, of the Conversion Price to the value
for the Common Stock reflected by the terms of such reorganization or
reclassification if the value so reflected is less than the Conversion
7
<PAGE>
Price in effect immediately prior to such reorganization or
reclassification). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of
common stock of the surviving corporation are issuable to holders of Common
Stock of the Corporation outstanding immediately prior to such merger or
consolidation, the Conversion Price in effect immediately prior to such
merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock of the Corporation. The Corporation will not effect any such
consolida tion or merger, or any sale of all or substantially all its
assets and properties, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) re sulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument (in form reasonably satisfactory to the
holders of at least 66-2/3% of the shares of Series A Preferred Stock at
the time outstanding) executed and mailed or delivered to each holder of
shares of Series A Preferred Stock at the last address of such holder
appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive.
3G. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by first class mail, postage prepaid, addressed to each holder of
shares of Series A Preferred Stock at the address of such holder as shown
on the books of the Corporation, which notice shall state the Conversion
Price resulting from such adjustment, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
3H. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to,
another corporation; or
(4) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by
first class mail, postage prepaid, addressed to each holder of any shares
of Series A Preferred Stock at the
8
<PAGE>
address of such holder as shown on the books of the Corporation, (a) at
least 15 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determin ing rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (b) in the case
of any such reor ganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least 15 days' prior written
notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of
any such dividend, distribution or subscription rights, the date on which
the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (b) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
3I. Mandatory Conversion. The Series A Preferred Stock shall be
--------------------
automatically converted if at any time the Corporation shall effect an
initial public offering (an "Initial Public Offering") of shares of its
Common Stock registered under the Securities Act of 1933, as amended, in
which (i) the aggregate net proceeds to the Corporation are at least
$5,000,000 and (ii) the per share price to the public is not less than
$3.00 (appropriately adjusted for any stock splits, combinations or stock
dividends); such conversion shall be effected at the time of and subject to
the closing of the sale of such shares.
3J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized but unissued Common Stock, solely
for the purpose of issuance upon the conversion of the Series A Preferred
Stock as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding shares of Series A
Preferred Stock. All shares of Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges arising out of or by reason of the issue
thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action
as may be requisite to assure that the par value per share of the Common
Stock is at all times equal to or less than the effective Conversion Price.
The Corporation will take all such action within its control as may be
necessary on its part to assure that all such shares of Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Common
Stock of the Corporation may be listed. The Corporation will not take any
action which results in any adjustment of the Conversion Price if after
such action the total number of shares of Common Stock issued and
outstanding and thereafter issuable upon exercise of all options and
conversion of Convertible Securities, including upon conversion of the
Series A Preferred Stock, would exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation.
9
<PAGE>
3K. No Reissuance of Series A Preferred Stock. Shares of Series A
-----------------------------------------
Preferred Stock that are converted into shares of Common Stock as provided
herein shall not be reissued.
3L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Series A Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series A Preferred Stock which is being converted.
3M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series A Preferred Stock or of
any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Preferred Stock in any manner which interferes with the
timely conversion of such Series A Preferred Stock.
3N. Definition of Common Stock. As used in this paragraph 3, the
--------------------------
term "Common Stock" shall mean and include the Corporation's authorized
Common Stock as constituted on the date of filing of this Certificate of
Designation and shall also include any capital stock of any class of the
Corporation thereafter authorized that shall not be limited to a fixed sum
in respect of the rights of the holders thereof to participate in dividends
or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; provided,
--------
however, that such term, when used to describe the securities receivable
-------
upon conversion of shares of the Series A Preferred Stock of the
Corporation, shall include only shares designated as Common Stock of the
Corporation on the date of filing of this Certificate of Designation, any
shares resulting from any combina tion or subdivision thereof referred to
in subparagraph 3D(5), or in case of any reorganiza tion or
reclassification of the outstanding shares thereof, the stock, securities
or assets provided for in subparagraph 3F.
4. Voting - Series A Preferred Stock. Except as otherwise provided
---------------------------------
by law and this Certificate of Incorporation, the holders of Series A
Preferred Stock shall vote together with the holders of Common Stock on all
matters to be voted on by the share holders of the Corporation, and each
holder of Series A Preferred Stock shall be entitled to one vote for each
share of Common Stock that would be issuable to such holder upon the
conversion of all the shares of Series A Preferred Stock held by such
holder on the record date for the determination of shareholders entitled to
vote.
5. Restrictions. At any time when shares of Series A Preferred Stock
------------
are out standing, and in addition to any other vote of shareholders
required by law or by the Certificate of Incorporation, without the prior
consent of the holders of a majority of the outstanding Series A Preferred
Stock, given in person or by proxy, either in writing or at a
10
<PAGE>
special meeting called for that purpose, at which meeting the holders of
the shares of such Series A Preferred Stock shall vote together as a class:
(i) the Corporation will not (y) create or authorize the creation
of any additional class of shares unless the same ranks junior to or on
parity with the Series A Preferred Stock as to the distribution of assets
on liquidation, or (z) increase the authorized amount of the Series A
Preferred Stock, or increase the authorized amount of any additional class
of shares unless the same ranks junior to or on parity with the Series A
Preferred Stock as to the distribution of assets on liquida tion, in each
case whether any such creation or authorization or increase shall be by
means of amendment of the Certificate of Incorporation, merger,
consolidation or otherwise;
(ii) the Corporation will not amend, alter or repeal the
Corporation's Certificate of Incorporation or By-laws in any manner, or
file any directors' resolutions pursuant to Delaware General Corporation
Law containing any provision, in either case which affects the respective
preferences, voting power, qualifications, special or relative rights or
privileges of the Series A Preferred Stock or the holders thereof; and
(iii) the Corporation will not declare, or set aside funds for
the payment of, a cash dividend on Common Stock in contemplation of
the liquidation, dissolution or winding up of the Corporation.
6. No Waiver. Except as otherwise modified or provided for herein,
---------
the holders of Series A Preferred Stock shall also be entitled to, and
shall not be deemed to have waived, any other applicable rights granted to
such holders under the Delaware General Corporation Law.
7. No Impairment. The Corporation will not, through any
-------------
reorganization, transfer of assets, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all time in good faith assist in
the carrying out of all the provisions of this Article Fourth and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights and liquidation preferences granted hereunder
of the holders of the Series A Preferred Stock against impairment."
11
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designations has been executed
by the Corporation by its President as of this 2nd day of July, 1998.
WIT CAPITAL GROUP, INC.
By /s/ Ronald Readmond
-------------------------
Ronald Readmond
President
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES B PREFERRED STOCK
OF
WIT CAPITAL GROUP, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
___________________________________________
WIT CAPITAL GROUP, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to authority vested in the Board of Directors of the Corporation by
Article Fourth of the Certificate of Incorporation of the Corporation, the
following resolution was adopted as of July 2, 1998 by the Board of Directors of
the Corporation pursuant to Section 141 of the Delaware General Corpora tion
Law:
"RESOLVED that, pursuant to authority vested in the Board of Directors
of the Corporation by Article Fourth of the Corporation's Certificate of
Incorporation of the total authorized number of 30,000,000 shares of Preferred
Stock, par value $.01 per share, of the Corporation, there shall be designated a
series of 3,000,000 shares which shall be issued in and constitute a single
series to be known as "Series B Preferred Stock" (hereinafter called the "Series
B Preferred Stock"). The shares of Series B Preferred Stock shall have the
voting powers, designations, preferences and other special rights, and
qualifications, limitations and re strictions thereof set forth below:
1. Dividends. The holders of Series B Preferred Stock shall not be
---------
entitled to receive dividends in any fixed amount, provided, however, that
-------- -------
in the event that the Corporation shall at any time pay a dividend on the
Common Stock (other than a dividend payable solely in shares of Common
Stock), it shall, at the same time, pay to each holder of Series B
Preferred Stock a dividend equal to the dividend that would have been
payable to such holder if the shares of Series B Preferred Stock held by
such holder had been converted into Common Stock on the date of
determination of holders of Common Stock entitled to receive such
dividends.
<PAGE>
2. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, the holders of the
shares of Series B Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock, to be paid an amount
equal to $1.00 per share, and the holders of the Series B Preferred Stock
shall not be entitled to any further payment, such amounts being herein
sometimes referred to as the "Liquidation Payments." If upon such
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series B Preferred Stock of the Corporation shall be insufficient to permit
payment to the holders of Series B Preferred Stock of the full amount of
the Liquidation Payments, then the entire assets of the Corporation to be
so distributed shall be distributed ratably per share among the holders of
Series B Preferred Stock in proportion to the amounts to which they
respectively are entitled. Upon any such liquidation, dissolution or
winding up of the Corporation, after the holders of the Series B Preferred
Stock shall have been paid in full the amounts to which they shall be
entitled, the remaining net assets of the Corporation shall be distributed
ratably to the holders of Common Stock. Written notice of such
liquidation, dissolution or winding up, stating a payment date, the amount
of the Liquidation Payment and the place where said sums shall be payable
shall be given by mail, postage prepaid, not less than 30 or more than 60
days prior to the payment date stated therein, to the holders of record of
the Series B Preferred Stock and the Common Stock, such notice to be
addressed to each shareholder at his post office address as shown by the
records of the Corporation. Neither the consolidation or merger of the
Corporation into or with any other corporation or corporations, nor the
sale or transfer by the Corporation of all or any part of its assets, shall
be deemed to be a liqui dation, dissolution or winding up of the
Corporation within the meaning of any of the provisions of this paragraph
2.
3. Conversion.
----------
3A Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 3, the holder of any share or shares of Series B Preferred Stock
shall have the right, at its option at any time, to convert any such shares
of Series B Preferred Stock into such number of fully paid and
nonassessable whole shares of Common Stock as is obtained by multiplying
the number of shares of Series B Preferred Stock so to be converted by
$1.00 and dividing the result by the conversion price of $1.00 per share
or, if there has been an adjustment of the conversion price, by the
conversion price as last adjusted and in effect at the date any share or
shares of Series B Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to herein as the
"Conversion Price"). Such rights of conversion shall be exercised by the
holder thereof by giving written notice that the holder elects to convert a
stated number of shares of Series B Pre ferred Stock into Common Stock and
by surrender of a certificate or certificates for the shares so to be
converted to the Corporation at its principal office (or such other office
or agency of the Corporation as the Corporation may designate by notice in
writing to the holder or holders of the Series B Preferred Stock) at any
time during its usual business
2
<PAGE>
hours on the date set forth in such notice, together with a statement of
the name or names (with address), subject to compliance with applicable
laws to the extent such designation shall involve a transfer, in which the
certificate or certificates for shares of Common Stock shall be issued.
3B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt by the Corporation of the written notice referred to in
subparagraph 3A and surrender of the certificate or certificates for the
share or shares of the Series B Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct,
subject to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series B Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price
shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the
certificate or certifi cates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of such
share or shares of Series B Preferred Stock shall cease, and the person or
persons in whose name or names any certificate or certificates for shares
of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
thereby.
3C. Fractional Shares; Dividends; Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of the Series B Preferred Stock into
Common Stock and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share, and no payment or adjustment shall be
made upon any conversion on account of any cash dividends on the Series B
Preferred Stock so converted or the Common Stock issued upon such
conversion. In case the number of shares of Series B Preferred Stock
represented by the certificate or certificates surrendered pursuant to
subparagraph 3A exceeds the number of shares converted, the Corporation
shall, upon such conversion, execute and deliver to the holder thereof, at
the expense of the Corporation, a new certificate or certificates for the
number of shares of Series B Preferred Stock, represented by the
certificate or certificates surrendered which are not to be converted.
3D. Adjustment of Price Upon Issuance of Common Shares. Except as
--------------------------------------------------
provided in subparagraph 3E hereof, if and whenever the Corporation shall
issue or sell, or is, in accordance with subparagraphs 3D(1) through 3D(7),
deemed to have issued or sold, any shares ("Additional Common Shares") of
its Common Stock without consider ation or for a consideration per share
less than the Conversion Price in effect immediately prior to the time of
such issue or sale, then, the Conversion Price shall be reduced,
concurrently with such issue or sale, to a price (calculated to the nearest
cent) determined by dividing (x) an amount equal to the aggregate
consideration received by the Corpora tion upon such issue or sale, by (y)
the total number of Additional Common Shares so
3
<PAGE>
issued or sold. In the event that any Additional Common Shares are issued
or sold without consideration, then the consideration per share shall be
deemed to be $.01.
No adjustment of the Conversion Price, however, shall be made in an
amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per share or more.
For purposes of this subparagraph 3D, the following subparagraphs
3D(1) to 3D(7) shall also be applicable:
3D(1). Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in
a merger or otherwise) any rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consider ation for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convert ible Securities and upon the conversion or exchange
thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon the conversion or
exchange of all such Convertible Securities issuable upon the exercise of
such Options) shall be less than the Conversion Price in effect immediately
prior to the time of the granting of such Options, then the total maximum
number of shares of Common Stock issuable upon the exercise of such Options
or upon conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of
granting of such Options and thereafter shall be deemed to be outstanding.
Except as otherwise provided in subparagraph 3D(3), no adjustment of the
Conversion Price shall be made upon the actual issue of such Common Stock
or of such Convertible Securities upon exercise of such Options or upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
3D(2). Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert thereunder are
4
<PAGE>
immediately exercisable, and the price per share for which Common Stock is
issuable upon such conversion or exchange (determined by dividing (i) the
total amount received or receivable by the Corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the
Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed
to have been issued for such price per share as of the date of the issue or
sale of such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in subparagraph
3D(3) below, no adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities, and (b) if any such issue or sale of such
Convertible Securities is made upon exercise of any Option to purchase any
such Convertible Securities for which adjustments of the Conversion Price
have been or are to be made pursuant to other provisions of this
subparagraph 3D, no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.
3D(3). Change in Option Price or Conversion Rate. Upon the happening
-----------------------------------------
of any of the following events, namely, if the purchase price provided for
in any Option referred to in subparagraph 3D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 3D(1) or 3D(2), or the
rate at which any Convertible Securities referred to in subparagraph 3D(1)
or 3D(2) are convertible into or exchangeable for Common Stock shall change
at any time (in each case other than under or by reason of provisions
designed to protect against dilution), the Conversion Price in effect at
the time of such event shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such Options or Con
vertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at
the time initially granted, issued or sold; and on the expiration of any
such Option or the termination of any such right to convert or exchange
such Convertible Securities, the Conversion Price then in effect hereunder
shall forthwith be increased to the Conversion Price which would have been
in effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued, and the Common Stock issuable
thereunder shall no longer be deemed to be outstanding. If the purchase
price provided for in any such Option referred to in subparagraph 3D(1) or
the rate at which any Convertible Securities referred to in subpara graph
3D(1) or 3D(2) are convertible into or exchangeable for Common Stock shall
be reduced at any time under or by reason of provisions with respect
thereto designed to protect against dilution, then, in case of the delivery
of Common Stock upon the exercise of any such Option or upon conversion or
exchange of any such Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be adjusted to such respective amount as
would have been obtained had such Option or Convertible Securities never
been issued as to such Common Stock and had adjustments been made upon the
issuance of the shares of Common Stock delivered as aforesaid, but only if
as a result of such adjustment the Conversion Price then in effect
hereunder is thereby reduced.
5
<PAGE>
3D(4). Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration and the Conversion Price then in
effect immediately prior to such dividend declaration or distribution shall
be reduced as if the Corporation had subdivided its outstanding shares of
Common Stock into a greater number of shares as provided in subparagraph
3D(5).
3D(5). Subdivision or Combination of Stock. In case the Corporation
-----------------------------------
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares or shall declare or pay a dividend on its
outstanding shares of Common Stock payable in shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
3D(6). Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors of
the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. The amount of consideration deemed to be received
by the Corporation pursuant to the foregoing provisions of this
subparagraph 3D(6) upon any issuance and/or sale of shares of Common Stock,
Options or Convertible Securities, pursuant to an established compensation
plan of the Corporation, to directors, officers or employees of the
Corporation in connection with their employment shall be increased by the
amount of any tax benefit realized by the Corporation as a result of such
issuance and/or sale, the amount of such tax benefit being the amount by
which the Federal and/or state income or other tax liability of the
Corporation shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Options shall be issued
in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no
specific consideration is allocated to such Options by the parties thereto,
such Options shall be deemed to have been issued without consideration.
6
<PAGE>
3D(7). Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities, or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
3E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not make any adjustment of
the Conver sion Price in the case of (i) the issuance of shares of Common
Stock upon conversion of Series B Preferred Stock and (ii) the issuance of
up to 2,500,000 shares of Common Stock reserved for issuance to employees,
officers, directors and consultants of the Corporation pursuant to stock
options granted pursuant to a plan approved by the Board of Directors of
the Corporation.
3F. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way (including, without limitation, by way of
consolidation or merger) that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provision (in form satisfactory to
the holders of at least 66-2/3% of the outstanding shares of Series B
Preferred Stock) shall be made whereby each holder of a share or shares of
Series B Preferred Stock shall thereafter have the right to receive, upon
the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock of the Corporation immediately theretofore
receivable upon the conversion of such share or shares of the Series B
Preferred Stock, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of
such stock immediately theretofore so receivable had such reorganization or
reclassification not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of such
holder to the end that the provisions hereof (including without limita
tion provisions for adjustments of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliver able upon the exercise of such
conversion rights (including an immediate adjustment, by reason of such
reorganization or reclassification, of the Conversion Price to the value
for the Common Stock reflected by the terms of such reorganization or
reclassification if the value so reflected is less than the Conversion
7
<PAGE>
Price in effect immediately prior to such reorganization or
reclassification). In the event of a merger or consolidation of the
Corporation as a result of which a greater or lesser number of shares of
common stock of the surviving corporation are issuable to holders of Common
Stock of the Corporation outstanding immediately prior to such merger or
consolidation, the Conversion Price in effect immediately prior to such
merger or consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares of Common
Stock of the Corporation. The Corporation will not effect any such
consolidation or merger, or any sale of all or substantially all its
assets and properties, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) re sulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument (in form reasonably satisfactory to the
holders of at least 66-2/3% of the shares of Series B Preferred Stock at
the time outstanding) executed and mailed or delivered to each holder of
shares of Series B Preferred Stock at the last address of such holder
appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive.
3G. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by first class mail, postage prepaid, addressed to each holder of
shares of Series B Preferred Stock at the address of such holder as shown
on the books of the Corporation, which notice shall state the Conversion
Price resulting from such adjustment, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
3H. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to,
another corporation; or
(4) there shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by
first class mail, postage prepaid, addressed to each holder of any shares
of Series B Preferred Stock at the
8
<PAGE>
address of such holder as shown on the books of the Corporation, (a) at
least 15 days' prior written notice of the date on which the books of the
Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect of any such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, and (b) in the case
of any such reor ganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least 15 days' prior written
notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (a) shall also specify, in the case of
any such dividend, distribution or subscription rights, the date on which
the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (b) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be.
3I. Mandatory Conversion. The Series B Preferred Stock shall be
--------------------
automatically converted if at any time the Corporation shall effect an
initial public offering (an "Initial Public Offering") of shares of its
Common Stock registered under the Securities Act of 1933, as amended, in
which (i) the aggregate net proceeds to the Corporation are at least
$5,000,000 and (ii) the per share price to the public is not less than
$3.00 (appropriately adjusted for any stock splits, combinations or stock
dividends); such conversion shall be effected at the time of and subject to
the closing of the sale of such shares.
3J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized but unissued Common Stock, solely
for the purpose of issuance upon the conversion of the Series B Preferred
Stock as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding shares of Series B
Preferred Stock. All shares of Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges arising out of or by reason of the issue
thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action
as may be requisite to assure that the par value per share of the Common
Stock is at all times equal to or less than the effective Conversion Price.
The Corporation will take all such action within its control as may be
necessary on its part to assure that all such shares of Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Common
Stock of the Corporation may be listed. The Corporation will not take any
action which results in any adjustment of the Conversion Price if after
such action the total number of shares of Common Stock issued and
outstanding and thereafter issuable upon exercise of all options and
conversion of Convertible Securities, including upon conversion of the
Series B Preferred Stock, would exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation.
9
<PAGE>
3K. No Reissuance of Series B Preferred Stock. Shares of Series B
-----------------------------------------
Preferred Stock that are converted into shares of Common Stock as provided
herein shall not be reissued.
3L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Series B Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series B Preferred Stock which is being converted.
3M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series B Preferred Stock or of
any shares of Common Stock issued or issuable upon the conversion of any
shares of Series B Preferred Stock in any manner which interferes with the
timely conversion of such Series B Preferred Stock.
3N. Definition of Common Stock. As used in this paragraph 3, the
--------------------------
term "Common Stock" shall mean and include the Corporation's authorized
Common Stock as constituted on the date of filing of this Certificate of
Designation and shall also include any capital stock of any class of the
Corporation thereafter authorized that shall not be limited to a fixed sum
in respect of the rights of the holders thereof to participate in dividends
or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; provided,
--------
however, that such term, when used to describe the securities receivable
-------
upon conversion of shares of the Series B Preferred Stock of the
Corporation, shall include only shares designated as Common Stock of the
Corporation on the date of filing of this Certificate of Designation, any
shares resulting from any combina tion or subdivision thereof referred to
in subparagraph 3D(5), or in case of any reorganiza tion or
reclassification of the outstanding shares thereof, the stock, securities
or assets provided for in subparagraph 3F.
4. Voting - Series B Preferred Stock. Except as otherwise provided
---------------------------------
by law and this Certificate of Incorporation, the holders of Series B
Preferred Stock shall vote together with the holders of Common Stock on all
matters to be voted on by the share holders of the Corporation, and each
holder of Series B Preferred Stock shall be entitled to one vote for each
share of Common Stock that would be issuable to such holder upon the
conversion of all the shares of Series B Preferred Stock held by such
holder on the record date for the determination of shareholders entitled to
vote.
5. Restrictions. At any time when shares of Series B Preferred Stock
------------
are out standing, and in addition to any other vote of shareholders
required by law or by the Certificate of Incorporation, without the prior
consent of the holders of a majority of the outstanding Series B Preferred
Stock, given in person or by proxy, either in writing or at a
10
<PAGE>
special meeting called for that purpose, at which meeting the holders of
the shares of such Series B Preferred Stock shall vote together as a class:
(i) the Corporation will not (y) create or authorize the creation
of any additional class of shares unless the same ranks junior to or on
parity with the Series B Preferred Stock as to the distribution of assets
on liquidation, or (z) increase the authorized amount of the Series B
Preferred Stock, or increase the authorized amount of any additional class
of shares unless the same ranks junior to or on parity with the Series B
Preferred Stock as to the distribution of assets on liquidation, in each
case whether any such creation or authorization or increase shall be by
means of amendment of the Certificate of Incorporation, merger,
consolidation or otherwise;
(ii) the Corporation will not amend, alter or repeal the
Corporation's Certificate of Incorporation or By-laws in any manner, or
file any directors' resolutions pursuant to Delaware General Corporation
Law containing any provision, in either case which affects the respective
preferences, voting power, qualifications, special or relative rights or
privileges of the Series B Preferred Stock or the holders thereof; and
(iii) the Corporation will not declare, or set aside funds for
the payment of, a cash dividend on Common Stock in contemplation of the
liquidation, dissolution or winding up of the Corporation.
6. No Waiver. Except as otherwise modified or provided for herein,
---------
the holders of Series B Preferred Stock shall also be entitled to, and
shall not be deemed to have waived, any other applicable rights granted to
such holders under the Delaware General Corporation Law.
7. No Impairment. The Corporation will not, through any
-------------
reorganization, transfer of assets, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all time in good faith assist in
the carrying out of all the provisions of this Article Fourth and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights and liquidation preferences granted hereunder
of the holders of the Series B Preferred Stock against impairment.
8. Pari Passu Treatment. Except as and to the extent expressly set
--------------------
forth hereinabove, each of the Series B Preferred Stock and the Series A
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock"),
of the Corporation shall be pari passu to the other in all respects,
provided, however, that with respect to voting rights, the
-------- -------
11
<PAGE>
holders of Series A Preferred Stock and the holders of Series B Preferred
Stock shall vote as separate classes on all matters for which such holders
are entitled to vote."
IN WITNESS WHEREOF, this Certificate of Designations has been executed
by the Corporation by its President as of this 2nd day of July, 1998.
WIT CAPITAL GROUP, INC.
By /s/ Ronald Readmond
-----------------------
Ronald Readmond
President
12
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES C PREFERRED STOCK
OF
WIT CAPITAL GROUP, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
_________________________________________
WIT CAPITAL GROUP, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to authority vested in the Board of Directors of the Corporation by
Article Fourth of the Certificate of Incorporation of the Corporation, the
following resolution was adopted as of September __, 1998 by the Board of
Directors of the Corporation pursuant to Section 141 of the Delaware General
Corporation Law:
"RESOLVED that, pursuant to authority vested in the Board of
Directors of the Corporation by Article Fourth of the Corporation's Certificate
of Incorporation of the total authorized number of 30,000,000 shares of
Preferred Stock, par value $.01 per share, of the Corporation, there shall be
designated a series of 7,445,000 shares which shall be issued in and constitute
a single series to be known as "Series C Preferred Stock" (hereinafter called
the "Series C Preferred Stock"). The shares of Series C Preferred Stock shares
have the voting powers, designations, preferences and other special rights, and
qualifications, limitations and restrictions thereof set forth below:
1. Dividends. The holders of Series C Preferred Stock shall not be
---------
entitled to receive dividends in any fixed amount, provided, however, that
-------- -------
in the event that the Corporation shall at any time pay a dividend on the
Common Stock (other than a dividend payable solely in shares of Common
Stock), it shall, at the same time, pay to each holder of Series C
Preferred Stock a dividend equal to the dividend that would have been
payable to such holder if the shares of Series C Preferred Stock held by
such holder had been converted into Common Stock on the date of
determination of holders of Common Stock entitled to receive such
dividends.
2. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, the holders of the
shares of Series C Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock, Series A Preferred
Stock or Series B Preferred Stock, to be paid an
<PAGE>
amount equal to $1.00 per share (appropriately adjusted to reflect the
occurrence of any stock split, stock dividend, stock combination, stock
subdivision or like occurrences) plus any declared and unpaid dividends
(the "Series C Preferred Liquidation Preference") payable with respect to
such share under Section 1 before any distributions shall be made to the
holders of the Series A Preferred Stock, the Series B Preferred Stock, the
Common Stock or any other class of capital stock of the Corporation
ranking junior to the Series C Preferred Stock. If upon such liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, the assets to be distributed among the holders of Series C
Preferred Stock of the Corporation shall be insufficient to permit payment
to the holders of Series C Preferred Stock of the full amount of the
Liquidation Payments, then the entire assets of the Corporation to be so
distributed shall be distributed ratably per share among the holders of
Series C Preferred Stock in proportion to the amounts to which they
respectively are entitled. Upon any such liquidation, dissolution or
winding up of the Corporation after the holders of the Series C Preferred
Stock shall have been paid in full the amounts to which they shall be
entitled, and after the holders of the Series A Preferred Stock and the
Series B Preferred Stock shall have been paid in full in accordance with
the rights and preferences to which they are entitled, the remaining net
assets of the Corporation shall be distributed ratably and exclusively to
the holders of Common Stock. Written notice of such liquidation,
dissolution or winding up, stating a payment date, the amount of the
Liquidation Payment and the place where said sums shall be payable shall
be given by mail, postage prepaid, not less than 30 or more than 60 days
prior to the payment date stated therein, to the holders of record of the
Series C Preferred Stock and the Common Stock, such notice to be addressed
to each shareholder at his post office address as shown by the records of
the Corporation. Unless waived in writing by the holders of 66-2/3% of the
Series C Preferred Stock, a consolidation or merger of the Corporation
into or with any other corporation or corporations, or the sale or
transfer by the Corporation of all or substantially all of its assets, in
each case under circumstances in which the holders of a majority in voting
power of the outstanding capital stock of the Corporation, immediately
prior to such a merger, consolidation or sale, own less than a majority in
voting power of the outstanding capital stock of the corporation or the
surviving or resulting corporation or acquirer, as the case may be,
immediately following such a merger, consolidation or sale (each such
transaction being hereinafter referred to as a "Corporate Transaction").
3. Conversion.
----------
3A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 3, the holder of any share or shares of Series C Preferred Stock
shall have the right, at its option at any time, to convert any such
shares of Series C Preferred Stock into such number of fully paid and
nonassessable whole shares of Common Stock as is obtained by multiplying
the number of shares of Series C Preferred Stock so to be converted by
$1.00 and dividing the result by the conversion price of $1.00 per share
or, if there has been an adjustment of the conversion price, by the
conversion price as last adjusted and in effect at the date any share or
shares of Series C Preferred Stock are surrendered
2
<PAGE>
for conversion (such price, or such price as last adjusted, being referred
to herein as the "'Conversion Price"). Such rights of conversion shall be
exercised by the holder thereof by giving written notice that the holder
elects to convert a stated number of shares of Series C Preferred Stock
into Common Stock and by surrender of a certificate or certificates for
the shares so to be converted to the Corporation at its principal office
(or such other office or agency of the Corporation as the Corporation may
designate by notice in writing to the holder or holders of the Series C
Preferred Stock) at any time during its usual business hours on the date
set forth in such notice, together with a statement of the name or names
(with address), subject to compliance with applicable laws to the extent
such designation shall involve a transfer, in which the certificate or
certificates for shares of Common Stock shall be issued.
3B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt by the Corporation of the written notice referred to in
subparagraph 3A and surrender of the certificate or certificates for the
share or shares of the Series C Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct,
subject to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series C Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price
shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of
such share or shares of Series C Preferred Stock shall cease, and the
person or persons in whose name or names any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares
represented thereby.
3C. Fractional Shares; Dividends; Partial Conversion. No
------------------ -----------------------------
fractional shares shall be issued upon conversion of the Series C
Preferred Stock into Common Stock and the number of shares of Common Stock
to be issued shall be rounded to the nearest whole share, and no payment
or adjustment shall be made upon any conversion on account of any cash
dividends on the Series C Preferred Stock so converted or the Common Stock
issued upon such conversion. In case the number of shares of Series C
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 3A exceeds the number of shares converted, the
Corporation shall upon such conversion, execute and deliver to the holder
thereof, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Series C Preferred Stock
represented by the certificate or certificates surrendered which are not
to be converted.
3D. Adjustment of Price Upon Issuance. If and at any time or from
---------------------------------
time to time, after the Original Issuance Date for the Series C Preferred
Stock and prior to the
3
<PAGE>
consummation of a Qualified Offering (as hereinafter defined), the
Corporation shall issue or sell, or is, in accordance with subparagraphs
3D(l) through 3D(7), deemed to have issued or sold, any shares
("Additional Common Shares") of its Common Stock other than Excluded Stock
(as defined hereinafter) without consideration or for a consideration per
share less than the Conversion Price in effect immediately prior to the
time of such issue or sale, then the Conversion Price shall be reduced,
concurrently with issue or sale, to a price equal to the price paid (or
deemed to have been paid) per share for such Additional Common Shares. If
the Corporation shall at any time after a Qualified Offering issue or
sell, or is, in accordance with subparagraphs 3D(l) through 3D(7) below,
deemed to have issued or sold, any Additional Common Shares other than
Excluded Stock without consideration or for a consideration per share less
than the Conversion Price in effect immediately prior to the time of such
issue or sale, then the Conversion Price in effect immediately prior to
each such issuance shall be reduced, concurrently with such issue or sale,
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 subparagraphs 3D (1) through 3D (7) below) immediately prior to such
issuance, multiplied by the applicable Conversion Price in effect
immediately prior to such issuance of Additional Common Shares, 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
subparagraphs 3D (1) through 3D (7) below) immediately after such issuance
of the Additional Comon Shares. As used herein, the term "Qualified
Offering" shall mean the consummation by the Corporation of any equity
financing, in a single transaction or series or related transactions,
yielding aggregate gross proceeds to the Corporation of at least
$15,000,000, at a price per share of at least $3.00 (appropriately
adjusted to reflect the occurrence of any stock split, stock dividend,
stock combination, stock subdivision or like occurrences).
No adjustment of the Conversion Price, however, shall be made in an
amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per share or more.
For purposes of this subparagraph 3D, the following subparagraphs
3D(l) to 3D(7) shall also be applicable:
3D(l). Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption
in a merger or otherwise) any rights to subscribe for or to purchase, or
any option for the purchase of, Common Stock or any stock or securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "Options" and such convertible or exchangeable stock
or securities being herein called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
4
<PAGE>
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convertible Securities and upon the conversion or exchange thereof
by (ii) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Conversion Price in effect immediately prior to the
time of the granting of such Options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to
have been issued for such price per share as of the date of granting of
such Options and thereafter shall be deemed to be outstanding. Except as
otherwise provided in subparagraph 3D(3), no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities.
3D(2). Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger
or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and
the price per share for which Common Stock is issuable upon such
conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof by (ii) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of
such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in
subparagraph 3D(3) below, no adjustment of the Conversion Price shall be
made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and (b) if any such issue or sale
of such Convertible Securities is made upon exercise of any Option to
purchase any such Convertible Securities for which adjustments of the
Conversion Price have been or are to be made pursuant to other provisions
of this subparagraph 3D, no further adjustment of the Conversion Price
shall be made by reason of such issue or sale.
5
<PAGE>
3D(3). Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events after December 31, 1998, namely,
if the purchase price provided for in any Option referred to in
subparagraph 3D(l), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph 3D(l) or 3D(2), or the rate at which any Convertible
Securities referred to in subparagraph 3D(l) or 3D(2) are convertible into
or exchangeable for Common Stock shall change at any time (in each case
other than under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such
Option or the termination of any such right to convert or exchange such
Convertible Securities, the Conversion Price then in effect hereunder
shall forthwith be increased to the Conversion Price which would have been
in effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such Option referred to in subparagraph
3D(l) or the rate at which any Convertible Securities referred to in
subparagraph 3D(l) or 3D(2) are convertible into or exchangeable for
Common Stock shall be reduced at any time under or by reason of provisions
with respect thereto designed to protect against dilution, then, in case
of the delivery of Common Stock upon the exercise of any such Option or
upon conversion or exchange of any such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be adjusted to
such respective amount as would have been obtained had such Option or
Convertible Securities never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced.
3D(4). Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration and the Conversion Price then in
effect immediately prior to such dividend declaration or distribution
shall be reduced as if the Corporation had subdivided its outstanding
shares of Common Stock into a greater number of shares as provided in
subparagraph 3D(5).
3D(5). Subdivision or Combination of Stock. In case the Corporation
-----------------------------------
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares or shall deduct or pay a dividend on its
outstanding shares of Common Stock payable in shares of Common Stock, the
Conversion Price in effect immediately prior
6
<PAGE>
to such subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the Corporation shall be
combined into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination shall be proportionately increased.
3D(6). Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors
of the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. The amount of consideration deemed to be
received by the Corporation pursuant to the foregoing provisions of this
subparagraph 3D(6) upon any issuance and/or sale of shares of Common
Stock, Options or Convertible Securities, pursuant to an established
compensation plan of the Corporation, to directors, officers or employees
of the Corporation in connection with their employment shall be increased
by the amount of any tax benefit realized by the Corporation as a result
of such issuance and/or sale, the amount of such tax benefit being the
amount by which the Federal and/or state income or other tax liability of
the Corporation shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Options shall be issued
in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no
specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
3D(7). Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities, or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
3E. Excluded Stock. As used herein, the term "Excluded Stock" shall
--------------
mean (i) shares of Common Stock issuable upon the exercise of stock
options or stock purchase rights or as restricted stock or otherwise that
have been or may be granted to officers, directors, employees or
consultants of the Corporation with the approval of the Board of
Directors, (ii) shares of Common Stock issued by the Corporation as a
stock dividend or upon any subdivision, combination or split-up of Common
Stock, (iii)
7
<PAGE>
securities issued pursuant to commercial transactions approved by the
Board of Directors (including, without limitation, equipment leases or
bank lines or credit), (iv) securities issued in connection with
acquisitions or strategic investments or corporate partnering transactions
or relationships, (v) securities issuable pursuant to the exercise of the
warrants [identify], (vi) stock subscription warrants issued or issuable
to Draper Fisher Jurvetson Fund V, L.P. and Draper Fisher Jurveston
Partners LLC pursuant to the Series C Stock Purchase Agreement dated as of
the Original Issuance Date for the Series C Preferred Stock, among the
Corporation and the other signatories thereto or any shares of Series C
Preferred Stock issuable upon exercise thereof, (vii) securities that have
been approved for issuance or grant by the holders of a majority, by
voting power, of the outstanding shares of Series C Preferred Stock or
(viii) shares of Common Stock issuable upon conversion of Series A
Preferred Stock, Series B Preferred Stock and/or Series C Preferred Stock.
3F. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way (including, without limitation, by way of
consolidation or merger) that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for
Common Stock then, as a condition of such reorganization or
reclassification, lawful and adequate provision (in form satisfactory to
the holders of at least 66-2/3% of the outstanding shares of Series C
Preferred Stock) shall be made whereby each holder of a share or shares of
Series C Preferred Stock shall thereafter have the right to receive, upon
the basis and upon the terms and conditions specified herein and in lieu of
the shares of Common Stock of the Corporation immediately theretofore
receivable upon the conversion of such share or shares of the Series C
Preferred Stock, such shares of stock securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore so receivable had such reorganization or
reclassification not taken place and in any such case appropriate provision
shall be made with respect to the rights and interests of such holder to
the end that the provisions hereof (including without limitation provisions
for adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of such conversion rights
(including an immediate adjustment, by reason of such reorganization or
reclassification, of the Conversion Price to the value for the Common Stock
reflected by the terms of such reorganization or reclassification if the
value so reflected is less than the Conversion Price in effect immediately
prior to such reorganization or reclassification). In the event of a
merger or consolidation of the Corporation as a result of which a greater
or lesser number of shares of common stock of the surviving corporation are
issuable to holders of Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Conversion Price in
effect immediately prior to such merger or consolidation shall be adjusted
in the same manner as though there were a subdivision or combination of the
outstanding shares of Common Stock of the Corporation. The Corporation
will not effect any such consolidation or merger, or any sale of all or
substantially all its assets
8
<PAGE>
and properties, unless prior to the consummation thereof the successor
corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument (in form reasonably satisfactory to the
holders of at least 66-2/3% of the shares of Series C Preferred Stock at
the time outstanding) executed and mailed or delivered to each holder of
shares of Series C Preferred Stock at the last address of such holder
appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to receive.
3G. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written
notice thereof by first class mail, postage prepaid, addressed to each
holder of shares of Series C Preferred Stock at the address of such holder
as shown on the books of the Corporation, which notice shall state the
Conversion Price resulting from such adjustment, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
3H. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to,
another corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by
first class mail, postage prepaid, addressed to each holder of any shares
of Series C Preferred Stock at the address of such holder as shown on the
books of the Corporation, (a) at least 15 days prior written notice of the
date on which the books of the Corporation shall close or a record shall
be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (b) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least 15 days prior written notice of the date when the
same shall take place. Such notice in accordance with the foregoing
clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the
9
<PAGE>
date on which the holders of Common Stock shall be entitled thereto, and
such notice in accordance with the foregoing clause (b) shall also specify
the date on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable
upon such reorganization, reclassification consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
3I. Mandatory Conversion. Each share of Series C Preferred Stock
--------------------
shall be automatically converted into the number of shares of Common Stock
equal to the quotient obtained by dividing (i) the product of $1.00 and
the number of shares of Series C Preferred Stock being converted by (ii)
the Conversion Price, as last adjusted and then in effect, if at any time
the Corporation shall effect an initial public offering (an "Initial
Public Offering") of shares of its Common Stock registered under the
Securities Act of 1933, as amended (the "Securities Act"), hereof in which
(i) the aggregate net proceeds to the Corporation are at least $25,000,000
and (ii) the per share price to the public is not less than $3.00
(appropriately adjusted to reflect the occurrence of any stock split,
stock dividend, stock combination, stock subdivision or like occurrences).
Such conversion shall be effected at the time of and subject to the
consummation of the Initial Public Offering and otherwise in accordance
with the provisions of subparagraphs 3B and 3C hereof.
3J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized but unissued Common Stock solely
for the purpose of issuance upon the conversion of the Series C Preferred
Stock as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding shares of Series C
Preferred Stock. All shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free
from all taxes, liens and charges arising out of or by reason of the issue
thereof and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action
as may be requisite to assure that the par value per share of the Common
Stock is at all times equal to or less than the effective Conversion
Price. The Corporation will take all such action within its control as
may be necessary on its part to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or
regulation, or of any requirements of any national securities exchange
upon which the Common Stock of the Corporation may be listed. The
Corporation will not take any action which results in any adjustment of
the Conversion Price if after such action the total number of shares of
Common Stock issued and outstanding and thereafter issuable upon exercise
of all options and conversion of Convertible Securities, including upon
conversion of the Series C Preferred Stock, would exceed the total number
of shares of Common Stock then authorized by the Corporation's Certificate
of Incorporation.
3K. No Reissuance of Series C Preferred Stock. Shares of Series C
-----------------------------------------
Preferred Stock that are converted into shares of Common Stock as
provided herein shall not be reissued.
10
<PAGE>
3L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Series C Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any
tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of the
holder of the Series C Preferred Stock which is being converted.
3M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series C Preferred Stock or of
any shares of Common Stock issued or issuable upon the conversion of any
------
shares of Series C Preferred Stock in any manner which interferes with the
timely conversion of such Series C Preferred Stock.
3N. Definition of Common Stock. As used in this paragraph 3, the
----------------------------
term "Common Stock" shall mean and include the Corporation's authorized
Common Stock as constituted on the date of filing of this Certificate of
Designation and shall also include any capital stock of any class of the
Corporation thereafter authorized that shall not be limited to a fixed sum
in respect of the rights of the holders thereof to participate in
dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
provided, however, that such term, when used to describe the Securities
------------------
receivable upon conversion of shares of the Series C Preferred Stock of
the Corporation, shall include only shares designated as Common Stock of
the Corporation on the date of filing of this Certificate of Designation,
any shares resulting from any combination or subdivision thereof referred
to in subparagraph 3D(5), or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities
or assets provided for in subparagraph 3F.
4. Optional Redemption. (a) In the event that the Corporation has not,
-------------------
on or before the sixth anniversary of the Original Issuance Date for the
Series C Preferred Stock, consummated an initial public offering of shares
of Common Stock pursuant to the Securities Act or a Corporate Transaction
has not been consummated or the original purchaser of Series C Preferred
Stock has not disposed of such Series C Preferred Stock, then such original
holder of Series C Preferred Stock shall have the option, exercisable by
written notice in accordance with the first sentence of Section 4(b) from
such holder delivered to the Corporation, to cause the Corporation to
redeem, and the Corporation shall (unless prohibited by law) so redeem (the
"Optional Redemption") that number of shares as shall equal 50% of the
shares of Series C Preferred Stock held by such holder on the seventh
anniversary of the Original Issuance Date for the Series C Preferred Stock
and the balance of such shares of Series C Preferred Stock on the eighth
anniversary of the Original Issuance Date for the Series C Preferred Stock
(each an "Optional Redemption Date"), at a redemption price per share (the
"Optional Redemption Price") equal to the fair market value thereof as at
the sixth anniversary of the Original Issuance Date for the Series C
Preferred Stock as determined by an
11
<PAGE>
investment banking firm or other third party mutually designated by the
Corporation and the holders of a majority of the then outstanding shares of
Series C Preferred Stock.
(b) Notice of the exercise of the redemption option pursuant to Section
4(a) shall be sent by first-class certified mail, postage prepaid and
return receipt requested, or by overnight courier to the Corporation. At
any time on or after the Optional Redemption Date, the holders of record of
shares of Series C Preferred Stock exercising their right to Optional
Redemption, shall, as to the shares of Series C Preferred Stock to be
redeemed on such date, be entitled to receive payment in cash of the
Optional Redemption Price with respect to such Series C Preferred Stock
upon actual delivery to the Corporation or its agent of the certificate or
certificates representing the shares of Series C Preferred Stock to be
redeemed. If the Corporation does not have sufficient funds legally
available to redeem all shares of Series C Preferred Stock to be redeemed
at the Optional Redemption Date, then it shall redeem such shares pro rata
(based on the portion of the aggregate Optional Redemption Price payable in
respect of such shares) to the extent possible and shall redeem the
remaining shares to be redeemed as soon as sufficient funds are legally
available.
(c) On and after the Optional Redemption Date with respect to the shares
of Series C Preferred Stock to be redeemed by the Corporation pursuant to
this Section 4 on such date (unless the Corporation (i) is legally
prohibited from redeeming such shares of Series C Preferred Stock as have
been requested to be redeemed on such Optional Redemption Date, in which
event such right shall be exercisable until the removal of such legal
disability or (ii) otherwise fails to pay the Optional Redemption Price
applicable thereto) all rights in respect of the shares of Series C
Preferred Stock to be redeemed, except the right to review the Optional
Redemption Price as herein provided, shall cease and terminate; and such
shares shall no longer be deemed to be outstanding, whether or not the
certificates representing such shares have been received by the
Corporation.
(d) Anything contained herein to the contrary notwithstanding, the
holders of shares of Series C Preferred Stock exercising their optional
redemption rights under this Section 4 shall have the right, exercisable at
any time up to the close of business on the applicable Optional Redemption
Date, to convert all or any part of such shares into shares of Common Stock
pursuant to Section 3 hereof.
5. Voting - Series C Preferred Stock. Except as otherwise provided by
---------------------------------
law and this Certificate of Incorporation, the holders of Series C
Preferred Stock shall vote together with the holders of Series Common Stock
on all matters to be voted on by the shareholders of the Corporation, and
each holder of Series C Preferred Stock shall be entitled to one vote for
each share of Common Stock that would be issuable to such holder upon the
conversion of all the shares of Series C Preferred Stock held by such
holder on the record date for the determination of shareholders entitled to
vote.
12
<PAGE>
6. Restrictions. At any time when shares of Series C Preferred Stock
------------
are outstanding, and in addition to any other vote of shareholders required
by law or by the Certificate of Incorporation, without the prior consent of
the holders of 66-2/3% of the outstanding Series C Preferred Stock, given
in person or by proxy, either in writing or at a special meeting called for
that purpose, at which meeting the holders of the shares of such Series C
Preferred Stock shall vote together as a class, the Corporation will not:
(i) authorize, create, designate or establish any class or series of
capital stock ranking senior to the Series C Preferred Stock or reclassify
any shares of Common Stock into shares having any preference or priority as
to dividends or assets superior to any such preference or priority of
Series C Preferred Stock; (ii) sell all or substantially all of the
Corporation's assets; (iii) amend the Certificate of Incorporation or By-
laws of the Corporation in any manner that would materially adversely
affect the powers, preferences or rights, or qualifications, limitations or
restrictions of the shares of Series C Preferred Stock; (iv) approve or
authorize any liquidation or dissolution of the Corporation or (v) approve
or authorize a Corporate Transaction.
7. No Waiver. Except as otherwise modified or provided for herein,
---------
the holders of Series C Preferred Stock shall also be entitled to, and
shall not be deemed to have waived, any other applicable rights granted to
such holders under the Delaware General Corporation Law.
8. No Impairment. The Corporation will not, through any
-------------
reorganization, transfer of assets, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all time in good faith assist in
the carrying out of all the provisions of this Article Fourth and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights and liquidation preferences granted
hereunder of the holders of the Series C Preferred Stock against
impairment.
13
<PAGE>
IN WITNESS WHERFOF, this Certificate of Designation has been executed
by the Corporation by its President as of this 17th day of September, 1998.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald W. Readmond
-------------------------
Name: Ronald W. Readmond
Title: President
14
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:29 PM 11/19/1998
981447358 - 2916664
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WIT CAPITAL GROUP, INC.
WIT CAPITAL GROUP, INC., Delaware corporation (the "Corporation"),
hereby certifies as follows:
1. The current name of the Corporation is "WIT CAPITAL GROUP, INC."
2. Effective immediately, Section 2 of the Certificate of Designations,
Preferences, and Rights of Series C Preferred Stock of WIT Capital Group, Inc.
(the "Certificate of Designation"), is hereby amended to read in its entirety as
follows:
"2. Liquidation. Upon any liquidation, dissolution or winding
-----------
up of the Corporation, whether voluntary or involuntary, the holders of
the shares of Series C Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock, Series A
Preferred Stock or Series B Preferred Stock, and pari passu with the
---- -----
holders of Series D Preferred Stock, to be paid an amount equal
to $1.00 per share (appropriately adjusted to reflect the occurrence of
any stock split, stock dividend, stock combination, stock subdivision or
like occurrences) plus any declared and unpaid dividends (the "Series C
Preferred Liquidation Preference") payable with respect to such share
under Section 1 pari passu with the holders of Series D Preferred Stock
---- -----
before any distributions shall be made to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Common Stock or any
other class of capital stock of the Corporation ranking junior to the
Series D Preferred Stock and the Series C Preferred Stock. If upon such
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders
of Series D Preferred Stock and Series C Preferred Stock of the
Corporation shall be insufficient to permit payment to the holders of
Series D Preferred Stock and Series C Preferred Stock of the full amount
of the Liquidation Payments, then the entire assets of the Corporation
to be so distributed shall be distributed ratably per share among the
holders of Series D Preferred Stock and Series C Preferred Stock in
proportion to the amounts to which they respectively are entitled. Upon
any such liquidation, dissolution or winding up of the Corporation after
the holders of Series D Preferred Stock and Series C Preferred Stock
shall have been paid in full the amounts to which they shall be
entitled, and after the holders of the Series A Preferred Stock and the
Series B Preferred Stock shall have been paid in full in accordance with
the rights and preferences to which they are entitled, the remaining net
assets of the Corporation shall be distributed ratably and exclusively
to the holders of Common Stock. Written notice of such liquidation,
dissolution or winding up, stating a payment date, the amount of the
Liquidation Payment and the place where said sums shall be payable shall
be given by
<PAGE>
mail, postage prepaid, not less than 30 or more than 60 days prior to
the payment date stated therein, to the holders of record of the Series
D Preferred Stock, Series C Preferred Stock and the Common Stock, such
notice to be addressed to each shareholder at his post office address as
shown by the records of the Corporation. Unless waived in writing by the
holders of 66-2/3% of the Series C Preferred Stock and Series D
Preferred Stock, voting together as one class, a consolidation or merger
of the Corporation into or with any other corporation or corporations,
or the sale or transfer by the Corporation of all or substantially all
of its assets, in each case under circumstances in which the holders of
a majority in voting power of the outstanding capital stock of the
Corporation, immediately prior to such a merger, consolidation or sale,
own less than a majority in voting power of the outstanding capital
stock of the corporation or the surviving or resulting corporation or
acquirer, as the case may be, immediately following such a merger,
consolidation or sale (each such transaction being hereinafter referred
to as a "Corporate Transaction") shall be deemed to be a liquidation
within the meaning of this Section 2."
3. Effective immediately, Section 3E(v) of the Certificate of Designation
is amended to read in its entirety as follows:
"(v) securities issuable upon the exercise of warrants outstanding on
the Original Issuance Date."
4. Effective immediately, Section 3E(viii) is hereby amended by inserting
at the end thereof "and/or Series D Preferred Stock."
5. Effective immediately, Section 3F is hereby amended by inserting at the
end of the second parenthetical therein "and Series D Preferred Stock, voting
together as one class" and by inserting after reference to Series C Preferred
Stock in the last parenthetical therein "and Series D Preferred Stock, voting
together as one class."
6. Effective immediately, Section 6 of the Certificate of Designation is
hereby amended to read in its entirety as follows:
"6. Restrictions. At any time when shares of Series D Preferred
------------
Stock and Series C Preferred Stock are outstanding, and in addition to
any other vote of shareholders required by law or by the Certificate of
Incorporation, without the prior consent of the holders of 66-2/3% of
the outstanding Series D Preferred Stock and Series C Preferred Stock,
voting together as one class, given in person or by proxy, either in
writing or at a special meeting called for that purpose, at which
meeting the holders of the shares of such Series D Preferred Stock and
the Series C Preferred Stock shall vote together as a class, the
Corporation will not: (i) sell all or substantially all of the
Corporation's assets; (ii) approve or authorize any liquidation or
dissolution of the Corporation or (iii) approve or authorize a Corporate
Transaction. At any time when shares of Series C Preferred Stock are
outstanding, and in addition to any other vote of shareholders required
by law or by the Certificate of Incorporation, without the prior consent
of the holders of 66-2/3% of the outstanding Series C Preferred Stock,
given in person or by proxy, either in writing or at a special meeting
called for that purpose, at which meeting the holders of the shares of
such Series C Preferred Stock shall vote together as a class, the
Corporation will not: (i) authorize, create, designate or establish any
class or series of capital stock ranking senior to the Series C
Preferred Stock or reclassify any shares of Common Stock into shares
having any preference or priority as to dividends or assets superior to
any such preference
2
<PAGE>
or priority of Series C Preferred Stock or (ii) amend the Certificate of
Incorporation or By-laws of the Corporation in any manner that would
materially adversely affect the powers, preferences or rights, or
qualifications, limitations or restrictions of the shares of Series C
Preferred Stock."
7. This Amendment was duly adopted by the Board of Directors of the
Corporation, acting by unanimous written consent in lieu of a meeting effective
as of this date, pursuant to Section 242 of the General Corporation Law of the
State of Delaware and by the stockholders of the Corporation, acting by written
consent in lieu of a meeting effective as of this date pursuant to Section 228
of the General Corporation Law of the State of Delaware and Paragraph Sixth of
the Certificate of Incorporation of the Corporation.
*****
3
<PAGE>
IN WITNESS WHEREOF, this Corporation has caused this Certificate
of Amendment of Certificate of Incorporation to be signed as of the 19th day of
November, 1998, by its President, who hereby affirms and acknowledges, under
penalty of perjury, that this Certificate is the act and deed of the Corporation
and that the facts stated herein are true.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald Readmond
----------------------
Name: Ronald Readmond
Title: President
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES D PREFERRED STOCK
OF
WIT CAPITAL GROUP, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
_________________________________________
WIT CAPITAL GROUP, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to authority vested in the Board of Directors of the Corporation by
Article Fourth of the Certificate of Incorporation of the Corporation, the
following resolution was adopted as of November __, 1998 by the Board of
Directors of the Corporation pursuant to Section 141 of the Delaware General
Corporation Law:
"RESOLVED that, pursuant to authority vested in the Board of
Directors of the Corporation by Article Fourth of the Corporation's Certificate
of Incorporation of the total authorized number of 30,000,000 shares of
Preferred Stock, par value $.01 per share, of the Corporation, there shall be
designated a series of 8,000,000 shares which shall be issued in and constitute
a single series to be known as "Series D Preferred Stock" (hereinafter called
the "Series D Preferred Stock"). The shares of Series D Preferred Stock shares
have the voting powers, designations, preferences and other special rights, and
qualifications, limitations and restrictions thereof set forth below:
1. Dividends. The holders of Series D Preferred Stock shall not be
---------
entitled to receive dividends in any fixed amount, provided, however, that
-------- -------
in the event that the Corporation shall at any time pay a dividend on the
Common Stock (other than a dividend payable solely in shares of Common
Stock), it shall, at the same time, pay to each holder of Series D
Preferred Stock a dividend equal to the dividend that would have been
payable to such holder if the shares of Series D Preferred Stock held by
such holder had been converted into Common Stock on the date of
determination of holders of Common Stock entitled to receive such
dividends.
2. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, the holders of the
shares of Series D Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock, Series A Preferred
Stock or Series B Preferred Stock, and pari passu
---- -----
<PAGE>
with the holders of Series C Preferred Stock, to be paid an amount equal
to $1.50 per share (appropriately adjusted to reflect the occurrence of
any stock split, stock dividend, stock combination, stock subdivision or
like occurrences) plus any declared and unpaid dividends (the "Series D
Preferred Liquidation Preference") payable with respect to such share
under Section 1 pari passu with the holders of Series C Preferred Stock
---- -----
before any distributions shall be made to the holders of the Series A
Preferred Stock, the Series B Preferred Stock, the Common Stock or any
other class of capital stock of the Corporation ranking junior to the
Series D Preferred Stock and the Series C Preferred Stock. If upon such
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders
of Series D Preferred Stock and the Series C Preferred Stock of the
Corporation shall be insufficient to permit payment to the holders of
Series D Preferred Stock and Series C Preferred Stock of the full amount
of the Liquidation Payments, then the entire assets of the Corporation to
be so distributed shall be distributed ratably per share among the holders
of Series D Preferred Stock and Series C Preferred Stock in proportion to
the amounts to which they respectively are entitled. Upon any such
liquidation, dissolution or winding up of the Corporation after the
holders of Series D Preferred Stock and Series C Preferred Stock shall
have been paid in full the amounts to which they shall be entitled, and
after the holders of the Series A Preferred Stock and the Series B
Preferred Stock shall have been paid in full in accordance with the rights
and preferences to which they are entitled, the remaining net assets of
the Corporation shall be distributed ratably and exclusively to the
holders of Common Stock. Written notice of such liquidation, dissolution
or winding up, stating a payment date, the amount of the Liquidation
Payment and the place where said sums shall be payable shall be given by
mail, postage prepaid, not less than 30 or more than 60 days prior to the
payment date stated therein, to the holders of record of the Series D
Preferred Stock and Series C Preferred Stock and the Common Stock, such
notice to be addressed to each shareholder at his post office address as
shown by the records of the Corporation. Unless waived in writing by the
holders of 66-2/3% of the Series C Preferred Stock and Series D Preferred
Stock, voting together as one class, a consolidation or merger of the
Corporation into or with any other corporation or corporations, or the
sale or transfer by the Corporation of all or substantially all of its
assets, in each case under circumstances in which the holders of a
majority in voting power of the outstanding capital stock of the
Corporation, immediately prior to such a merger, consolidation or sale,
own less than a majority in voting power of the outstanding capital stock
of the corporation or the surviving or resulting corporation or acquirer,
as the case may be, immediately following such a merger, consolidation or
sale (each such transaction being hereinafter referred to as a "Corporate
Transaction") shall be deemed to be a liquidation within the meaning of
this Section 2.
3. Conversion.
----------
3A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 3, the holder of any share or shares of Series D Preferred Stock
shall have the right, at its option at any time, to convert any such
shares of Series D Preferred Stock into such
2
<PAGE>
number of fully paid and nonassessable whole shares of Common Stock as is
obtained by multiplying the number of shares of Series D Preferred Stock
so to be converted by $1.50 and dividing the result by the conversion
price of $1.50 per share or, if there has been an adjustment of the
conversion price, by the conversion price as last adjusted and in effect
at the date any share or shares of Series D Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted,
being referred to herein as the "'Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written
notice that the holder elects to convert a stated number of shares of
Series D Preferred Stock into Common Stock and by surrender of a
certificate or certificates for the shares so to be converted to the
Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the
holder or holders of the Series D Preferred Stock) at any time during its
usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address), subject to compliance with
applicable laws to the extent such designation shall involve a transfer,
in which the certificate or certificates for shares of Common Stock shall
be issued.
3B. Issuance of Certificates; Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt by the Corporation of the written notice referred to in
subparagraph 3A and surrender of the certificate or certificates for the
share or shares of the Series D Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct,
subject to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series D Preferred Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected and the Conversion Price
shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been
surrendered as aforesaid, and at such time the rights of the holder of
such share or shares of Series D Preferred Stock shall cease, and the
person or persons in whose name or names any certificate or certificates
for shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become the holder or holders of record of the shares
represented thereby.
3C. Fractional Shares; Dividends; Partial Conversion. No
------------------ -----------------------------
fractional shares shall be issued upon conversion of the Series D
Preferred Stock into Common Stock and the number of shares of Common Stock
to be issued shall be rounded to the nearest whole share, and no payment
or adjustment shall be made upon any conversion on account of any cash
dividends on the Series D Preferred Stock so converted or the Common Stock
issued upon such conversion. In case the number of shares of Series D
Preferred Stock represented by the certificate or certificates surrendered
pursuant to subparagraph 3A exceeds the number of shares converted, the
Corporation shall upon such conversion, execute and deliver to the holder
thereof, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Series D
3
<PAGE>
Preferred Stock represented by the certificate or certificates surrendered
which are not to be converted.
3D. Adjustment of Price Upon Issuance. If and at any time or from
---------------------------------
time to time, after the Original Issuance Date for the Series D Preferred
Stock and prior to the consummation of a Qualified Offering (as
hereinafter defined), the Corporation shall issue or sell, or is, in
accordance with subparagraphs 3D(l) through 3D(7), deemed to have issued
or sold, any shares ("Additional Common Shares") of its Common Stock other
than Excluded Stock (as defined hereinafter) without consideration or for
a consideration per share less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the Conversion
Price shall be reduced, concurrently with issue or sale, to a price equal
to the price paid (or deemed to have been paid) per share for such
Additional Common Shares. If the Corporation shall at any time after a
Qualified Offering issue or sell, or is, in accordance with subparagraphs
3D(l) through 3D(7) below, deemed to have issued or sold, any Additional
Common Shares other than Excluded Stock without consideration or for a
consideration per share less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the Conversion
Price in effect immediately prior to each such issuance shall be reduced,
concurrently with such issue or sale, 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 subparagraphs 3D (1)
through 3D (7) below) immediately prior to such issuance, multiplied by
the applicable Conversion Price in effect immediately prior to such
issuance of Additional Common Shares, 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 subparagraphs 3D (1) through 3D (7) below)
immediately after such issuance of the Additional Comon Shares. As used
herein, the term "Qualified Offering" shall mean the consummation by the
Corporation of any equity financing, in a single transaction or series or
related transactions, yielding aggregate gross proceeds to the Corporation
of at least $15,000,000, at a price per share of at least $3.00
(appropriately adjusted to reflect the occurrence of any stock split,
stock dividend, stock combination, stock subdivision or like occurrences).
No adjustment of the Conversion Price, however, shall be made in an
amount less than $.01 per share, and any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried
forward shall amount to $.01 per share or more.
For purposes of this subparagraph 3D, the following subparagraphs
3D(l) to 3D(7) shall also be applicable:
3D(l). Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption
in a merger or otherwise) any
4
<PAGE>
rights to subscribe for or to purchase, or any option for the purchase of,
Common Stock or any stock or securities convertible into or exchangeable
for Common Stock (such rights or options being herein called "Options" and
such convertible or exchangeable stock or securities being herein called
"Convertible Securities") whether or not such Options or the right to
convert or exchange any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon the exercise of such Options or upon conversion or exchange of such
Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the
granting of such Options, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon the exercise of all such
Options, plus, in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if
any, payable upon the issue or sale of such Convertible Securities and
upon the conversion or exchange thereof by (ii) the total maximum number
of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the
Conversion Price in effect immediately prior to the time of the granting
of such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to have been issued for such
price per share as of the date of granting of such Options and thereafter
shall be deemed to be outstanding. Except as otherwise provided in
subparagraph 3D(3), no adjustment of the Conversion Price shall be made
upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such Options or upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities.
3D(2). Issuance of Convertible Securities. In case the Corporation
----------------------------------
shall in any manner issue (whether directly or by assumption in a merger
or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable, and
the price per share for which Common Stock is issuable upon such
conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon the
conversion or exchange thereof by (ii) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total
maximum number of shares of Common Stock issuable upon conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued for such price per share as of the date of the issue or sale of
such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that (a) except as otherwise provided in
subparagraph 3D(3) below, no adjustment of the Conversion Price shall be
made upon the actual issue of such Common Stock upon conversion or
exchange of
5
<PAGE>
such Convertible Securities, and (b) if any such issue or sale
of such Convertible Securities is made upon exercise of any Option to
purchase any such Convertible Securities for which adjustments of the
Conversion Price have been or are to be made pursuant to other provisions
of this subparagraph 3D, no further adjustment of the Conversion Price
shall be made by reason of such issue or sale.
3D(3). Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events after December 31, 1998, namely,
if the purchase price provided for in any Option referred to in
subparagraph 3D(l), the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in
subparagraph 3D(l) or 3D(2), or the rate at which any Convertible
Securities referred to in subparagraph 3D(l) or 3D(2) are convertible into
or exchangeable for Common Stock shall change at any time (in each case
other than under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold; and on the expiration of any such
Option or the termination of any such right to convert or exchange such
Convertible Securities, the Conversion Price then in effect hereunder
shall forthwith be increased to the Conversion Price which would have been
in effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such expiration or termination never been issued, and the Common Stock
issuable thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such Option referred to in subparagraph
3D(l) or the rate at which any Convertible Securities referred to in
subparagraph 3D(l) or 3D(2) are convertible into or exchangeable for
Common Stock shall be reduced at any time under or by reason of provisions
with respect thereto designed to protect against dilution, then, in case
of the delivery of Common Stock upon the exercise of any such Option or
upon conversion or exchange of any such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be adjusted to
such respective amount as would have been obtained had such Option or
Convertible Securities never been issued as to such Common Stock and had
adjustments been made upon the issuance of the shares of Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced.
3D(4). Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock, Options or Convertible Securities, any Common
Stock, Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have been
issued or sold without consideration and the Conversion Price then in
effect immediately prior to such dividend declaration or distribution
shall be reduced as if the Corporation had subdivided its outstanding
shares of Common Stock into a greater number of shares as provided in
subparagraph 3D(5).
6
<PAGE>
3D(5). Subdivision or Combination of Stock. In case the Corporation
-----------------------------------
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares or shall deduct or pay a dividend on its
outstanding shares of Common Stock payable in shares of Common Stock, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Corporation shall be combined into a smaller number of
shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.
3D(6). Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the Corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by the Board of Directors
of the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. The amount of consideration deemed to be
received by the Corporation pursuant to the foregoing provisions of this
subparagraph 3D(6) upon any issuance and/or sale of shares of Common
Stock, Options or Convertible Securities, pursuant to an established
compensation plan of the Corporation, to directors, officers or employees
of the Corporation in connection with their employment shall be increased
by the amount of any tax benefit realized by the Corporation as a result
of such issuance and/or sale, the amount of such tax benefit being the
amount by which the Federal and/or state income or other tax liability of
the Corporation shall be reduced by reason of any deduction or credit in
respect of such issuance and/or sale. In case any Options shall be issued
in connection with the issue and sale of other securities of the
Corporation, together comprising one integral transaction in which no
specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without
consideration.
3D(7). Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities, or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
7
<PAGE>
3E. Excluded Stock. As used herein, the term "Excluded Stock" shall
--------------
mean (i) shares of Common Stock issuable upon the exercise of stock options
or stock purchase rights or as restricted stock or otherwise that have been
or may be granted to officers, directors, employees or consultants of the
Corporation with the approval of the Board of Directors, (ii) shares of
Common Stock issued by the Corporation as a stock dividend or upon any
subdivision, combination or split-up of Common Stock, (iii) securities
issued pursuant to commercial transactions approved by the Board of
Directors (including, without limitation, equipment leases or bank lines or
credit), (iv) securities issued in connection with acquisitions or
strategic investments or corporate partnering transactions or
relationships, (v) securities issuable pursuant to the exercise of warrants
outstanding on the Original Issuance Date, (vi) securities that have been
approved for issuance or grant by the holders of a majority, by voting
power, of the outstanding shares of Series D Preferred Stock or (vii)
shares of Common Stock issuable upon conversion of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D
Preferred Stock.
3F. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation
shall be effected in such a way (including, without limitation, by way of
consolidation or merger) that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for
Common Stock then, as a condition of such reorganization or
reclassification, lawful and adequate provision (in form satisfactory to
the holders of at least 66-2/3% of the outstanding shares of Series D
Preferred Stock and Series C Preferred Stock, voting together as one class)
shall be made whereby each holder of a share or shares of Series D
Preferred Stock shall thereafter have the right to receive, upon the basis
and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock of the Corporation immediately theretofore
receivable upon the conversion of such share or shares of the Series D
Preferred Stock, such shares of stock securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore so receivable had such reorganization or
reclassification not taken place and in any such case appropriate provision
shall be made with respect to the rights and interests of such holder to
the end that the provisions hereof (including without limitation provisions
for adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of such conversion rights
(including an immediate adjustment, by reason of such reorganization or
reclassification, of the Conversion Price to the value for the Common Stock
reflected by the terms of such reorganization or reclassification if the
value so reflected is less than the Conversion Price in effect immediately
prior to such reorganization or reclassification). In the event of a
merger or consolidation of the Corporation as a result of which a greater
or lesser number of shares of common stock of the surviving corporation are
issuable to holders of Common Stock of the Corporation outstanding
immediately prior to such merger or consolidation, the Conversion Price in
effect immediately prior to such merger or consolidation shall be adjusted
in the same manner
8
<PAGE>
as though there were a subdivision or combination of the outstanding shares
of Common Stock of the Corporation. The Corporation will not effect any
such consolidation or merger, or any sale of all or substantially all its
assets and properties, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument (in form reasonably satisfactory to the
holders of at least 66-2/3% of the shares of Series D Preferred Stock at
the time outstanding) executed and mailed or delivered to each holder of
shares of Series D Preferred Stock and Series C Preferred Stock, voting
together as one class, at the last address of such holder appearing on the
books of the Corporation, the obligation to deliver to such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to receive.
3G. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof by first class mail, postage prepaid, addressed to each holder of
shares of Series D Preferred Stock at the address of such holder as shown
on the books of the Corporation, which notice shall state the Conversion
Price resulting from such adjustment, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
3H. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;
(3) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to,
another corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give,
by first class mail, postage prepaid, addressed to each holder of any
shares of Series D Preferred Stock at the address of such holder as shown
on the books of the Corporation, (a) at least 15 days prior written notice
of the date on which the books of the Corporation shall close or a record
shall be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (b) in the case of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, at least 15 days prior written notice of the date when the
9
<PAGE>
same shall take place. Such notice in accordance with the foregoing clause
(a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause
(b) shall also specify the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
3I. Mandatory Conversion. Each share of Series D Preferred Stock
--------------------
shall be automatically converted into the number of shares of Common Stock
equal to the quotient obtained by dividing (i) the product of $1.50 and the
number of shares of Series D Preferred Stock being converted by (ii) the
Conversion Price, as last adjusted and then in effect, if at any time the
Corporation shall effect an initial public offering (an "Initial Public
Offering") of shares of its Common Stock registered under the Securities
Act of 1933, as amended (the "Securities Act"), hereof in which (i) the
aggregate net proceeds to the Corporation are at least $25,000,000 and (ii)
the per share price to the public is not less than $4.50 (appropriately
adjusted to reflect the occurrence of any stock split, stock dividend,
stock combination, stock subdivision or like occurrences). Such conversion
shall be effected at the time of and subject to the consummation of the
Initial Public Offering and otherwise in accordance with the provisions of
subparagraphs 3B and 3C hereof.
3J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized but unissued Common Stock solely
for the purpose of issuance upon the conversion of the Series D Preferred
Stock as herein provided, such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding shares of Series D
Preferred Stock. All shares of Common Stock which shall be so issued shall
be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges arising out of or by reason of the issue
thereof and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action
as may be requisite to assure that the par value per share of the Common
Stock is at all times equal to or less than the effective Conversion Price.
The Corporation will take all such action within its control as may be
necessary on its part to assure that all such shares of Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Common
Stock of the Corporation may be listed. The Corporation will not take any
action which results in any adjustment of the Conversion Price if after
such action the total number of shares of Common Stock issued and
outstanding and thereafter issuable upon exercise of all options and
conversion of Convertible Securities, including upon conversion of the
Series D Preferred Stock, would exceed the total number of shares of Common
Stock then authorized by the Corporation's Certificate of Incorporation.
3K. No Reissuance of Series D Preferred Stock. Shares of Series D
-----------------------------------------
Preferred Stock that are converted into shares of Common Stock as provided
herein shall not be reissued.
10
<PAGE>
3L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of the Series D Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series D Preferred Stock which is being converted.
3M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series D Preferred Stock or of
any shares of Common Stock issued or issuable upon the conversion of any
shares of Series D Preferred Stock in any manner which interferes with the
timely conversion of such Series D Preferred Stock.
3N. Definition of Common Stock. As used in this paragraph 3, the
----------------------------
term "Common Stock" shall mean and include the Corporation's authorized
Common Stock as constituted on the date of filing of this Certificate of
Designation and shall also include any capital stock of any class of the
Corporation thereafter authorized that shall not be limited to a fixed sum
in respect of the rights of the holders thereof to participate in dividends
or in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, provided,
---------
however, that such term, when used to describe the Securities receivable
--------
upon conversion of shares of the Series D Preferred Stock of the
Corporation, shall include only shares designated as Common Stock of the
Corporation on the date of filing of this Certificate of Designation, any
shares resulting from any combination or subdivision thereof referred to in
subparagraph 3D(5), or in case of any reorganization or reclassification of
the outstanding shares thereof, the stock, securities or assets provided
for in subparagraph 3F.
4. Optional Redemption. (a) In the event that the Corporation has
-------------------
not, on or before the sixth anniversary of the Original Issuance Date for
the Series D Preferred Stock, consummated an initial public offering of
shares of Common Stock pursuant to the Securities Act or a Corporate
Transaction has not been consummated or the original purchaser of Series D
Preferred Stock has not disposed of such Series D Preferred Stock, then
such original holder of Series D Preferred Stock shall have the option,
exercisable by written notice in accordance with the first sentence of
Section 4(b) from such holder delivered to the Corporation, to cause the
Corporation to redeem, and the Corporation shall (unless prohibited by law)
so redeem (the "Optional Redemption") that number of shares as shall equal
50% of the shares of Series D Preferred Stock held by such holder on the
seventh anniversary of the Original Issuance Date for the Series D
Preferred Stock and the balance of such shares of Series D Preferred Stock
on the eighth anniversary of the Original Issuance Date for the Series D
Preferred Stock (each an "Optional Redemption Date"), at a redemption price
per share (the "Optional
11
<PAGE>
Redemption Price") equal to the fair market value thereof as at the sixth
anniversary of the Original Issuance Date for the Series D Preferred Stock
as determined by an investment banking firm or other third party mutually
designated by the Corporation and the holders of a majority of the then
outstanding shares of Series D Preferred Stock.
(b) Notice of the exercise of the redemption option pursuant to
Section 4(a) shall be sent by first-class certified mail, postage prepaid
and return receipt requested, or by overnight courier to the Corporation.
At any time on or after the Optional Redemption Date, the holders of record
of shares of Series D Preferred Stock exercising their right to Optional
Redemption, shall, as to the shares of Series D Preferred Stock to be
redeemed on such date, be entitled to receive payment in cash of the
Optional Redemption Price with respect to such Series D Preferred Stock
upon actual delivery to the Corporation or its agent of the certificate or
certificates representing the shares of Series D Preferred Stock to be
redeemed. If the Corporation does not have sufficient funds legally
available to redeem all shares of Series D Preferred Stock to be redeemed
at the Optional Redemption Date, then it shall redeem such shares pro rata
(based on the portion of the aggregate Optional Redemption Price payable in
respect of such shares) to the extent possible and shall redeem the
remaining shares to be redeemed as soon as sufficient funds are legally
available.
(c) On and after the Optional Redemption Date with respect to the
shares of Series D Preferred Stock to be redeemed by the Corporation
pursuant to this Section 4 on such date (unless the Corporation (i) is
legally prohibited from redeeming such shares of Series D Preferred Stock
as have been requested to be redeemed on such Optional Redemption Date, in
which event such right shall be exercisable until the removal of such legal
disability or (ii) otherwise fails to pay the Optional Redemption Price
applicable thereto) all rights in respect of the shares of Series D
Preferred Stock to be redeemed, except the right to review the Optional
Redemption Price as herein provided, shall cease and terminate; and such
shares shall no longer be deemed to be outstanding, whether or not the
certificates representing such shares have been received by the
Corporation.
(d) Anything contained herein to the contrary notwithstanding, the
holders of shares of Series D Preferred Stock exercising their optional
redemption rights under this Section 4 shall have the right, exercisable at
any time up to the close of business on the applicable Optional Redemption
Date, to convert all or any part of such shares into shares of Common Stock
pursuant to Section 3 hereof.
5. Voting - Series D Preferred Stock. Except as otherwise provided
---------------------------------
by law and this Certificate of Incorporation, the holders of Series D
Preferred Stock shall vote together with the holders of Common Stock on all
matters to be voted on by the shareholders of the Corporation, and each
holder of Series D Preferred Stock shall be entitled to one vote for each
share of Common Stock that would be issuable to such holder upon the
conversion of all the shares of Series D Preferred Stock held by such
holder on the record date for the determination of shareholders entitled to
vote.
12
<PAGE>
6. Restrictions. At any time when shares of Series D Preferred
------------
Stock and Series C Preferred Stock are outstanding, and in addition to any
other vote of shareholders required by law or by the Certificate of
Incorporation, without the prior consent of the holders of 66-2/3% of the
outstanding Series D Preferred Stock and Series C Preferred Stock, voting
together as one class, given in person or by proxy, either in writing or at
a special meeting called for that purpose, at which meeting the holders of
the shares of such Series D Preferred Stock and the Series C Preferred
Stock shall vote together as a class, the Corporation will not: (i) sell
all or substantially all of the Corporation's assets; (ii) approve or
authorize any liquidation or dissolution of the Corporation or (iii)
approve or authorize a Corporate Transaction. At any time when shares of
Series D Preferred Stock are outstanding, and in addition to any other vote
of shareholders required by law or by the Certificate of Incorporation,
without the prior consent of the holders of 66-2/3% of the outstanding
Series D Preferred Stock, given in person or by proxy, either in writing or
at a special meeting called for that purpose, at which meeting the holders
of the shares of such Series D Preferred Stock shall vote together as a
class, the Corporation will not: (i) authorize, create, designate or
establish any class or series of capital stock ranking senior to the Series
D Preferred Stock or reclassify any shares of Common Stock into shares
having any preference or priority as to dividends or assets superior to any
such preference or priority of Series D Preferred Stock; (ii) amend the
Certificate of Incorporation or By-laws of the Corporation in any manner
that would materially adversely affect the powers, preferences or rights,
or qualifications, limitations or restrictions of the shares of Series D
Preferred Stock.
7. No Waiver. Except as otherwise modified or provided for herein,
---------
the holders of Series D Preferred Stock shall also be entitled to, and
shall not be deemed to have waived, any other applicable rights granted to
such holders under the Delaware General Corporation Law.
8. No Impairment. The Corporation will not, through any
-------------
reorganization, transfer of assets, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation but will at all time in good faith assist in
the carrying out of all the provisions of this Article Fourth and in the
taking of all such action as may be necessary or appropriate in order to
protect the conversion rights and liquidation preferences granted hereunder
of the holders of the Series D Preferred Stock against impairment.
13
<PAGE>
IN WITNESS WHERFOF, this Certificate of Designation has been executed
by the Corporation by its President as of this 19th day of November, 1998.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald Readmond
-------------------------
Name: Ronald Readmond
Title: President
14
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:30 PM 12/30/1998
981508519 - 2916664
CERTIFICATE OF INCREASE
OF SERIES D PREFERRED STOCK
OF WIT CAPITAL GROUP, INC.
WIT CAPITAL GROUP, INC., a Delaware corporation (the
"Corporation"), acting pursuant to Section 151 of the General Corporation Law of
the State of Delaware, does hereby submit the following Certificate of Increase
its Series D Preferred Stock:
DOES HEREBY CERTIFY:
FIRST: That, pursuant to authority conferred upon the
Board of Directors of the Corporation (the "Board") by the Certificate of
Incorporation of said Corporation, said Board, acting by unanimous written
action in lieu of a meeting thereof dated as of December 17, 1998, duly
determined that an additional 6,666,667 shares of Preferred Stock, $.01 par
value, shall be designated "Series D Preferred Stock" and to that end the Board
adopted a resolution providing for the designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations and
restrictions, of the Series D Preferred Stock, which resolution is as follows:
"RESOLVED, that the Board, pursuant to the authority vested in
it by the provisions of the Certificate of Incorporation of the
Corporation, as amended, hereby authorizes the designation of an
additional 6,666,667 shares of preferred stock, $.01 par value,
of the Corporation, as "Series D Preferred Stock" (the
"Additional Series D Preferred Stock") (representing an
aggregate of 14,666,667 shares of preferred stock designated as
Series D Preferred Stock as of the date hereof). The Additional
Series D Preferred Stock shall have such designations,
preferences and relative, participating, optional or other
rights, and the qualifications, limitations and restrictions as
set forth in the Certificate of Incorporation of the
Corporation, as amended and in effect as of the date hereof."
SECOND: That said determination of the designations,
preferences and relative, participating, optional or other rights, and the
qualifications, limitations and restrictions, of the Series D Preferred Stock
was duly made by the Board pursuant to the provisions of the Certificate of
Incorporation of the Corporation and in accordance with the provisions of the
General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, this Certificate of Increase has been signed by the
President, and attested to by the Secretary, of the Corporation, this 20th day
of December, 1998.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald Readmond
----------------------
Ronald Readmond
President
ATTEST:
/s/ M. Bernard Siegel
- ---------------------
M. Bernard Siegel
Secretary
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:00 PM 03/16/1999
991103450 - 2916664
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WIT CAPITAL GROUP, INC.
WIT CAPITAL GROUP, INC., Delaware corporation (the "Corporation"),
hereby certifies as follows:
1. FIRST: The current name of the Corporation is "WIT CAPITAL GROUP, INC."
2. SECOND: The fourth paragraph of the Certificate of Incorporation of Wit
Capital Group be, and hereby is, amended by deleting (a) the reference to
"90,000,000" and inserting in lieu thereof "180,000,000" (b) the reference to
"60,000,000" and inserting in lieu thereof "120,000,000" and (c) both references
to "30,000,000" and inserting in lieu of each thereof "60,000,000".
3. THIRD: The sixth paragraph of the Certificate of Designations,
Preferences and Rights of Series C Preferred Stock of the Corporation be, and
hereby is, amended to delete the initial sentence thereof in its entirety.
3. FOURTH: The sixth paragraph of the Certificate of Designations,
Preferences and Rights of Series D Preferred Stock of the Corporation be, and
hereby is, amended to delete the initial sentence thereof in its entirety.
4. FIFTH: This Amendment was duly adopted by the Board of Directors of the
Corporation, acting by unanimous written consent in lieu of a meeting effective
as of this date, pursuant to Section 242 of the General Corporation Law of the
State of Delaware and by the stockholders of the Corporation, acting by written
consent in lieu of a meeting effective as of this date pursuant to Section 228
of the General Corporation Law of the State of Delaware and Paragraph Sixth of
the Certificate of Incorporation of the Corporation.
*****
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Certificate of Incorporation to be signed as of the 15 day of
--
March, 1999, by its President, who hereby affirms and acknowledges, under
penalty of perjury, that this Certificate is the act and deed of the Corporation
and that the facts stated herein are true.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald Readmond
---------------------------
Name: Ronald Readmond
Title: President
ATTEST:
By: /s/ Bernard Siegel
----------------------------
Name: Bernard Siegel
Title: Secretary
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
________________________________
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "WIT CAPITAL GROUP, INC.", FILED IN THIS OFFICE ON THE SIXTEENTH
DAY OF MARCH, A.D. 1999, AT 4:01 O'CLOCK P.M.
[SEAL APPEARS HERE]
/s/ Edward J. Freel
-----------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9687280
DATE: 04-14-99
<PAGE>
CERTIFICATE OF INCREASE
OF SERIES D PREFERRED STOCK
OF WIT CAPITAL GROUP, INC.
WIT CAPITAL GROUP, INC., a Delaware corporation (the "Corporation"),
acting pursuant to Section 151 of the General Corporation Law of the State of
Delaware, does hereby submit the following Certificate of Increase of its Series
D Preferred Stock:
DOES HEREBY CERTIFY:
FIRST: That pursuant to authority conferred upon the Board of
Directors of the Corporation (the "Board") by the Certificate of Incorporation
of said Corporation, said Board, acting by unanimous written action in lieu of a
meeting thereof dated as of January 28 1999, duly determined that an additional
16,666,667 shares of Preferred Stock, $.01 par value, shall be designated
"Series D Preferred Stock" and to that end the Board adopted a resolution
providing for the designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations and restrictions,
of the Series D Preferred Stock, which resolution is as follows:
"RESOLVED, that the Board, pursuant to the authority vested in it by
the provisions of the Certificate of Incorporation of the Corporation,
as amended, hereby authorizes the designation of an additional
16,666,667 shares of preferred stock, $.01 par value, of the
Corporation, as "Series D Preferred Stock" (the "Additional Series D
Preferred Stock") (representing an aggregate of 31,333,334 shares of
preferred stock designated as Series D Preferred Stock as of the date
hereof). The Additional Series D Preferred Stock shall have such
designations, preferences and relative, participating, optional or
other rights, and the qualifications, limitations and restrictions as
set forth in the Certificate of Incorporation of the Corporation, as
amended and in effect as of the date hereof."
SECOND: That said determination of the designations, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations and restrictions, of the Series D Preferred Stock was duly made by
the Board pursuant to the provisions of the Certificate of Incorporation of the
Corporation and in accordance with the provisions of the General Corporation Law
of the State of Delaware.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:01 PM 03/16/1999
991103466 - 2916664
<PAGE>
IN WITNESS WHEREOF, this Certificate of Increase has been signed by
the President, and attested to by the Secretary, of the Corporation this 4 day
-
of February, 1999.
WIT CAPITAL GROUP, INC.
By: /s/ Ronald Readmond
--------------------------
Ronald Readmond
President
ATTEST:
/s/ Bernard Siegel
- ------------------------
M. Bernard Siegel
Secretary
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 04/08/1999
991138703 - 2916664
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
WIT CAPITAL GROUP, INC.
WIT CAPITAL GROUP, INC., a Delaware corporation (the "Corporation"),
hereby certifies as follows:
1. The current name of the Corporation is "WIT CAPITAL GROUP, INC."
2. Article FOURTH of the Certificate of Incorporation of Wit Capital Group,
Inc. be, and hereby is, amended by:
(i) inserting immediately prior to the reference to "("Common
Stock")" the following: "of which 159,000,000 shall be voting Common Stock"; and
inserting immediately following the reference to "("Common Stock")" the
following: "and 25,000,000 shall be shares of non-voting Class B Common Stock,
("Class B Common Stock")";
(ii) deleting the reference to "180,000,000" and inserting in lieu
thereof "288,000,000", deleting the reference to "120,000,000" and inserting in
lieu thereof "184,000,000" and deleting the reference to "60,000,000" and
inserting in lieu thereof "104,000,000"; and
(iii) inserting at the end thereof:
"Terms of the Common Stock and the Class B Common Stock
------------------------------------------------------
(a) Voting rights. Each outstanding share of Common Stock shall have one
-------------
vote on all matters submitted to a vote of the stockholders. The Common Stock
shall vote as a single class with the Preferred Stock.
The Class B Common Stock shall have no voting rights except (i) as may be
required by the Delaware General Corporation law, (ii) such rights as may be
otherwise provided in this Certificate of Incorporation and (iii) the right, as
a separate class, to approve any amendment or repeal of any provision of this
Certificate of Incorporation (including, without limitation, by way of a merger
or consolidation of the Corporation) that would adversely affect the rights and
preferences of the holders of the Class B Common Stock; provided that a merger
--------
or consolidation that (x) constitutes a Corporate Transaction and (y) in which
all holders of Class B Common stock receive in such merger or consolidation the
same consideration they would have received had their Class B Common Stock been
converted into Common Stock immediately
<PAGE>
prior to the record date for such transaction, shall not be deemed to adversely
affect the rights, preferences, privileges or voting powers of the holders of
the Class B Common Stock.
(b) Dividend and Distributions.
--------------------------
(i) Subject to the provisions of this Article FOURTH, the
Corporation shall not pay dividends or make distributions to
any holder of Common Stock unless simultaneously with such
dividend or distribution, as the case may be, the Corporation
makes the same dividend or distribution with respect to each
outstanding share Class B Common Stock.
(ii) In the case of any dividend or other distribution on any share
of Common Stock payable in Common Stock (including, without
limitation, distributions pursuant to stock splits or divisions
of Common Stock), shares of Class B Common Stock shall be
distributed with respect to each outstanding share of Class B
Common Stock. In each case the number of shares of Class B
Common Stock payable per share Class B Common Stock shall be
equal to the number of shares of Common Stock payable per share
of Common Stock.
(iii) In the case of any dividend or other distribution on any share
of Common Stock consisting of other voting securities of the
Corporation or of voting securities of any Subsidiary of
the Corporation, the Corporation shall declare and pay each
such dividend in securities of two separate classes, identical
in all respects, except that: (A) the voting rights of each
such security paid to the holders of Class B Common Stock shall
have the same voting rights as the Class B Common Stock; (B)
such security paid to the holders of the Class B Common Stock
shall convert into the security paid to the holders of the
Common Stock on the same terms and conditions applicable to the
conversion of the Class B Common Stock into the Common Stock;
and (C) with respect only to dividends or distributions of
voting securities of any Person that is a Subsidiary of the
Corporation, the respective voting rights of each such security
paid to the holders of the Class B Common Stock shall otherwise
be as comparable as is practicable to those of the Class B
Common Stock.
(iv) In the case of any dividend or distribution on any share of
Common Stock consisting of securities convertible into, or
exchangeable for, voting securities of the Corporation or
voting securities of a Subsidiary of the Corporation, the
Corporation shall declare and pay such dividend or distribution
in securities of two separate classes, and provide that such
convertible or exchangeable securities and the underlying
securities be identical in all respects, except that (A) the
voting rights of each security underlying the convertible or
exchangeable security paid to the holders of Class B Common
Stock shall have the same voting rights as the Class B Common
Stock; and (B) such underlying securities issuable to the
holders of the Class B Common Stock shall convert into the
underlying securities
2
<PAGE>
paid to the holders of the Common Stock on the same terms and
conditions applicable to the conversion of the Class B Common
Stock into the Common Stock.
(c) Class B Common Stock to Receive Equal Treatment. The Class B Common
-----------------------------------------------
Stock shall, with respect to any reclassification, recapitalization, stock split
or similar transaction and in any merger, consolidation or share exchange, be
treated in all respects identical to the Common Stock except as otherwise
required by law.
(d) Conversion. Upon any Transfer of shares of Class B Common Stock to any
----------
Person other than a GS Holder such transferred shares of Class B Common Stock
shall be automatically and irrevocably converted into an equal number of shares
of Common Stock, and thereafter all rights of the holder of such transferred
shares of Class B Common Stock as a holder of Class B Common Stock shall cease
and the Person or Persons in whose name or names the certificate or certificates
of Common Stock are to be issued shall be treated for all purposes as having
become the holder or holders of such shares of Common Stock.
(e) Corporation to Reserve Shares of Common Stock for Conversion of Class
---------------------------------------------------------------------
B Common Stock.
--------------
The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon conversion or exchange of the shares of Class B Common Stock and,
as may be applicable, shares of the Series E Preferred Stock, at least such
number of shares of Common Stock as is equal to the sum of (x) the number of
shares of Series E Preferred Stock then outstanding or issuable upon exercise of
warrants or options then outstanding or upon conversion or exchange of other
securities then outstanding and (y) the number of shares of Class B Common Stock
then outstanding or issuable upon exercise of warrants or options then
outstanding or upon conversion or exchange of other securities then outstanding.
(f) For purposes of this Article FOURTH, the following terms shall have
the following meanings:
"Affiliate" means, with respect to any Person, any Person who, directly or
---------
indirectly, controls, is controlled by or is under common control with that
Person. For purposes of this definition, "control" when used with respect
to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise;
"Common Stock Equivalent" means any security of the Corporation which is
-----------------------
convertible into, exercisable for or exchangeable for, directly or
indirectly, Common Stock or Class B Common Stock of the Corporation,
whether at the time of issuance or upon the passage of time or the
occurrence of some future event;
"Corporate Transaction" means a consolidation or merger of the Corporation
---------------------
into or with any other corporation or corporations, or the sale or transfer
by the Corporation of all or substantially all of its assets, in each case
under circumstances in which the holders of a majority in voting power of
the outstanding capital stock of the Corporation, immediately
3
<PAGE>
prior to such a merger, consolidation or sale, own less than a majority in
voting power of the outstanding capital stock of the Corporation or the
surviving or resulting corporation or acquirer, as the case may be,
immediately following such a merger, consolidation or sale;
"GS Holder" means The Goldman Sachs Group, L.P. and any Affiliate of such
---------
Person to which The Goldman Sachs Group, L.P., directly or indirectly,
transfers Common Stock, Class B Common Stock or Common Stock Equivalents
and any successive transferees thereafter that are Affiliates of The
Goldman Sachs Group, L.P.;
"Person" means any individual, corporation, partnership, limited liability
------
company, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof;
"Subsidiary" of any Person means (x) a corporation a majority of whose
----------
outstanding shares of capital stock or other equity interests with voting
power, under ordinary circumstances, to elect directors, is at the time,
directly or indirectly, owned by such Person, by one or more Subsidiaries
of such Person or by such Person and one or more Subsidiaries of such
Person, and (y) any other Person (other than a corporation) in which such
Person, a Subsidiary of such Person or such Person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, has (i) at least a majority ownership interest or
(ii) the power to elect or direct the election of the directors or other
governing body of such Person; and
"Transfer" means any sale or other disposition, whether voluntary or
--------
involuntary, of beneficial ownership of any class B Common Stock."
3. This Amendment was duly adopted by the Board of Directors of the
Corporation, voting at a meeting of the Board of Directors of the Corporation
held on April 1, 1999, and by a majority of the stockholders of the
Corporation, voting at a special meeting of stockholders held on April 6, 1999
pursuant to Section 211 of the General Corporation Law of the State of Delaware.
*****
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of Certificate of Incorporation to be signed as of the 8/th/ day of
April, 1999, by its President, who hereby affirms and acknowledges, under
penalty of perjury, that this Certificate is the act and deed of the Corporation
and that the facts stated herein are true.
WIT CAPITAL GROUP, INC
By: /s/ Ronald Readmond
-----------------------------
Name: Ronald Readmond
Title: President & Co. CEO
April 7, 1999
ATTEST:
By: /s/ Bernard Siegel
---------------------------
Name: M. Bernard Siegel
Title: Secretary
<PAGE>
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES E PREFERRED STOCK
OF
WIT CAPITAL GROUP, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
____________________________
WIT CAPITAL GROUP, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies that,
pursuant to authority vested in the Board of Directors of the Corporation by
Article Fourth of the Certificate of Incorporation, the following resolution was
adopted as of April 1, 1999 by the Board of Directors of the Corporation
pursuant to Section 141 of the Delaware General Corporation Law.
"RESOLVED that, pursuant to authority vested in the Board of Directors
of the Corporation by Article Fourth of the Corporation's Certificate of
Incorporation of the total authorized number of 104,000,000 shares of Preferred
Stock, par value $.01 per share, of the Corporation, there shall be designated a
series of 24,938,870 shares which shall be issued in and constitute a single
series to be known as "Series E Preferred Stock" (hereinafter called the "Series
E Preferred Stock"). The shares of Series E Preferred Stock have the vesting
powers, designations, preferences and other special rights, and qualifications,
limitations and restrictions thereof set forth below:
1. Dividends. The holders of Series E Preferred Stock shall not be
---------
entitled to receive dividends in any fixed amount, provided, however, that
-------- -------
in the event that the Corporation shall at any time pay a dividend on the
Common Stock and, if any shares of Class B Common Stock are then
outstanding, Class B Common Stock (other than a dividend payable solely in
shares of Common Stock or Class B Common Stock), it shall, at the same
time, pay to each holder of Series E Preferred Stock a dividend equal to
the dividend that would have been payable to such holder if the shares of
Series E Preferred Stock held by such holder had been converted into Class
B Common Stock or, upon or after a Qualifying Transfer (as defined in
Section 3A below), Common Stock on the date of determination of holders of
Common Stock and Class B Common Stock entitled to receive such dividends;
and provided, further, that so long as any shares of the
-------- -------
Series E
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:31 PM 04/08/1999
991138717 - 2916664
<PAGE>
Preferred Stock are outstanding, no dividends shall be declared or paid or set
apart for payment on the Series C Preferred Stock, the Series D Preferred Stock
or any other Preferred Stock of the Corporation of any series ranking, as to
dividends, junior to or on a parity with the Series E Preferred Stock, unless a
dividend shall be paid at the same time to each holder of Series E Preferred
Stock, in an amount such that the holders of such other series of Preferred
Stock, on the hand, and the holders of Series E Preferred Stock, on the other,
receive dividends in the same relative proportions that each would have received
had all such shares of Preferred Stock been converted into Common Stock and/or
Class B Common Stock immediately prior to the declaration of a dividend on such
Preferred Stock.
2. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation, whether voluntary or involuntary, the holders of the shares of
Series E Preferred Stock shall be entitled, before any distribution or payment
is made upon any Common Stock, Class B Common Stock, Series A Preferred Stock or
Series B Preferred Stock, and pari passu with the holders of Series D Preferred
---- -----
Stock and Series C Preferred Stock, to be paid an amount equal to $1.50 per
share (approximately adjusted to reflect the occurrence of any stock split,
stock dividend, stock combination, stock subdivision or like occurrences) plus
any declared and unpaid dividends (the "Series E Preferred Liquidation
Preference") payable with respect to such share under Section 1 pari passu with
---- -----
the holders of Series D Preferred Stock and Series C Preferred Stock before any
distributions shall be made to the holders of the Series A Preferred Stock, the
Series B Preferred Stock, the Common Stock, the Class B Common Stock or any
other class of capital stock of the Corporation ranking junior to the Series E
Preferred Stock, the Series D Preferred Stock and the Series C Preferred Stock.
If upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series E Preferred Stock, the Series D Preferred Stock and the Series C
Preferred Stock of the Corporation shall be insufficient to permit payment to
the holders of Series E Preferred Stock, Series D Preferred Stock and Series C
Preferred Stock of the full amount of the Liquidation Payments, then the entire
assets of the Corporation to be so distributed shall be distributed ratably per
share among the holders of Series E Preferred Stock, Series D Preferred and
Series C Preferred Stock in proportion to the amounts to which they respectively
are entitled. Upon any such liquidation, dissolution or winding up of the
Corporation after the holders of Series E Preferred Stock, Series D Preferred
Stock and Series C Preferred Stock shall have been paid in full the amounts to
which they shall be entitled, and after the holders of the Series A Preferred
Stock and the Series B Preferred Stock shall have been paid in full in
accordance with the rights and preferences to which they are entitled, the
remaining net assets of the Corporation shall be distributed ratably and
exclusively to the holders of Common Stock and Class B Common Stock. Written
notice of such liquidation, dissolution or winding up, stating a payment date,
the amount of the Liquidation Payment and the place where said sums shall be
payable shall be given by mail, postage prepaid, not less than 30 or
-2-
<PAGE>
more than 60 days prior to the payment date stated therein, to the holders
of record of the Series E Preferred Stock, Series D Preferred Stock and
Series C Preferred Stock and the Common Stock and Class B Common Stock,
such notice to be addressed to each shareholder at his post office address
as shown by the records of the Corporation. Unless waived in writing by the
holders of 66-2/3% of the Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, voting together as one class, a
consolidation or merger of the Corporation into or with any other
corporation or corporations, or the sale or transfer by the Corporation of
all or substantially all of its assets, in each case under circumstances in
which the holders of a majority in voting power of the outstanding capital
stock of the Corporation, immediately prior to such a merger, consolidation
or sale, own less than a majority in voting power of the outstanding
capital stock of the corporation or the surviving or resulting corporation
or acquirer, as the case may be, immediately following such a merger,
consolidation or sale (each such transaction being hereinafter referred to
as a "Corporate Transaction") shall be deemed to be a liquidation within
the meaning of this Section 2.
3. Conversion.
----------
3A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 3, the holder of any share or shares of Series E Preferred Stock
shall have the right, at its option at any time, to convert any such shares
of Series E Preferred Stock into such number of fully paid and
nonassessable whole shares of Class B Common Stock or, upon and after a
Qualifying Transfer (as defined in this paragraph 3A), shares of Common
Stock, as is obtained by multiplying the number of shares of Series E
Preferred Stock so to be converted by $1.50 and dividing the result by the
conversion price of $1.50 per share or, if there has been an adjustment of
the conversion price, by the conversion price as last adjusted and in
effect at the date any share or shares of Series E Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted,
being referred to herein as the "Conversion Price"). Such rights of
conversion shall be exercised by the holder thereof by giving written
notice that the holder elects to convert a stated number of shares of
Series E Preferred Stock into Class B Common Stock or Common Stock, as the
case may be, and by surrender of a certificate or certificates for the
shares so to be converted to the Corporation at its principal office (or
such other office or agency of the Corporation as the Corporation may
designate by notice in writing to the holder or holders of the Series E
Preferred Stock) at any time during its usual business hours on the date
set forth in such notice, together with a statement of the name or names
(with address), subject to compliance with applicable laws to the extent
such designation shall involve a transfer, in which the certificate or
certificates for shares of Class B Common Stock or Common Stock, as the
case may be, shall be issued. If at any time after the original issuance of
the Series E Preferred Stock, Beneficial Ownership of shares of Series E
Preferred Stock are sold or otherwise transferred to a Person other than a
GS Holder (as defined in the Third Amended and Restated Stockholders
Agreement (the
-3-
<PAGE>
"Stockholders Agreement"), dated as of April 8, 1999, among the Corporation
and the signatories listed therein, each such transfer, a "Qualifying
Transfer"), then such shares of Series E Preferred Stock shall thereafter,
without any further action on the part of such holder, be convertible,
subject to the other terms and conditions of this paragraph 3, into whole
shares of Common Stock and the holder of record of such shares of Series E
Preferred Stock (whether or not such holder is also the Beneficial Owner
thereof) shall be deemed to be the holder of record of Shares of Series E
Preferred Stock convertible, subject to the terms and conditions of this
paragraph 3, into shares of Common Stock, notwithstanding that certificates
evidencing such shares of Series E Preferred Stock shall not have been
registered in the name of the transferee thereof or shall not have been
delivered to such transferee. For purposes of this paragraph (3),
"Beneficially Owned" or "Beneficial Ownership" shall have the meaning
ascribed to such terms in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended, provided, however, that for the purposes
-------- -------
of calculating the number of shares Beneficially Owned by The Goldman Sachs
Group, L.P. or the GS Holders and their Controlled Affiliates (as such
terms are defined in the Stockholders Agreement), there shall be excluded
from such calculation any shares Beneficially Owned by a Controlled
Affiliate of The Goldman Sachs Group, L.P. or any other GS Holder that are
held (i) for the account of a registered investment company advised by The
Goldman Sachs Group, L.P. or any of its Controlled Affiliates, (ii) in an
account with respect to which The Goldman Sachs Group, L.P. or any of its
Controlled Affiliates has investment or voting discretion or (iii) in a
fiduciary capacity for others.
3B. Issuance of Certificates: Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt by the Corporation of the written notice referred to in
subparagraph 3A and surrender of the certificate or certificates for the
share or shares of the Series E Preferred Stock to be converted, the
Corporation shall issue and deliver, or cause to be issued and delivered,
to the holder, registered in such name or names as such holder may direct,
subject to compliance with applicable laws to the extent such designation
shall involve a transfer, a certificate or certificates for the number of
whole shares of Class B Common Stock, or Common Stock, as the case may be,
issuable upon the conversion of such share or shares of Series E Preferred
Stock. To the extent permitted by law, such conversion shall be deemed to
have been effected and the Conversion Price shall be determined as of the
close of business on the date on which such written notice shall have been
received by the Corporation and the certificate or certificates for such
shares shall have been surrendered as aforesaid, and at such time the
rights of the holder of such share or shares of Series E Preferred Stock
shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of Class B Common Stock, as the case
may be, shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby.
-4-
<PAGE>
3C. Fractional Shares: Dividends: Partial Conversion. No fractional shares
------------------------------------------------
shall be issued upon conversion of the Series E Preferred Stock into Class B
Common Stock or Common Stock, as the case may be, and the number of the shares
of Class B Common Stock or Common Stock to be issued shall be rounded to the
nearest whole share, and no payment or adjustment shall be made upon any
conversion on account of any cash dividends on the Series E Preferred Stock so
converted or the Class B Common Stock issued upon such conversion. In case the
number of shares of Series E Preferred Stock represented the certificate or
certificates surrendered pursuant to subparagraph 3A exceeds the number of
shares converted, the Corporation shall upon such conversion, execute and
deliver to the holder thereof, at the expense of the Corporation, a new
certificate for the number of shares of Series E Preferred Stock represented by
the certificate or certificates surrendered which are not to be converted.
3D. Adjustment of Price Upon Issuance. If and at any time or from time to
---------------------------------
time, after the Original Issuance Date for the Series E Preferred Stock and
Prior to the consummation of a Qualified Offering (as hereinafter defined), the
Corporation shall issue or sell, or is, in accordance with subparagraphs 3D(1)
through 3D(7), deemed to have issued or sold, any shares ("Additional Common
Shares") of its Common Stock other than Excluded Stock (as defined hereinafter)
without consideration or for a consideration per share less than the Conversion
Price in effect immediately prior to the time of such issue or sale, then the
Conversion Price in effect immediately prior to the time of such issue or sale,
then the Conversion Price shall be reduced, concurrently with issue or sale, to
a price equal to the price paid (or deemed to have been paid) per share for such
Additional Common Shares. If the Corporation shall at any time after a Qualified
Offering issue or sell, or is, in accordance with subparagraphs 3D(1) through
3D(7) below, deemed to have issued or sold, any Additional Common Shares other
than Excluded Stock without consideration or for a consideration per share less
than the Conversion Price in effect immediately prior to the time of such issue
or sale, then the Conversion Price in effect immediately prior to each such
issuance shall be reduced, concurrently with such issue or sale, 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
deemed to have been issued pursuant to subparagraphs 3D(1) through 3D(7) below)
immediately prior to such issuance, multiplied by the applicable Conversion
Price in effect immediately prior to such issuance of Additional Common Shares,
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
deemed to have been issued pursuant to subparagraphs 3D(1) through 3D(7) below)
immediately after such issuance of the Additional Common Shares. As used herein,
the term "Qualified Offering" shall mean the consummation by the Corporation of
any equity financing, in a single transaction or series or related transactions,
yielding aggregate gross proceeds to the Corporation of at least $15,000,000 at
a price per share of at least $3.00 (appropriately adjusted to reflect the
occurrence of any stock split, stock dividend, stock combination, stock
subdivision or like occurrences).
-5-
<PAGE>
No adjustment of the Conversion Price, however, shall be made in an amount
less than $0.01 per share, and any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to $.01 per share or more.
For purposes of this subparagraph 3D, the following paragraphs 3D(1)to
3D(7) shall also be applicable:
3D(1). Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any rights to subscribe for or to purchase, or any option
for the purchase of, Common Stock or Class B Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such rights or
options being herein called "Options" and such convertible or exchangeable stock
or securities being herein called "Convertible Securities"), whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issued upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options and thereafter shall be deemed
to be outstanding. Except as otherwise provided in subparagraph 3D(3), no
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock or of such Convertible Securities upon exercise of such Options or
upon the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities.
3D(2). Issuance of Convertible Securities. In case the Corporation shall
----------------------------------
in any manner issue (whether directly or by assumption in a merger or otherwise)
or sell any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable and the price per share for which
Common Stock is issuable
-6-
<PAGE>
upon such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Conversion Price in effect immediately prior to the time
of such issue or sale, then the total maximum number of shares of Common Stock
issuable upon conversion or exchange of all such Convertible Securities shall
be deemed to have been issued for such price per share as of the date of the
issue or sale of such Convertible Securities and thereafter shall be deemed to
be outstanding, provided that (a) except as otherwise provided in subparagraph
3D(3) below, no adjustment of the Conversion Price shall be made upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities, and (b) if any such issue or sale of such Convertible Securities is
made upon exercise of any Option to purchase any such Convertible Securities for
which adjustments of the Conversion Price have been or are to be made pursuant
to other provisions of this subparagraph 3D, no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
3D(3). Change in Option Price or Conversion Rate. Upon the happening of
-----------------------------------------
any of the following events after the original date of issuance of Series E
Preferred Stock, namely, if the purchase price provided for in any Option
referred to in subparagraph 3D(1), the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities referred to in
subparagraph 3D(1) or 3D(2), or the rate at which any Convertible Securities
referred to in subparagraph 3D(1) or 3D(2) are convertible into or exchangeable
for Common Stock shall change at any time (in each case other than under or by
reason of provisions designed to protect against dilution), the Conversion Price
in effect at the time of such event shall forthwith be readjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold; and on the expiration of any such Option
or the termination of any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination never
been issued, and the Common Stock issuable thereunder shall no longer be deemed
to be outstanding. If the purchase price provided for in any such Option
referred to in subparagraph 3D(1) or the rate at which any Convertible
Securities referred to in subparagraph 3D(1) or 3D(2) are convertible into or
exchangeable for Common Stock shall be reduced at any time under or by reason of
provisions with respect thereto designed to protect against dilution, then, in
case of the delivery of Common
-7-
<PAGE>
Stock upon the exercise of any such Option or upon conversion or exchange of any
such Convertible Securities, the Conversion Price then in effect hereunder shall
forthwith be adjusted to such respective amount as would have been obtained had
such Option or Convertible Securities never been issued as to such Common Stock
and had adjustments been made upon the issuance of the shares of Common Stock
delivered as aforesaid, but only if as a result of such adjustment the
Conversion Price then in effect hereunder is thereby reduced.
3D(4). Stock Dividends. In case the Corporation shall declare a dividend or
---------------
make any other distribution upon any stock of the Corporation payable in Common
Stock, Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold without
consideration and the Conversion Price then in effect immediately prior to such
dividend declaration or distribution shall be reduced as if the Corporation had
subdivided its outstanding shares of Common Stock into a greater number of
shares as provided in subparagraph 3D(5).
3D(5). Subdivision or Combination of Stock. In case the Corporation shall
-----------------------------------
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares or shall declare or pay a dividend on its outstanding shares of
Common Stock payable in shares of Common Stock, the Conversion Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of Common Stock of the Corporation
shall be combined into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination shall be proportionately increased.
3D(6). Consideration for Stock. In case any shares of Common Stock, Options
-----------------------
or Convertible Securities shall be issued or sold for cash, the consideration
received shall be deemed to be the amount received by the Corporation therefor,
without deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be deemed to be
the fair value of such consideration as determined in good faith by the Board of
Directors of the Corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Corporation in
connection therewith. The amount of consideration deemed to be received by the
Corporation pursuant to the foregoing provisions of this subparagraph 3D(6) upon
any issuance and/or sale of shares of Common Stock, Options or Convertible
Securities, pursuant to an established compensation plan of the Corporation, to
directors, officers or employees of the Corporation in connection with their
employment shall be increased by the amount of any tax benefit realized by the
Corporation as a result of such issuance
-8-
<PAGE>
and/or sale, the amount of any tax benefit being the amount by which the Federal
and/or state income or other liability of the Corporation shall be reduced by
reason of any deduction or credit in respect of such issuance and/or sale. In
case any Options shall be issued in connection with the issue and sale of other
securities of the Corporation together comprising one Integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued without consideration.
3D(7). Record Date. In case the Corporation shall take a record of the
-----------
holders of its Common Stock for the purpose of entitling them (i) to receive a
dividend or other distribution payable in Common Stock, Options or Convertible
Securities, or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
3E. Excluded Stock. As used herein, the term "Excluded Stock" shall mean
--------------
(i) shares of Common Stock issuable upon the exercise of stock options or stock
purchase rights or as restricted stock or otherwise that have been or may be
granted to officers, directors, employees or consultants of the Corporation with
the approval of the Board of Directors, (ii) shares of Common Stock issued by
the Corporation as a stock dividend or upon any subdivision, combination or
split-up of Common Stock, (iii) securities issued pursuant to commercial
transactions approved by the Board of Directors (including without limitation,
equipment leases or bank lines or credit), (iv) securities issued in connection
with acquisitions or strategic investments or corporate partnering transactions
or relationships, (v) securities issuable pursuant to the exercise of warrants
outstanding on the Original Issuance Date, (vi) securities that have been
approved for issuance or grant by the holders of a majority of the outstanding
shares of Series E Preferred Stock or (vii) shares of Common Stock issuable upon
conversion of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock.
3F. Reorganization or Reclassification. If any capital reorganization or
----------------------------------
reclassification of the capital stock of the Corporation shall be effected in
such a way (including, without limitation, by way of the consolidation or
merger) that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock then, as a
condition of such reorganization or reclassification, lawful and adequate
provision (in form satisfactory to the holders of at least 66-2/3% of the
outstanding shares of Series E Preferred Stock, Series D Preferred Stock and
Series C Preferred Stock, voting together as one class) shall be made whereby
each holder of a share or shares of Series E Preferred Stock shall thereafter
have the right
-9-
<PAGE>
to receive, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Class B Common Stock or Common Stock of
the Corporation immediately theretofore receivable upon the conversion of
such share or shares of the Series E Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of Common Stock equal to the
number of shares of such stock immediately theretofore so receivable had
such reorganization or reclassification not taken place and in any such
case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Conversion Price)
shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise of such conversion rights (including an immediate adjustment, by
reason of such reorganization or reclassification, of the Conversion Price
to the value for the Common Stock reflected by the terms of such
reorganization or reclassification if the value so reflected is less than
the Conversion Price in effect immediately prior to such reorganization or
reclassification); provided that with respect to any outstanding shares of
--------
Series E Preferred Stock that have not been the subject of a Qualifying
Transfer, the holder of such shares shall have the right to elect, in
respect of any shares of stock or other securities as may be issued or
payable in lieu of Common Stock or Class B Common Stock as aforesaid, to
receive only shares or securities having no greater voting rights than that
of the Series E Preferred Stock. In the event of a merger or consolidation
of the Corporation as a result of which a greater or lesser number of
shares of common stock of the surviving corporation are issuable to holders
of the Common Stock of the Corporation outstanding immediately prior to
such merger or consolidation, the Conversion Price in effect immediately
prior to such merger or consolidation shall be adjusted in the same manner
as though there were a subdivision or combination of the outstanding shares
of Common Stock of the Corporation. The Corporation will not effect any
such consolidation or merger, or any sale of all or substantially all its
assets and properties, unless prior to the consummation thereof the
successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall
assume by written instrument (in form reasonably satisfactory to the
holders of at least 66-2/3% of the shares of Series E Preferred Stock,
Series D Preferred Stock and Series C Preferred Stock, voting together as
one class, at the time outstanding) executed and mailed or delivered to
each holder of shares of Series E Preferred Stock at the last address of
such holder appearing on the books of the Corporation, the obligation to
deliver to such holder such shares of stocks, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive.
3G. Notice of Adjustment. Upon any adjustment of the Conversion Price,
--------------------
then, and in each such case the Corporation shall give written notice
thereof by first class mail, postage prepaid, addressed to each holder of
shares of Series E Preferred Stock at
-10-
<PAGE>
the address of such holder as shown on the books of the Corporation, which
notice shall state the Conversion Price resulting from such adjustment,setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
3H. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of its
Common Stock;
(2) the Corporation shall offer for subscription pro rata to the holders
--- ----
of its Common Stock any additional shares of such stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification of the
capital stock of the Corporation, or a consolidation or merger of the
Corporation with, or a sale of all or substantially all its assets to, another
corporation; or
(4) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of Series E
Preferred Stock at the address of such holder as shown on the books of the
Corporation, (a) at least 15 days prior written notice of the date on which the
books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 15 days prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause(a) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in accordance with the foregoing clause (b)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
3I. Mandatory Conversion. Each share of Series E Preferred Stock shall
--------------------
be automatically converted into the number of shares of Class B Common Stock
(or, after a Qualifying Transfer, Common Stock) equal to the quotient obtained
by dividing (i) the product of $1.50 and the number of shares of Series E
Preferred Stock being converted by (ii) the Conversion Price, if at any time
the Corporation shall effect an initial public
-11-
<PAGE>
offering (a "Qualified Public Offering") of shares of its Common Stock
registered under the Securities Act of 1933, as amended (the "Securities
Act"), hereof in which (i) the aggregate net proceeds to the Corporation
are at lease $25,000,000 and (ii) the per share price to the public is not
less than $4.50 (appropriately adjusted to reflect the occurrence of any
stock split, stock dividend, stock combination, stock subdivision or like
occurrences). Such conversion shall be effected at the time of and subject
to the consummation of the Qualified Public Offering and otherwise in
accordance with the provisions of subparagraphs 3B and 3C hereof.
3J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized but unissued Class B Common Stock
and Common Stock solely for the purpose of issuance upon the conversion of
the Series E Preferred Stock as herein provided, such number of shares of
Class B Common Stock and Common Stock as shall then be issuable upon the
conversion of all outstanding shares of Series E Preferred Stock. All
shares of Class B Common Stock or Common Stock, as the case may be, which
shall be so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes liens and charges arising out of or
by reason of the issue thereof and, without limiting the generality of the
foregoing, the Corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share
of each of the Class B Common Stock and the Common Stock is at all times
equal to or less than the effective Conversion Price. The Corporation will
take all such action within its control as may be necessary on its part to
assure that all such shares of Class B Common Stock and Common Stock may be
so issued without violation of any applicable law or regulation, or of any
requirements of any national securities exchange upon which the Class B
Common Stock Common Stock, as the case may be, of the Corporation may be
listed. The Corporation will not take any action which results in any
adjustment of the Conversion Price if after such action the total number of
shares of Class B Common Stock or Common Stock issued and outstanding and
thereafter issuable upon exercise of all options and conversion of
Convertible Securities, including upon conversion of the Series E Preferred
Stock, would exceed the total number of shares of such class of Common
Stock then authorized by the Corporation's Certificate of Incorporation.
3K. No Reissuance of Series E Preferred Stock. Shares of Series E
-----------------------------------------
Preferred Stock that are converted into shares of Class B Common Stock or
Common Stock as provided herein shall not be reissued.
3L. Issue Tax. The issuance of certificates for shares of Class B
---------
Common Stock or Common Stock, as the case may be, upon conversion of the
Series E Preferred Stock shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the
Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate
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<PAGE>
in a name other than that of the holder of the Series E Preferred Stock which is
being converted.
3M. Closing of Books. The Corporation will at no time close its transfer
----------------
books against the transfer of any Series E Preferred Stock or of any shares of
Class B Common Stock or Common stock issued or issuable upon the conversion of
any shares of Series E Preferred Stock in any manner which interferes with the
timely conversion of such Series E Preferred Stock.
3N. Definition of Common Stock. As used in this paragraph 3, the term
--------------------------
"Common Stock" shall mean and include the Corporation's authorized Common
Stock and Class B Common Stock as constituted on the date of filing of this
Certificate of Designation and shall also include any capital stock of any class
of the Corporation thereafter authorized that shall not be limited to a fixed
sum in respect of the rights of the holders thereof to participate in dividends
or in the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided however, that such term,
--------
when used to describe the Securities receivable upon conversion of shares of the
Series E Preferred Stock of the Corporation and when used in paragraph 5, shall
include only shares designated as Class B Common Stock or designated as Common
Stock of the Corporation on the date of filing of this Certificate of
Designation, any shares resulting from any combination or subdivision thereof
referred to in subparagraph 3D(5), or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in subparagraph 3F.
4. Optional Redemption. (a) In the event that the Corporation has not, on
-------------------
or before the sixth anniversary of the Original Issuance Date for the Series E
Preferred Stock, consummated an initial public offering shares of Common Stock
pursuant to the Securities Act or a Corporate Transaction has not been
consummated or the original purchaser of Series E Preferred Stock has not
disposed of such Series E Preferred Stock, then such original holder of Series E
Preferred Stock shall have the option, exercisable by written notice in
accordance with the first sentence of Section 4(b) from such holder delivered to
the Corporation, to cause the Corporation to redeem, and the Corporation shall
(unless prohibited by law) so redeem (the "Optional Redemption") that number of
shares as shall equal 50% of the shares of Series E Preferred Stock held by such
holder on the seventh anniversary of the Original Issuance Date for the Series E
Preferred Stock and the balance of such shares of Series E Preferred Stock on
the eighth anniversary of the Original Issuance Dates for the Series E Preferred
Stock (each an "Optional Redemption Date"), at a redemption price per share (the
"Optional Redemption Price") equal to the fair market value thereof as at the
sixth anniversary of the Original Issuance Date for the Series E Preferred Stock
as determined by an investment banking firm or other third party mutually
designated by the Corporation and the holders of a majority of the then
outstanding shares of Series E Preferred Stock.
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<PAGE>
(b) Notice of the exercise of the redemption option pursuant to
Section 4(a) shall be sent by first-class certified mail, postage prepaid
and return receipt requested, or by overnight courier to the Corporation.
At any time on or after the Optional Redemption Date, the holders of
record of shares of Series E Preferred Stock exercising their right to
Optional Redemption, shall, as to the shares of Series E Preferred Stock to
be redeemed on such date, be entitled to receive payment in cash of the
Optional Redemption Price with respect to such Series E Preferred Stock
upon actual delivery to the Corporation or its agent of the certificate or
certificates representing the shares of Series E Preferred Stock to be
redeemed. If the Corporation does not have sufficient funds legally
available to redeem all shares of Series E Preferred Stock to be redeemed
at the Optional Redemption Date, then it shall redeem such shares pro rata
(based on the portion of the aggregate Optional Redemption Price payable in
respect of such shares) to the extent possible and shall redeem the
remaining shares to be redeemed as soon as sufficient funds are legally
available.
(c) On and after the Optional Redemption Date with respect to the
shares of Series E Preferred Stock to be redeemed by the Corporation
pursuant to this Section 4 on such date (unless the Corporation (i) is
legally prohibited from redeeming such shares of Series E Preferred Stock
as have been requested to be redeemed on such Optional Redemption Date, in
which event such right shall be exercisable until the removal of such legal
disability or (ii) otherwise fails to pay the Optional Redemption Price
applicable thereto) all rights in respect of the shares of Series E
Preferred Stock to be redeemed, except the right to review the Optional
Redemption Price as herein provided, shall cease and terminate; and such
shares shall no longer be deemed to be outstanding, whether or not the
certificates representing such shares have been received by the
Corporation,
(d) Anything contained herein to the contrary notwithstanding, the
holders of shares of Series E Preferred Stock exercising their optional
redemption rights under this Section 4 shall have the right, exercisable at
any time up to the close of business on the applicable Optional Redemption
Date, to convert all or any part of such shares into shares of Common Stock
pursuant to Section 3 hereof.
5. Voting - Series E Preferred Stock. Except as otherwise provided
---------------------------------
by law and this Certificate of Incorporation, the holders of Series E
Preferred Stock shall have no voting rights other than the right to vote on
any matter on which the holders of Class B Common Stock are entitled to
vote. Notwithstanding the foregoing, from and after a Qualifying Transfer,
holders of shares of Series E Preferred Stock that are thereafter
convertible into shares of Common Stock shall have the right to vote on any
matter on which the holders of Common Stock are entitled to vote. With
respect to the voting rights of the holders of the Series E Preferred Stock
pursuant to the preceding two sentences, each holder of Series E Preferred
Stock shall be entitled to one vote for each
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<PAGE>
share of Class B Common Stock or Common Stock, as the case may be, that would be
issuable to such holder upon the conversion of all shares of Series E Preferred
Stock held by such holder on the record date for the determination of
shareholders entitled to vote and they shall vote together as a class with the
Class B Common Stock, as the case may be.
6. Further Restrictions. At any time when shares of Series E Preferred
--------------------
Stock are outstanding, and in addition to any other vote of the holders of
Series E Preferred Stock required by law or by the Certificate of Incorporation,
without the prior consent of the holders of 66-2/3% of the outstanding Series E
Preferred Stock, given in person or by proxy, either in writing or at a special
meeting called for that purpose, at which meeting the holders of the shares of
such Series E Preferred Stock shall vote together as a class, the Corporation
will not: (i) authorize, create, designate, establish or issue any class or
series of capital stock ranking senior to the Series E Preferred Stock or
reclassify any shares of Common Stock into shares having any preference or
priority as to dividends or assets superior to any such preference or priority
of Series E Preferred Stock; or (ii) amend, alter or repeal, whether by merger,
consolidation or otherwise, the Certificate of Incorporation or By-Laws of the
Corporation or the Resolutions contained in this Certificate of Designations of
the Series E Preferred Stock and the powers, preferences, privileges, relative,
participating, optional and other special rights and qualifications, limitations
and restrictions thereof, which would adversely affect any right, preference
privilege or voting power of the Series E Preferred Stock, or which would
increase the amount of authorized shares of the Series E Preferred Stock, or of
any other series of preferred stock ranking senior to the Series E Preferred
Stock, with respect to the payment of dividends (whether or not such series of
preferred stock is cumulative or noncumulative as to payment of dividends) or
liquidation, provided that a merger or consolidation (i) that constitutes a
--------
Corporate Transaction, and (ii) in which all holders of Preferred Stock receive
in such merger or consolidation the same consideration they would have received
had their Preferred Stock been converted into Common Stock and/or Class B Common
Stock immediately prior to the record date for such transaction, shall not be
deemed to adversely affect the rights, preferences, privileges or voting powers
of the Series E Preferred Stock.
7. No Waiver. Except as otherwise modified or provided for herein, the
---------
holders of Series E Preferred Stock shall also be entitled to, and shall not be
deemed to have waived, any other applicable rights granted to such holders under
the Delaware General Corporation Law.
8. No Impairment. The Corporation will not, through any reorganization,
-------------
transfer of assets, merger, dissolution, issue or sale of securities on any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all time in good faith
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<PAGE>
assist in the carrying out of all the provisions of this Article Fourth and
in the taking of all such aution as may be necessary or appropriate in
order to protect the conversion rights and liquidation preferences granted
hereunder of the holders of the Series E Preferred Stock against
impairment.
IN WITNESS WHEREOF, this Certificate of Designation has been executed
by the Corporation by its Chief Financial Officer as of this 1st day of April
1999.
WIT CAPITAL GROUP, INC.
By: /s/ M. Bernard Siegel
------------------------
Name: M. Bernard Siegel
Title: Chief Financial Officer
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<PAGE>
EXHIBIT 10.6
WIT CAPITAL GROUP, INC.
826 Broadway
New York, NY 10003
Mr. Robert H. Lessin
131 South Woodland Street
Englewood, NJ 07631
Dear Bob:
This letter agreement (the "Letter Agreement") is being entered into effective
as of June 8, 1998, by and between Wit Capital Group, Inc., a New York
corporation (the "Company") and you.
On April 9, 1998, the Company and you entered into a letter agreement (the
"Prior Agreement") pursuant to which you were engaged as Chairman of the Board
of Directors of the Company (the "Board") and received, among other things, a
nonqualified stock option to purchase 5,750,000 shares of common stock of the
Company, $.01 par value per share ("Common Stock") with an exercise price of
$1.00 per share and the right, under certain circumstances, to receive cash
compensation in the aggregate amount of $5,000,000. It is both the Company's
and your desire to restate the terms of your employment with the Company in its
entirety, principally in order to cancel the stock option grant in consideration
for your agreement to purchase immediately 5,750,000 shares of Common Stock on
the terms set forth herein, and to expand your title to Chairman and Chief
Executive Officer ("CEO") of the Company.
Accordingly, set forth herein are the terms and conditions of your employment
with the Company. This Letter Agreement shall supersede, in all respects, the
Prior Agreement which shall be void and of no further force and effect.
1. Employment. (a) You hereby agree to be employed as Chairman of the Board
----------
and CEO of the Company. As Chairman and CEO, your responsibilities will
include, among others: (i) directing the growth and development of the
Company and Wit Capital Corporation, Inc., a New York corporation and
wholly-owned subsidiary of the Company, and developing and assisting in the
execution of a plan to raise capital in connection therewith, (ii) building
a team of capable management and investment personnel, (iii) generating
investment banking engagements and other revenue opportunities, and (iv)
creating and building a proprietary funds business. You will report solely
to the Board and will have authority consistent that normally associated
with the positions of Chairman and CEO.
<PAGE>
2. Cash Compensation. (a) Through December 31, 1998, you will not receive a
-----------------
base salary. Thereafter, you will receive a base salary in an amount to be
determined by the Board in its sole discretion.
(b) Starting immediately, and during the term of your employment by the
Company as Chairman and CEO, you shall be entitled to participate in such
revenue sharing arrangements or programs as apply generally to the
Company's senior investment banking personnel on a basis which is no less
favorable than is made available to any other senior investment banking
personnel or executives of the Company. In addition, you shall receive such
additional cash compensation as may be determined by the Board in its sole
discretion. The Company's current revenue sharing policy is as follows: (i)
50% of net cash and warrant revenues generated from private placement
transactions shall be shared by the investment bankers and salespeople
responsible therefor, (ii) 50% of the net cash and warrants generated from
public offering transactions shall be shared by the investment bankers and
salepeople responsible therefor, and (iii) 50% of the net cash and warrant
revenues generated from financial advisory transactions shall be shared by
the investment bankers responsible therefor. Allocation of such revenues
among the participants involved in any transaction shall be made initially
by agreement of the senior investment bankers involved in the transactions,
with final discretion exercised by the Board after consultation with you.
(c) In addition to any other compensation you receive hereunder or under
any future employment or consulting agreement, on the 12 month anniversary,
the 24 month anniversary and the 30 month anniversary of an "IPO" (as
defined in Section 6 below), you will be entitled to cash payments of $2
million, $2 million and $1 million, respectively. In addition, upon a
"Sale" (as defined in Section 6 below), you shall be entitled to a payment
of $5 million multiplied by a fraction (which shall not exceed 1), the
numerator of which is the value of the capital stock of the Company as
measured by reference to the proceeds received in connection with such
Sale, and the denominator of which is $25 million: provided that any amount
--------
payable pursuant to this sentence shall be reduced by any amounts paid or
payable pursuant to the preceding sentence.
(d) Notwithstanding the foregoing, no payment (or installment thereof)
described in Section 2(c) above shall be made on any payment date if (i)
you have materially breached Section 4(a)(i) or (ii) hereof and failed to
cure such breach within 30 days following written notice from the Company
of such breach or (ii) you are not employed by the Company (as Chairman and
CEO or otherwise) or engaged by the Company as a consultant on such
applicable payment date; provided that this Section 2(d) shall be of no
--------
force and effect and void ab initio if your employment or engagement is
---------
terminated (x) by the Company for any reason other than for Cause (as
defined in Section 6 below), Disability (as defined in Section 6 below) or
death, or (y) by you for Good Reason.
2
<PAGE>
3. Investment. (a) The Company has previously sold to you, and you have
----------
purchased from the Company, 50,00 shares of Common Stock in a private
placement transaction, at a purchase price of $1.00 per share (or $50,000
in the aggregate).
(b) The Company hereby agrees to sell to you, and you hereby agree to
purchase from the Company, an additional 5,750,000 shares of Common Stock
(the "Purchased Shares") in a private placement transaction, at a purchase
price of $1.00 per share or ($5,750,000 in the aggregate) which the Company
and you agree and acknowledge represents the current fair market value per
share of the Common Stock. The purchase price will be paid by you by
promissory note attached as Exhibit A hereto and your repayment obligation
under the promissory note shall be secured by the Purchased Shares as
evidenced by a pledge agreement attached as Exhibit B hereto.
(c) If a Call Event (as defined in Section 6 below) shall occur prior to
April 1, 2000, the Company shall have the right, in its discretion, at any
time within 30 days following the occurrence of such Call Event, to
repurchase from you, at a per share purchase price equal to the lower of
$1.00 and the then fair market value per share of Common Stock, any
Purchased Shares which are then unvested. The Purchased Shares shall be
deemed to vest as follows: (i) 1,916,667 Purchased Shares will be vested
immediately as of the date of your purchase and (ii) an additional
1,916,666 Purchased Shares will vest on each of April 1, 1999 and April 1,
2000. The purchase price of any such repurchase or repurchases shall be
paid in cash and shall be effected promptly by the parties after written
notice from the Company to you shall be effected pursuant to such
procedures as the Company shall reasonably request. For purposes of this
Section 3(c), "fair market value" shall be as determined by the Company's
Board of Directors in good faith; provided that, if you dispute such
--------
determination you shall have the right to require the Company to obtain an
independent appraisal of the fair market value by a nationally recognized
investment banking or valuation firm. In such event, you shall bear the
cost of such appraisal unless the appraiser's determination of fair market
value shall be 120% or more than the fair market value as determined by the
Board of Directors, in which case the Company shall bear the cost of such
appraisal.
(d) Notwithstanding the foregoing, all of the Purchased Shares shall be
deemed vested and the provisions of Section 3(c) shall be of no force and
effect and void ab initio (x) upon the occurrence of a Sale or (y) if your
---------
employment as Chairman and CEO is terminated (A) by the Company for any
reason other than for Cause, (B) by you for Good Reason, or (C) due to your
Disability or death.
(e) Registration
------------
(i) Upon the consummation of an IPO, the Purchased Shares will (x) be
registered pursuant to a Form S-8 if the Company determines, on advice of
counsel, that such Form is available for the Purchased Shares or (y) if
Form S-8 is not available,
3
<PAGE>
then in connection with the IPO and any other offering of Company
securities by the Company for its own account or for the account of any
stockholder(s) of the Company (other than a registration statement on Form
S-8 or any successor or other forms not available for registering capital
stock for sale to the public) (each an "Offering"), you will be entitled to
register all or any portion of the Purchased Shares on the same terms and
conditions as is made available to the Company or any such shareholders in
connection with such Offering. All expenses incurred in connection with any
registration pursuant to this Section 3(e) shall be borne by the Company.
(ii) Notwithstanding the forgoing, if the underwriter assisting the
Company in connection with such Offering advices the Company in writing
that in its opinion, including any portion of the Purchased Shares
requested by you to be included in the Offering could have an adverse
impact upon the Offering, the Company shall include in such Offering only
the aggregate the number, if any, of Purchased Shares that in the opinion
of such underwriter may be sold without any adverse impact upon such
Offering. In such event, unless you are able to register the remaining
portion of the Purchased Shares in another Offering within 180 days
following the consummation of an IPO, the Company agrees to promptly
thereafter, but in any event, no later than 90 days thereafter, file a
registration statement on Form S-3 (or another appropriate Form) (a "Demand
Offering") covering the remaining Purchased Shares and will use its best
efforts to cause such registration statement to be declared effective as
soon as practicable thereafter.
(iii) To the extent permitted by law, the Company will indemnify and
hold you harmless against any losses, claims, damages or liabilities (joint
or several) to which you may become subject under the Securities Act of
1933, the Securities Exchange Act of 1934 or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon (A) any untrue statement or
alleged untrue statement of a material fact contained in the registration
statement relating to an Offering or Demand Offering, including any
preliminary or final prospectus or any amendments or supplements related
thereof, (B) the omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements
therein no misleading or (C) any violation or alleged violation by the
Company of the Securities Act of 1933, the Securities Exchange Act of 1934
or any state securities law or any rule or regulation promulgated
thereunder (each a "Violation"); and the Company will pay, as incurred, to
you, any legal or other expenses reasonably incurred by you in connection
with investigating or defending any such loss, damage, liability or action,
as such expenses are incurred; provided that the indemnity contained in
this clause (iii) shall not apply to any losses, claims, damages or
liabilities to the extent they arise out of or are based on a Violation
which occurs in reliance upon and in conformity with information furnished
by you expressly for use in connection with such Offering or Demand
Offering.
4
<PAGE>
4. Restrictive Covenants. (a) You agree that you will not at any time prior to
---------------------
April 1, 2000, nor at any time while you are employed by the Company in any
capacity or otherwise engaged as a consultant to the Company (and, with
respect to (iii) below, at all times thereafter), directly or
indirectly: (i) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be connected as a
director, officer, employee, or lender with, or be compensated by, any
entity or business (including a sole proprietorship) that (x) is an NASD
registered broker-dealer, or (y) except as permitted pursuant to Section
4(b), that provides financial advisory services, provides investment
banking advice or engages in capital raising; provided that up to a 4.9%
interest in a publicly traded entity shall be permitted, (ii) employ or
otherwise engage, or offer to employ or otherwise engage, or solicit,
entice or induce for himself or any other person, entity or corporation,
the services or employment of any person who is, or during the three months
prior thereto has been, an employee of, or independent contractor,
consultant or agent, in each case, devoting a majority of its business time
to, the Company or any of its affiliates (other than your personal
secretary), and (iii) use or disclose, or authorize any other person or
entity to use or disclose, any information of a confidential nature (i.e.,
strategic plans, specifications for existing or future technology) other
than as necessary to further the business objectives of the Company in
accordance with the terms of your engagement hereunder; provided that the
--------
restrictions contained in this clause (iii) shall not apply to (x)
information that becomes publicly known (other than as a result of your
breach of this restriction) and (y) information, the disclosure of which is
reasonably necessary to defend yourself, or assert your rights, in
connection with any proceeding to which the Company or its affiliates is
directly or indirectly a party. You understand that your services for the
Company will be of a special and unique nature, and that the breach or
threatened breach of the provisions of this Section 4 would cause the
Company irreparable harm which could not be adequately compensated for in
damages by an action at law. In the event of a breach or threatened breach
by you of this Section 4, in addition to all other remedies available to
the Company at law or in equity, the Company will be entitled to seek a
temporary or permanent injunction or injunctions, or temporary restraining
orders or orders to prevent breaches hereof, in each case, without the need
to post any security or bond.
(b) The Company expressly acknowledges that it shall not be a violation of
subclause (y) of Section 4(a)(i) for you to act as a financial advisor to,
or engage in capital raising activities with respect to, any entity in
which you are or become an investor or director so long as any fee payable
with respect thereto is pursuant to an arrangement for which registration
as a broker-dealer is not required. Notwithstanding the foregoing, such
activities shall not be permitted if a principal purpose of your investment
or engagement as an outside director was to enable you to engage in
financial advisory or capital raising activities.
(c) The Company expressly acknowledges that while you are employed as
Chairman and CEO or otherwise employed or engaged as a consultant, you
shall have the right to own, manage, operate, join, control or participate
in the operation or control of, or be connected as a director, officer,
employee, partner, lender, consultant or otherwise with, any entity or
5
<PAGE>
business (including a sole proprietorship) that engages in venture capital
activities, provided that such activities do not violate clause (i) of
Section 4(a) above.
(d) The restrictive covenants contained in Section 4(a)(i) and (ii) shall
not be applicable if your employment is terminated (x) by the Company for
any reason other than for Cause or (y) by you for Good Reason.
5. Certain Representations. (a) The Company represents and warrants to you
-----------------------
that as of the date hereof: (i) 25,000,000 shares of Common Stock are
authorized, of which 10,130,136 shares are issued and outstanding,
20,000,000 shares of preferred stock are authorized, of which 11,312,952
shares are issued and outstanding, (ii) 9,610,412 shares of Common Stock
are subject to the exercise of options, and 797,000 shares of Common Stock
are subject to conversion of warrants, granted to employees and
consultants, (iii) except as set forth in clauses (i) or (ii), there are no
agreements, interests, or securities outstanding that would entitle any
party to an equity interest in the Company, and (iv) except as disclosed in
the Company's audited financial statements, the Company has no subsidiaries
other than Wit Capital Corporation. The Company further represents that it
has full authority to enter into this Agreement with you.
(b) You represent and warrant to the Company your employment hereunder will
not conflict with or result in a violation or breach of, or constitute a
default under any contract, agreement or understanding to which you are or
were a party.
6. Definitions. As used in this letter agreement:
-----------
"Call Event" shall mean (i) your material breach of Section 4(a)(i) and
your failure to cure such breach within 30 days of your receipt of written
notice of such breach from the Company, or (ii) your cessation of
employment as Chairman and CEO.
"Cause" means (i) your persistent or repeated refusal to perform the
material duties of your employment or engagement (other than by reason of a
physical or mental illness or impairment), after written notice thereof
from the board specifying in reasonable detail instances of such conduct
and a 30-day opportunity to cure, (ii) any act of fraud or embezzlement to
the material detriment of the Company after written notice thereof from the
Board specifying in reasonable detail instances of such act, (iii) your
material breach of any provision hereof (including, without limitation,
Section 4(a)) after written notice thereof from the Board specifying in
reasonable detail instances of such breach and a 30-day opportunity to
cure, or (iv) your conviction of the commission of a felony (including
pleading guilty to a felony);
"Disability" shall mean a determination by the Board that you have been
unable to perform the material duties of your employment or engagement with
the Company for any 180 days within a one-year period by reason of a
physical or mental illness or impairment.
6
<PAGE>
"Good Reason" means, without your consent, (i) a material reduction in your
authority or responsibilities, a change in your title or your reporting
lines, or (ii) the failure to pay compensation due hereunder, in each case
after written notice thereof from you specifying in reasonable detail
instances of such reduction, change or failure and a 30-day opportunity to
cure;
"IPO" means the closing of the initial public offering of the Company's
capital stock in a firm commitment underwriting registered with the
Securities Exchange Commission in compliance with the provisions of the
Securities Act of 1933, immediately after which the market capitalization
of the capital stock is at least $25 million; and
"Sale" means any transaction whereby, after giving effect to such
transaction, the beneficial owners of the Company's capital stock
immediately prior to such transaction cease to beneficially own, either
singly or in the aggregate, at least 20% of the voting power (as to the
election of directors) of the Company or any successor to substantially all
of the business or assets of the Company.
7. Withholding. The Company shall have the right to withhold from any amount
-----------
payable hereunder any amount necessary in order for the Company to satisfy
any withholding tax obligation it may have under applicable law.
8. Applicable Law. Our agreement outlined in this letter will be governed by,
--------------
and construed and enforced in accordance with, the laws of the State of New
York applicable to agreements made and to be performed wholly therein,
without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the
State of New York.
9. Prior Agreements. This Agreement supersedes all agreements between you and
----------------
the Company entered into prior to the date hereof, whether oral or written,
including the Prior Agreement.
10. Employee Benefits. You shall be entitled to participate in all employee
-----------------
benefit plans, programs and arrangements of the Company and its
subsidiaries that are made available to any other executives of the Company
and its subsidiaries on a basis which is no less favorable to you than is
provided to any other executive of the Company and its subsidiaries.
11. Legal Fees. The Company shall reimburse you, up to a maximum of $10,000,
----------
for legal fees paid by you to Paul, Weiss, Rifkind, Wharton & Garrison in
connection with your entering into this Letter Agreement upon presentation
of proper documentation thereof.
12. Indemnity. The Company agrees to indemnify you to the fullest extent
---------
permitted by law for any acts or omissions taken, or failed to be taken,
by you in your capacity as an officer or
7
<PAGE>
director of the Company or its affiliates (or any other entity with
respect to which the Company requests you to serve as an officer or
director) and the Company agrees to maintain customary and appropriate
directors and officers liability insurance for your benefit during the term
of your employment with or service as a director of, the Company.
13. Set-Off. The Company may set off from any amount payable to you any
-------
recourse obligation due and payable pursuant to your note to the Company
for the Purchased Shares, provided that the repurchase price payable
pursuant to Section 3(c) may be set off against the entire obligation due
and payable under the note, whether or not recourse.
14. Parachute Limitation.
--------------------
(a) In the event that the Company determines, based upon the advice of a
nationally recognized independent accounting firm mutually acceptable to
the Company and you (the "Accountant") that part or all of the
consideration, compensation or benefits to be paid to you hereunder
constitute "parachute payments" under section 280G(b)(2) of the Internal
Revenue Code of 1986 (the "Code"), then, if the aggregate present value of
such parachute payments, singularly or together with the aggregate present
value of any consideration, compensation or benefits to be paid to you
under any other plan, arrangement or agreement which constitute "parachute
payments" (collectively, the "Parachute Amount") exceeds 2.99 times your
"base amount," as defined in section 280G(b)(3) of the Code (the "Base
Amount"), the amounts constituting "parachute payments" that would
otherwise be payable to or for your benefit shall be reduced to the extent
necessary so that the Parachute Amount is equal to 2.99 times the Base
Amount (the "Reduced Amount"); provided that such amount shall not be so
--------
reduced if you determine, based upon the advice of the Accountant, that
without such reduction you would be entitled to receive and retain, on a
net after tax basis (including, without limitation, any excise taxes
payable under section 4999 of the Code), an amount which is greater than
the amount, on a net after tax basis, that you would be entitled to retain
upon your receipt of the Reduced Amount.
(b) If the determination made pursuant to paragraph (a) above results in a
reduction of the payments that would otherwise be paid to you, you may then
elect, in your sole discretion, which and how much of any particular
entitlement shall be eliminated or reduced and shall advise the Company in
writing of such election within 10 days of the determination of the
reduction in payments.
8
<PAGE>
If the foregoing is acceptable to you, kindly sign and return to me one copy of
this letter.
Sincerely yours,
/s/ Andrew D. Klein
Andrew D. Klein
AGREED TO:
/s/ Robert H. Lessin
- --------------------
Robert H. Lessin
9
<PAGE>
WIT CAPITAL GROUP, INC.
826 Broadway
New York, NY 10003
October 30, 1998
Robert H. Lessin
131 South Woodland Street
Englewood, New Jersey 07631
Dear Bob:
This letter shall amend the Letter Agreement ("Letter Agreement"), dated as
of June 8, 1998, by and between Wit Capital Group, Inc. (the "Company") and you,
relating to your employment with Wit. Except as specifically set forth herein,
the Letter Agreement shall remain in full force and effect.
1. Section 3(c).
------------
Section 3(c) shall be amended in its entirety and shall hereafter read as
follows:
"(c) If a Call Event (as defined in Section 6 below) shall occur prior to
April 1, 2001, the Company shall have the right, in its discretion, at any
time within 30 days following the occurrence of such Call Event to
repurchase from you, at a per share purchase price equal to the lower of
$1.00 and the then fair market value per share of Common Stock, any
Purchased Shares which are then unvested. The Purchased Shares shall be
deemed to vest as follows: (i) 1,916,667 Purchased Shares shall have vested
on June 8, 1998; (ii) 319,445 Purchased Shares shall have vested on July 1,
1998; (iii) 319,445 Purchased Shares shall have vested on October 1, 1998;
(iv) 319,445 Purchased Shares will vest on each of (A) January 1, 1999, (B)
April 1, 1999, and (C) July 1, 1999; and (v) 319,444 Purchased Shares will
vest on each of (A) October 1, 1999, (B) January 1, 2000, (C) April 1,
2000, (D) July 1, 2000 (E) October 1, 2000 (F) January 1, 2001, and (G)
April 1, 2001. The purchase price of any such repurchase or repurchases
<PAGE>
shall be paid in cash and shall be effected promptly by the parties after
written notice from the Company to you and shall be effected pursuant to
such procedures as the Company shall reasonably request. For purposes of
this Section 3(c), "fair market value" shall be as determined by the
Company's Board of Directors in good faith; provided that, if you dispute
--------
such determination you shall have the right to require the Company to
obtain an independent appraisal of the fair market value by a nationally
recognized investment banking or valuation firm. In such event, you shall
bear the cost of such appraisal unless the appraiser's determination of
fair market value shall be 120% or more than the fair market value as
determined by the Board of Directors, in which case the Company shall bear
the cost of such appraisal."
Section 4(a).
------------
In the first sentence of Section 4(a), "April 1, 2000" shall be replaced
with "April 1, 2001."
Very truly yours,
/s/ Ronald Readmond
----------------------------
Ronald Readmond
Agreed and Accepted:
/s/ Robert H. Lessin
- --------------------------
Robert H. Lessin
<PAGE>
WIT CAPITAL GROUP, INC.
826 Broadway
New York, New York 10003
Effective as of
January 1, 1999
Robert H. Lessin
131 South Woodland Street
Englewood, New Jersey 07631
Dear Bob:
This letter shall amend the Letter Agreement (the "Letter Agreement") dated
as of June 8, 1998, which was amended as of October 30, 1998, (the "Amendment"),
by and between Wit Capital Group, Inc. (the "Company") and you, relating to your
employment with the Company (collectively, the Letter Agreement and the
Amendment are hereinafter referred to as the "Employment Agreement"). Except as
specifically set forth herein, the Employment Agreement shall remain in full
force and effect.
1. Section 1
---------
Section 1 of the Employment Agreement shall be amended in its entirety and
shall hereafter read as follows:
EMPLOYMENT. (a) The Company agrees to employ you and you agree to be
----------
employed by the Company, as Co-Chief Executive Officer and as Chairman for
a period beginning January 1, 1999, through December 31, 2000 (the "Initial
Period") and, unless either you or the Company gives notice at least ninety
(90) days before December 31, 2000, for an additional twelve (12) month
period commencing January 1, 2001 (the "Additional Period"). You will
report solely
<PAGE>
Robert H. Lessin
January 1, 1999
Page 2
to the Board of Directors and will have authority consistent with that
normally associated with the position of Co-Chief Executive Officer and
Chairman.
(b) In the event that the Company gives notice not to continue your
employment for the Additional Period, any Purchased Shares not vested as of
December 31, 2000 shall immediately vest and shall not be subject to a Call
Event.
2. Section 2(a) and (b)
--------------------
Section 2(a) and (b) shall be amended in their entirety and shall
hereinafter read as follows:
(a) During the Employment Period, the Company shall pay to you a minimum
annual base salary of Two Hundred Fifty Thousand Dollars ($250,000). This
base salary will be payable in equal periodic installments which are not
less frequent than the periodic installments in effect for salaries of
other senior executives of the Company. The base salary be subject to
annual review by the Board (or a committee appointed by the Board) for
upward adjustments based on the policies of the Company and your
contributions to the business of the Company.
(b) During the Employment Period, you shall be entitled to participate at
the senior executive level in both the Annual Bonus Plan for Executives and
the Long-Term Incentive Plan. In no event shall the percentage of the
Annual Bonus Plan allocated to any other Co-Chief Executive Officer exceed
your allocable percentage of the Annual Bonus Plan. Notwithstanding the
foregoing, and in addition to the Annual Bonus Plan and any other salary or
compensation referred to herein, you shall continue to receive 50% of the
net cash and warrant revenues generated for those financial advisory
engagements for which you were responsible and which are entered into prior
to March 15, 1999.
3. Section 3(d)
------------
In Clause (y) of Section 3(d), the work "CEO" shall be deleted and replaced
with the word "Co-Chief Executive Officer".
<PAGE>
Robert H. Lessin
January 1, 1999
Page 3
4. Section 3(e)
------------
Section 3(e)(i) and 3(e)(ii) shall be amended in their entirety and shall
hereafter read as follows:
(i) Upon the consummation of and IPO; provided, however, that any "Lock-up"
-------- -------
Agreement entered into by you and with an underwriter in connection with such
IPO has expired, and, further, subject to (x) limitations contained in Section
--- -------
4.4, "Transfers by Key Employees," of the Second Amended and Restated
---------------------------
Stockholder's Agreement by and between the Company, Capital Z Financial Services
- -----------------------
Fund II, L.P., Capital Z Financial Services Private Fund II, L.P., and you; and
(y) subsection (e)(ii) below:
(a) if requested by you, all or a portion of the Purchased Shares will be
registered with the Securities and Exchange Commission pursuant to a Form
S-3 (or pursuant to the then applicable Form); or
(b) if not all of the Purchased shares have been registered pursuant to
subsection (a) above, then at any time the Company proposes to register any
of its securities for sale for its own account or for the account of any
other stockholder(s) (other than a registration relating either to the sale
of securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a Rule 145 transaction), you will be entitled
to register all or any portion of the Purchased Shares on the same terms
and conditions as is made available to the Company or any such shareholders
in connection with that offering.
For the purposes hereof, offerings pursuant to subsections (a) and (b)
above are referred to as an Offering. All expenses incurred in connection with
any registration pursuant to this Section 3(e) shall be borne by the Company.
(ii) Notwithstanding the foregoing, if the underwriter assisting the
Company in connection with any such Offering determines that including any
portion of the Purchased Shares requested by you to be included in the Offering
is limited due to market conditions or could have an adverse impact upon the
Offering, the Company shall include in such Offering only the aggregate number,
if any, of Purchased Shares that in the opinion of such underwriter may be sold.
<PAGE>
Robert H. Lessin
January 1, 1999
Page 4
5. Section 6
---------
In Clause (ii) in the definition of "Call Event" in Section 6, the words
"Chairman and CEO" shall be deleted and replaced with the word "Co-Chief
Executive Officer".
6. Section 10
----------
Section 10 shall be amended in its entirety and shall hereinafter read as
follows:
EMPLOYEE BENEFITS. In addition to and except for matters governed by this
-----------------
Employment Agreement, during the period you are employed by the Company you
shall be entitled to (i) employee benefits perquisites, including but not
limited to pension, deferred compensation plans, stock options, group life
insurance, disability, sickness and accident insurance and health benefits
under such plans and programs as provided to other senior executives of the
Company from time to time, and (ii) paid vacation, holidays, leave of
absence and leave for illness and temporary disability in accordance with
policies of the Company.
Very truly yours,
Ronald W. Readmond
Agreed and Accepted Effective
As of January 1, 1999
/s/ Robert H. Lessin
- -----------------------------
Robert H. Lessin
<PAGE>
Exhibit 10.9
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into effective as of
March 8, 1999, between Wit Capital Group, Inc., a Delaware corporation (the
"Corporation"), and Mark F. Loehr (the "Executive").
W I T N E S S E T H:
-------------------
The Corporation and the Executive entered into a Letter Agreement dated
March 5, 1999 which set forth the terms and conditions of the Executive's
employment by the Corporation commencing on March 8, 1999. The parties desire
to amend and restate the employment arrangement so that the format is consistent
with Employment Agreements currently being used by the Corporation in connection
with the employment of other executives.
The Corporation desires to employ the Executive to have the benefits of his
expertise and knowledge. The Executive, in turn, desires employment with the
Corporation. The parties, therefore, enter into this Agreement to establish the
terms and conditions of the Executive's employment with the Corporation.
In consideration of the mutual covenants and representations contained in
this Agreement, the Corporation and the Executive agree as follows:
1. Employment of Executive; Duties.
-------------------------------
The Corporation agrees to employ the Executive, and the Executive
agrees to be employed by the Corporation, as Managing Director, Investment
Banking Capital Markets and Trading, for the period specified in Section 2 (the
"Employment Period"), subject to the terms and conditions of this Agreement.
During the Employment Period, the Executive shall have such duties and
responsibilities generally consistent with his position and such other duties
not inconsistent with his title and position as may be properly assigned to him
by the Corporation. In particular, the Executive will be responsible for all
capital market activities, including investment banking syndicate, institutional
sales and trading and the coordination of the investment banking and research.
2. Employment Period. The Employment Period shall begin on the date
-----------------
first written above and shall continue for three (3) years.
3. Base Salary. During the Employment Period, the Corporation shall pay
-----------
the Executive a minimum annual base salary of Two Hundred Thousand Dollars
($200,000). The base salary shall be payable in equal periodic installments
which are not less frequent than the periodic installments in effect for
salaries of other senior executives of the Corporation. The base salary shall
be subject to annual review by the Board of Directors ("Board") (or a committee
appointed by the Board) for upward adjustments based on the policies of the
Corporation and the Executive's contributions to the business of the
Corporation.
4. Investment Banking Bonus Pool; Long-Term Incentive Plan. During the
-------------------------------------------------------
Employment Period, the Executive shall be entitled to participation at the
senior executive level in both the Investment Banking Bonus Pool and the Long-
Term Incentive Plan.
5. Benefits. In addition to and except for the matters governed by this
--------
Agreement, the Executive shall be entitled to: (i) employee benefits and
perquisites, including but not limited to pension, deferred compensation plans,
stock options, group life insurance, disability, sickness and accident insurance
and health benefits under such plans and programs as provided to other senior
executives of the
1
<PAGE>
Corporation from time to time; and (ii) paid vacation as well as holidays, leave
of absence and leave for illness and temporary disability in accordance with the
policies of the Corporation.
6. Stock Purchase.
--------------
The Executive shall have the right to purchase One Million Two Hundred
Fifty Thousand (1,250,000) shares of the Common Stock of the Corporation in
accordance with the Stock Purchase Agreement attached hereto as Exhibit I.
7. Non-Disclosure; Non-Competition.
-------------------------------
As a condition to the employment arrangement, Executive agrees to
execute and comply with the terms and conditions of the "Wit Capital Group, Inc.
Employee Non-Disclosure, Non-Competition and Assignment of Inventions Agreement"
attached hereto as Exhibit II.
8. Termination by the Corporation.
------------------------------
(a) The Corporation, by action of its Board, may terminate the
Executive's employment under this Agreement without Cause (as defined in Section
8(b)), at any time by giving notice thereof to the Executive at least ninety
(90) days before the effective date of such termination. The Employment Period
shall terminate as of the date of such termination of employment.
(b) The Corporation, by action of its Board, may terminate the
Executive's employment under this Agreement for Cause at any time by notifying
the Executive of such termination. For all purposes of this Agreement, the
Employment Period shall end as of the date of such termination of employment.
"Cause" means the Executive's: (i) persistent and repeated refusal, failure or
neglect to perform the material duties of his employment under this Agreement
(other than by reason of the Executive's physical or mental illness or
impairment), provided that such Cause shall be deemed to occur only after the
Corporation gave notice thereof to the Executive specifying in reasonable detail
the conduct constituting Cause, and the Executive failed to cure and correct his
conduct within thirty (30) days after such notice; (ii) committing any act of
fraud or embezzlement, provided that such Cause shall be deemed to occur only
after the Corporation gave notice thereof to the Executive specifying in
reasonable detail the instances of such conduct, and the Executive had the
opportunity to be heard at a meeting of the Board; (iii) breach of the Employee
Non-Disclosure, Non-Competition and Assignment of Inventions Agreement or of
such other subsequent agreements entered into during the Employment Period that
results in a material detriment to the Corporation; (iv) conviction of a felony
(including pleading guilty to a felony); or (v) habitual abuse of alcohol or
drugs.
8.1 Termination by the Executive. The Executive may terminate this
----------------------------
Agreement at any time, for any reason or for no reason at all, by giving notice
thereof to the Corporation at least ninety (90) days before the effective date
of such termination. The Employment Period shall terminate as of the date of
such termination of employment.
8.2 Severance Benefits.
------------------
(a) If the Executive's employment under this Agreement is terminated
before the end of the Employment Period by the Corporation without Cause
(specifically excluding, however, a termination due to the Executive's death or
disability), or by the Executive for Good Reason (as defined in Section 8.2(c)),
the Corporation shall continue to pay to the Executive his unpaid Base Salary
through the end of the three (3) year Employment Period. Additionally, the
Executive shall be entitled to his share of the unpaid Investment Banking Bonus
Pool accrued through the date of termination which shall be paid to him at such
time as the next payment is made to the other participants of the Investment
Banking Bonus Pool.
2
<PAGE>
(b) If the Executive's employment under this Agreement is terminated
by the Corporation for Cause, by the Executive without Good Reason or if the
Executive dies or becomes totally disabled (as defined in Section 8.3), the
Corporation shall pay the Executive a lump sum cash payment within thirty (30)
days of the date of such termination, equal to the Executive's unpaid Base
Salary earned to the termination date. Additionally, the Executive shall be
entitled to his share of the unpaid Investment Banking Bonus Pool accrued
through the date of termination which shall be paid to him at such time as the
next payment is made to the other participants of the Investment Banking Bonus
Pool.
(c) "Good Reason" means: (i) any material reduction in the Executive's
authority, duties or responsibilities; (ii) any material change in the
Executive's reporting lines or removal of the Executive from his principal
positions as of the beginning of the Employment Period (other than a promotion);
or (iii) any material failure by the Corporation to pay or provide the
compensation and benefits under this Agreement; provided that, in each such
event, the Executive shall give the Corporation notice thereof which shall
specify in reasonable detail the circumstances constituting Good Reason, and
there shall be no Good Reason with respect to any such circumstances cured by
the Corporation within thirty (30) days after such notice.
(d) If the Executive is entitled to receive payments or other benefits
under this Agreement upon the termination of his employment with the
Corporation, the Executive hereby irrevocably waives the right to receive any
payments or other benefits under any other severance or similar plan maintained
by the Corporation ("Other Severance Plan"), provided, however, that if the
payments and other benefits provided under such Other Severance Plan exceed the
payments and other benefits under this Agreement, the Executive, in his sole
discretion, may elect to receive the payments and benefits under such Other
Severance Plan in lieu of the payments and benefits under this Agreement upon
his termination of employment.
8.3 Termination by Death or Disability. This Agreement shall terminate
----------------------------------
automatically upon the Executive's death. If the Corporation determines in good
faith that the Executive has a "total disability" (within the meaning of such
term or of a similar term as defined in the Corporation's long-term disability
plan as in effect from time to time), the Corporation may terminate his
employment under this Agreement by notifying the Executive thereof at least
thirty (30) days before the effective date of such termination.
9. Representation by Executive. The Executive represents and warrants to
---------------------------
the Company that his employment hereunder will not conflict with or result in a
violation or breach of, or constitute a default under any contract, agreement or
understanding to which he is or was a party.
10. Notices. Any notices, requests, demands and other communications
-------
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Corporation or, in the case of the Corporation, to the
Corporation's principal executive offices.
11. Withholding Taxes. The Corporation shall have the right, to the
-----------------
extent permitted by law, to withhold from any payment of any kind due to the
Executive under this Agreement to satisfy the tax withholding obligations of the
Corporation under applicable law.
12. Binding Agreement. This Agreement shall be binding upon the Executive
-----------------
and the Corporation on and after the date of this Agreement. The rights and
obligations of the Corporation under this agreement shall inure to the benefit
of and shall be binding upon the Corporation and any successor of the
Corporation, and the benefits of this Agreement shall inure to the benefit of
the Executive's estate and beneficiaries in the event of the Executive's death.
The Corporation may assign this Agreement to any subsidiary, parent or
affiliate, without the consent of the Executive, and such assignment shall not,
in and of itself, constitute a termination of employment under this Agreement.
13. Entire Agreement. This Agreement constitutes the entire understanding
----------------
of the Executive and the Corporation with respect to the subject matter hereof
and supersedes and voids any and
3
<PAGE>
all prior agreements or understandings, written or oral, regarding the subject
matter hereof. This Agreement may not be changed, modified, or discharged
orally, but only by an instrument in writing signed by the parties.
14. Governing Law and Severability. This Agreement shall be governed by
------------------------------
the laws of the State of New York (without giving effect to choice of law
principles or rules thereof that would cause the application of the laws of any
jurisdiction other than the State of New York) and the invalidity or
unenforceability of any provisions hereof shall in no way affect the validity or
enforceability of any other provision. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
15. Arbitration. DISPUTES REGARDING THE EXECUTIVE'S EMPLOYMENT WITH THE
-----------
CORPORATION, INCLUDING, WITHOUT LIMITATION, ANY DISPUTE UNDER THIS AGREEMENT
WHICH CANNOT BE RESOLVED BY NEGOTIATIONS BETWEEN THE CORPORATION AND THE
EXECUTIVE, BUT EXCLUDING ANY DISPUTES REGARDING THE EXECUTIVE'S COMPLIANCE WITH
THE RESTRICTIONS OF THE EMPLOYEE NON-DISCLOSURE, NON-COMPETITION AND ASSIGNMENT
OF INVENTIONS AGREEMENT REFERRED TO IN SECTION 7 OF THIS AGREEMENT, SHALL BE
SUBMITTED TO, AND SOLELY DETERMINED BY, FINAL AND BINDING ARBITRATION CONDUCTED
BY JAMS/ENDISPUTE, INC.'S ARBITRATION RULES APPLICABLE TO EMPLOYMENT DISPUTES,
AND THE PARTIES AGREE TO BE BOUND BY THE FINAL AWARD OF THE ARBITRATOR IN ANY
SUCH PROCEEDING. THE ARBITRATOR SHALL APPLY THE LAWS OF THE STATE OF NEW YORK
WITH RESPECT TO THE INTERPRETATION OR ENFORCEMENT OF ANY MATTER RELATING TO THIS
AGREEMENT; IN ALL OTHER CASES THE ARBITRATOR SHALL APPLY THE LAWS OF THE STATE
SPECIFIED IN THE CORPORATION'S ALTERNATIVE DISPUTE RESOLUTION POLICY AS IN
EFFECT FROM TIME TO TIME (IF ANY). ARBITRATION MAY BE HELD IN NEW YORK, NEW
YORK, OR SUCH OTHER PLACE AS THE PARTIES HERETO MAY MUTUALLY AGREE, AND SHALL BE
CONDUCTED SOLELY BY A FORMER JUDGE. JUDGMENT UPON THE AWARD BY THE ARBITRATOR
MAY BE ENTERED IN ANY COURT HAVING JURISDICTION THEREOF.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
WITNESS/ATTEST WIT CAPITAL GROUP, INC.
_____________________________ By: ________________________________
Ronald W. Readmond,
Co-Chief Executive Officer
EXECUTIVE
_____________________________ ____________________________________
Mark F. Loehr
4
<PAGE>
Exhibit I
---------
STOCK PURCHASE AGREEMENT
with Schedule A (Partial Recourse Note)
and Schedule B (Pledge Agreement)
5
<PAGE>
Exhibit II
----------
WIT CAPITAL GROUP, INC.
EMPLOYEE NON-DISCLOSURE, NON-COMPETITION
AND ASSIGNMENT OF INVENTIONS AGREEMENT
6
<PAGE>
EXHIBIT 10.12
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED BASED UPON A REQUEST FOR
CONFIDENTIAL TREATMENT.
SUCH OMITTED PORTIONS HAVE BEEN SEPARATELY FILED WITH THE COMMISSION.
WIT CAPITAL CORPORATION
826 Broadway
New York, New York 10003
FORM OF E-DEALER AGREEMENT
[Date]
Ladies and Gentlemen:
From time to time we may invite you (and others) to participate on the
terms set forth herein as dealer in connection with certain public offerings of
securities by one or more underwriters ("Underwriters") in which we are the
manager or a co-manager. If we invite you to participate in a specific offering
(an "Offering") to which this Agreement shall apply, we will give you an express
notice (an "Advice") by e-mail, telecopy or otherwise in writing which will
specify (i) the securities to be offered (the "Securities") and the issuer
thereof, (ii) the offering terms, including, if applicable, the public offering
price, concession and reallowance with respect to such securities, (iii) the Web
site location at which will be posted the current Preliminary Prospectus and
Prospectus (as such terms are hereinafter defined) and any notice of the
Offering (a "Notice") complying with Rule 134 or Rule 135 under the Securities
Act of 1933, (iv) any limit on the amount of Securities which may be sold to you
and your customers, based upon our credit analysis, and (v) the extent to which
the general provisions of the Agreement shall be applicable. In addition to the
terms of this Agreement, in any public offering in which we are not the lead
manager, but in which you participate as a dealer at our invitation, you agree
to comply with the terms and conditions, and to make the representations and
warranties, applicable to participating dealers, as established by the
respective lead manager in its standard agreement with dealers and, if
applicable, in any advice or notice it issues to dealers participating in such
offerings (copies of which will be furnished to you upon request).
Except to the extent that the applicable Advice provides otherwise, you
hereby agree as follows with respect to each Offering to which we invite you to
and in which you participate as a dealer. For purposes of the following
provisions, with respect to any Offering, the term Preliminary Prospectus means
any preliminary prospectus relating to the offering of the Securities or any
preliminary prospectus supplement together with a prospectus relating to the
offering of the Securities; the term Prospectus means the prospectus, together
with the final prospectus supplement, if any, relating to the offering of the
Securities, filed pursuant to Rule
<PAGE>
424 under the Securities Act of 1933; and the terms Public Offering Price and
Reallowance shall mean, respectively, the public offering price and reallowance,
if any, then in effect with respect to the Securities.
Article 1
1.1 All offers of Securities are made subject to prior sale of the
Securities, when, as and if such Securities are delivered to and accepted by the
Underwriters and subject to the approval of legal matters by their counsel. Any
order from you or any customer of yours for Securities will be strictly subject
to confirmation and we reserve the right in our sole discretion to reject any
order in whole or in part.
1.2 You shall promptly offer the Securities to retail purchasers only, who
are existing customers of yours, upon the terms set forth in the Prospectus and
the Advice. Orders for Securities must be posted with our electronic order book
by you or directly by your customers, as you may elect. Such orders will
generally be accepted by us on a first-come, first-served basis, subject to our
right to specify minimum and maximum numbers of shares to be purchased in any
order and to establish such other terms, conditions and priorities as we believe
are reasonable and appropriate for an Offering.
1.3 If the Securities are shares of common stock ("Common Stock") of the
issuer thereof (the "Issuer") or securities of the Issuer that may be exchanged
for or converted into Common Stock, you agree that you will not, without our
approval in advance, at any time prior to the completion of the Offering, buy,
sell, deal or trade in (i) any Common Stock, (ii) any securities of the Issuer
convertible into Common Stock or (iii) any right or option to acquire or sell
Common Stock or any security of the Issuer convertible into Common Stock, for
your own account or for the account of a customer, except:
(1) as provided for in this Agreement, the applicable Advice, the
agreement among underwriters, if any, or the underwriting agreement
relating to the Securities;
(2) that you may convert any security of the Issuer convertible into
Common Stock owned by you and sell the Common Stock acquired upon such
conversion and that you may deliver Common Stock owned by you upon the
exercise of any option written by you as permitted by the provisions set
forth herein; and
(3) in brokerage transactions on unsolicited orders which have not
resulted from activities on your part in connection with the solicitation
of purchases and which are executed by you in the ordinary course of your
brokerage business.
2
<PAGE>
In addition, you will***********************************************************
********************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
*************************************** prior to the sixtieth (60th) day
following the date of the Prospectus relating thereto (or such earlier date as
we may stipulate to you).
1.4 If the Securities are not shares of Common Stock or securities of the
Issuer that may be exchanged for or converted into Common Stock, you agree that
you will not bid for or purchase, or attempt to induce any other person to
purchase, any Securities or any other securities of the Issuer designated in the
Advice other than (i) as provided in this Agreement, the agreement among
underwriters, if any, or the underwriting agreement relating to the Securities
or (ii) as a broker in executing unsolicited orders.
1.5 You represent that you have not participated, since the date you were
invited to participate in the Offering of the Securities, in any transaction
prohibited by Section 1.3 and that you have at all times complied with the
provisions of Regulation M of the Securities and Exchange Commission applicable
to such Offering.
1.6 You agree to provide us from time to time upon request information as
to the distribution of Securities sold by or through you including, without
limitation, the number of retail customers to whom you have sold Securities and
those customers, if any, who have resold or transferred from their accounts with
you any or all of the Securities they purchased prior to the sixtieth (60th) day
following the date of the Prospectus (or such earlier date as we may have
specified)**********************************************************************
******************************************************************************
******************************************************************************
******************.
1.7 If prior to the termination of this Agreement as it applies to the
offering of the Securities (or prior to such earlier date as we have determined)
we (or any manager or co-manager of the Offering) purchase or contract to
purchase in the open market or otherwise any Securities which were purchased by
you or your customers (including any Securities which may have been issued on
transfer or in exchange for such Securities), and which Securities were
therefore not effectively placed for investment by you, you authorize us (or
such manager or co-manager) either to charge your account with an amount equal
to the concession from the Public Offering Price at which you purchased such
Securities, which shall be credited against the cost of
______________________________________
*CONFIDENTIAL INFORMATION REQUESTED
3
<PAGE>
such Securities, or to require you to repurchase such Securities at a price
equal to the total cost of such purchase, including any commissions and transfer
taxes on redelivery.
Article 2
2.1 If you or your customers purchase any Securities from us in connection
with your participation as dealer in an Offering, you agree that such purchases
will be evidenced by an e-mail or written confirmation and will be subject to
the terms and conditions set forth in the confirmation and in the Prospectus.
2.2 As soon as practical, we will notify you of the number of Securities
to be sold to you and to your customers (including, in the case of sales to your
customers, the identification of each order to be filled and the time and date
of receipt thereof). Securities purchased from us by you or your customers in
connection with your participation as dealer in such Offering shall be paid for
in full by you at (i) the Public Offering Price, (ii) such price less the
applicable concession or (iii) the price set forth or indicated in the Advice,
as we shall advise, at the office of Wit Capital Corporation, 826 Broadway, New
York, New York 10003, at such time and on such day as we may advise you, by
certified or official bank check payable in New York Clearing House funds (or
such other funds as we may specify) to the order of Wit Capital Corporation, 826
Broadway, New York, New York 10003, against delivery of the Securities. If you
are called upon to pay the Public Offering Price for the Securities purchased by
you, the applicable concession will be paid to you, less any amounts charged to
your account pursuant to Article 1 above, after termination of this Agreement as
it applies to the offering of the Securities. Unless you promptly give us
written instructions otherwise, if transactions in the Securities may be settled
through the facilities of The Depository Trust Company, payment for and delivery
of Securities purchased by you will be made through such facilities, if you are
a member, or, if you are not a member, settlement may be made through your
ordinary correspondent who is a member.
Article 3
3.1 We will advise you of the date and time of termination of this
Agreement as it applies to the offering of the Securities or of any designated
provisions hereof. This Agreement shall, in any event, terminate with respect
to the offering of the Securities 30 days after the date of the initial public
offering of the Securities unless sooner terminated by us. *******************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
****************.
______________________________________
*CONFIDENTIAL INFORMATION REQUESTED
4
<PAGE>
Article 4
4.1 In purchasing Securities, you will rely only on the Prospectus and on
no other statements whatsoever, written or oral. Unless you otherwise
specifically request and we agree thereto, delivery of each Preliminary
Prospectus and each Prospectus shall be made by our posting of the same at the
Web site location identified in the Advice and you will not offer or sell any
Securities to any customer of yours who has not consented, prior to such offer
or sale, to such delivery by e-mail containing a hyperlink to the appropriate
Web site locations. You will promptly notify, by e-mailing the Notice relating
to the Offering, each customer to whom you wish to offer or sell any Securities;
such notice will contain a hyperlink to the Web site location of the current
preliminary Prospectus and the Prospectus. You will not provide by electronic
mail or otherwise to any customer of yours any information relating to any
Securities or the issuer thereof other than the Web site location of the current
Preliminary Prospectus, the Prospectus and any information we may post on a Web
site location for distribution to prospective purchasers of the Securities. Any
contacts with the issuer of any Securities in an Offering for due diligence or
other purposes will be coordinated through us.
4.2 You represent that you are a member in good standing of the NASD or
that you are a foreign bank or dealer, not eligible for membership in the NASD,
which agrees not to offer or sell any Securities in, or to persons who are
nationals or residents of, the United States. In making sales of Securities, if
you are such a member, you agree to comply with all applicable rules of the
NASD, including, without limitation, the NASD's Interpretation with Respect to
Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of
Fair Practice, or, if you are such a foreign bank or dealer, you agree to comply
with such Interpretation and Sections 8 and 36 of such Article as though you
were such a member and Section 25 of such Article as it applies to a nonmember
broker or dealer in a foreign country.
4.3 If you are a foreign bank or dealer, you represent that in connection
with sales and offers to sell Securities made by you outside the United States
you will advise each person to whom any such sale or offer is made of the Web
site location of the then current preliminary prospectus, if any, or of the
Prospectus (as then amended or supplemented). Any offering material in addition
to the then current preliminary prospectus or the Prospectus furnished by you to
any person in connection with any offers or sales referred to in the preceding
sentence (i) shall be prepared and so furnished at your sole risk and expense
and (ii) shall not contain information relating to the Securities or the Issuer
which is inconsistent in any respect with the information contained in the then
current preliminary prospectus, if any, or in the Prospectus (as then amended or
supplemented), as the case may be. It is understood that no action has been
taken by us or the Issuer to permit a public offering in any jurisdiction other
than the United States where action would be required for such purpose.
4.4 You will not give any information or make any representations other
than those contained in the Prospectus, or act as agent for the Issuer, any
Underwriter or us. You will not
5
<PAGE>
offer or sell any Securities in any jurisdiction except in compliance with
applicable laws and subject to such customer screening processes as we may
specify.
4.5 You agree that we, as manager or co-manager of the offering of the
Securities, have full authority to take such action as may seem advisable to us
in respect of all matters pertaining to such offering.
4.6 Neither we, as manager, nor any Underwriter shall be under any
liability to you for any act or omission, except for obligations expressly
assumed by us in this Agreement.
4.7 All communications to us relating to the offering of the Securities
shall be e-mailed to the Syndicate Department, Wit Capital Corporation at
[email protected]. Unless you have otherwise notified us in writing, any
notices to your shall be deemed to have been duly given if e-mailed, postal
mailed, telecopied or delivered to you at the address shown below.
Article 5
5.1 Neither we, as manager, nor any Underwriter will have any
responsibility with respect to the right of any dealer to sell Securities in any
jurisdiction, notwithstanding any information we may furnish in that connection.
Article 6
6.1 You agree that, for a period of ************* years following the date
of this Agreement, other than at our invitation, you
*****************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
*****************************************************************************
**************************. The restrictive covenant set forth in the first
sentence of this paragraph (the "Exclusivity Provision") shall become null and
void as of any [Month] 1 commencing ___________ (each such date a "Termination
Date") if as of such date any of the triggering events as defined below is
satisfied:
Termination Date Triggering Events
---------------- -----------------
[_____________] (i) in respect of the twelve months ended
____________ ("Year One"), we have failed
to
______________________________________
*CONFIDENTIAL INFORMATION REQUESTED
6
<PAGE>
offer you participation in at least "x"
qualified public offerings ("QPOs") in which
we have commanded an allocation of 250,000
shares or more, where "x" equals the number
of QPOs completed during such year period
times **** percent
***********************************
***********************************, and
where a QPO is defined as a domestic public
offering of not less than $35 million lead
managed by a nationally recognized major or
bulge bracket investment bank (whether or
not we participate in the transaction); or
(ii) in respect of Year One, both (a) "Your
Average Demand" (as defined) exceeded *****
percent of the "Average Wit Capital
Allocation" and (b) "Your Average
Allocation" (as defined) as a percentage of
the Wit Capital Allocation was less than
***** percent. "Your Average Demand" means
the average of the number of shares covered
by conditional orders submitted to us by you
on behalf of your customers in QPOs offered
through us. The "Average Wit Capital
Allocation" means the average number of
shares allocated to us by the lead managers
in QPOs in which we have acted as manager.
"Your Average Allocation" means the average
number of shares allocated to customers of
you in QPOs offered through us.
[_____________] (i) in respect of the twelve months ended
__________ ("Year Two"), we have failed to
offer you participation in at least "x" QPOs
in which we have commanded an allocation of
500,000 shares or more, where "x" equals the
number of QPOs completed during such year
period times ** percent
*******************************************
********************************; or (ii) in
respect of Year Two, both (a) Your Average
Demand exceeded **** percent of the Average
Wit Capital Allocation and (b) Your Average
Allocation as a percentage of the Wit
Capital Allocation was less than ****
percent.
_____________________________________
*CONFIDENTIAL INFORMATION REQUESTED
7
<PAGE>
Notwithstanding the satisfaction of the triggering event described in sub-
paragraph (i) above as of any Termination Date, the restrictive covenants shall
not become null and void if, as of such Termination Date, in respect of the
twelve months ending on such Termination Date, we have been the leading manager
of e-syndicates in the domestic underwriting market in terms of both the numbers
of deals managed and the total number of shares allocated. Notwithstanding the
satisfaction of the triggering event described in sub-paragraph (ii) above as of
any Termination Date, the restrictive covenants shall not become null and void
if, as of such Termination Date, you shall have failed to make efforts on your
part as have been reasonably recommended by us for the purposes of facilitating
the dissemination of offering materials to your customers and the expeditious
filtering and transmittal of such orders to us. ********************************
******************************************************************************
******************************************************************************
******************************************************************************
******************************************************************************
********************.
6.2 We agree, for a period of two/three years, provided we have obtained
the consent of the lead manager to invite you, and provided you are in
compliance with the terms and conditions of this Agreement, to invite you to
participate as a dealer in connection with each and every public offering of
securities in which we are the lead manager or a co-manager. For such
******** year period, we also agree to use our best efforts to obtain such lead
manager consent.
********************************************************************************
********************************************************************************
********************************************************************************
******************************************.
6.3 *****************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
********************************************************************************
*************************.
6.4 **********************************************************************
********************************************************************************
********************************************************************************
***.
6.5 *********************************************************************.
_____________________________________
*CONFIDENTIAL INFORMATION REQUESTED
8
<PAGE>
********************************************************************************
****************************************************.
6.6 This Agreement and each Advice shall be governed by and construed in
accordance with the laws of the State of New York.
Please confirm your acceptance of this Agreement by signing and returning
to us the enclosed duplicate copy hereof.
Very truly yours,
WIT CAPITAL CORPORATION
Confirmed and accepted
as of the date first written above
E-Mail Address:
Telephone:
Telecopy:
By:_____________________________
Title:
_____________________________________
*CONFIDENTIAL INFORMATION REQUESTED
9
<PAGE>
EXHIBIT 10.13
THIRD AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
BY AND AMONG
WIT CAPITAL GROUP, INC.
AND
THE SIGNATORIES LISTED HEREIN
-------------------------
Dated as of April 9, 1999
-------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
Article 1 DEFINITIONS 1
Section 1.1 Definitions 1
Section 1.2 Rules of Construction 7
Article 2 MANAGEMENT OF THE COMPANY AND CERTAIN ACTIVITIES 7
Section 2.1 Board of Directors 7
2.1.1 Board Representation 7
2.1.2 Vacancies 8
2.1.3 Termination of Rights 9
2.1.4 Committee Representation 10
2.1.5 Costs and Expenses 10
2.1.6 Other Activities of the Holders;
Fiduciary Duties 10
Article 3 STANDSTILLS 11
Section 3.1 Capital Z Standstill 11
Section 3.2 GS Standstill 12
Article 4 CERTAIN TRANSFER PROVISIONS 14
Section 4.1 Preemptive Rights 14
4.1.1 Right to Participate in Future Issuances 14
4.1.2 Exceptions to Preemptive Rights 16
Section 4.2 Right of First Refusal 16
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 4.3 Tag-Along Rights 18
Section 4.4 Transfers by Key Employees 19
Section 4.5 Exceptions 19
Article 5 DRAG ALONG RIGHTS 20
Section 5.1 Applicability 20
Section 5.2 Notice of Significant Sale 20
Article 6 CERTIFICATE LEGEND 21
Section 6.1 Certificate Legend 21
Article 7 TERMINATION 21
Section 7.1 Termination 21
Article 8 MISCELLANEOUS 22
Section 8.1 Notices 22
Section 8.2 Issuance of Additional Stock 22
Section 8.3 Information Rights; Budgets 23
Section 8.4 Confidentiality 24
Section 8.5 Effectiveness 24
Section 8.6 Governing Law 24
Section 8.7 Successors and Assigns 24
Section 8.8 Duplicate Originals 24
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 8.9 Severability 25
Section 8.10 No Waivers; Amendments 25
Section 8.11 Entire Agreement 25
<PAGE>
THIRD AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
----------------------
THIS THIRD AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this "Stockholders
------------
Agreement") dated as of April 9, 1999 (and to become effective at the time
- ---------
hereinafter described), is entered into by and among WIT Capital Group, Inc., a
Delaware corporation (including its successors, the "Company"), and the
-------
securityholders (or persons who have entered into agreements to acquire
securities of the Company) listed on the signature pages hereof or who may
execute counterpart signature pages hereto following the date hereof, in
accordance with Section 6.1 hereto.
WHEREAS, the Company and certain securityholders of the Company are parties
to that certain Second Amended and Restated Stockholders Agreement dated as of
February 23, 1999 (the "Existing Stockholders Agreement");
-------------------------------
WHEREAS, the parties hereto desire to enter into this Stockholders
Agreement in order to, upon the effectiveness of this Agreement, amend, restate
and replace the Existing Stockholders Agreement in its entirety; and
WHEREAS, this Stockholders Agreement will automatically become effective
upon the Closing (as hereinafter defined);
NOW, THEREFORE, in consideration of the premises, mutual covenants and
agreements hereinafter contained and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE 1
DEFINITIONS
-----------
SECTION 1.1 DEFINITIONS.
-----------
"ACCREDITED INVESTOR" means an "Accredited Investor," as defined in
Regulation D, or any successor rule then in effect.
"AFFILIATE" means, with respect to any Person, any Person who,
directly or indirectly, controls, is controlled by or is under common
control with that Person. For purposes of this definition, "control" when
used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.
<PAGE>
"BENEFICIALLY OWNED" or "BENEFICIAL OWNERSHIP" shall have the meaning
assigned in Section 3.1, provided, however, that for the purposes of
-------- -------
calculating the number of shares or other securities Beneficially Owned by
Goldman Sachs Group or the GS Holders and their Controlled Affiliates there
shall be excluded from such calculation any shares Beneficially Owned by a
Controlled Affiliate of Goldman Sachs Group or any other GS Holder that are
held (i) for the account of a registered investment company advised by
Goldman Sachs Group or any of its Controlled Affiliates, (ii) in an account
with respect to which Goldman Sachs Group or any of its Controlled
Affiliates has investment or voting discretion or (iii) in a fiduciary
capacity for others.
"BUDGET" shall have the meaning provided in Section 8.3.
-----------
"CAPITAL Z" means, collectively, Capital Z Financial Services Fund II,
L.P. and Capital Z Financial Services Private Fund II, L.P.
"CAPITAL Z HOLDERS" means, collectively, Capital Z and any Affiliate
of such Person to which Capital Z, directly or indirectly, transfers Common
Stock or Common Stock Equivalents and any successive transferees thereafter
that are Affiliates of Capital Z.
"CLASS B COMMON STOCK" means shares of the Class B Common Stock, $.01
par value per share, of the Company, and any capital stock into which such
Class B Common Stock thereafter may be changed (not including any capital
stock into which the Class B Common Stock is mandatorily convertible in
accordance with its terms as of the date of original issuance of Class B
Common Stock).
"CLOSING" means the closing of the purchase of shares of Series E
Preferred Stock by the Purchaser (as defined in the Purchase Agreement)
pursuant to the Purchase Agreement.
"COMMON STOCK" means and includes the Company's authorized Voting
Common Stock and Class B Common Stock as constituted on the date hereof and
shall also include any capital stock of any class of the Company thereafter
authorized that shall not be limited to a fixed sum in respect of the
rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company.
"COMMON STOCK EQUIVALENTS" means, without duplication with any other
Common Stock or Common Stock Equivalents, any security of the Company which
is convertible into, exercisable for or exchangeable for, directly or
indirectly, Common Stock of the Company, whether at the time of issuance or
upon the passage of time or the
<PAGE>
occurrence of some future event.
"COMPANY" shall have the meaning provided in the introductory
paragraph hereof.
"CONTROLLED AFFILIATE" means, with respect to any Person, any
Affiliate of such Person who, directly or indirectly, is controlled by such
Person; provided, however, that the term "Controlled Affiliate" with
-------- -------
respect to the Ultimate General Partner shall not include any entity with
respect to which, as of the time of such determination, the Ultimate
General Partner does not have the direct or indirect power (whether through
ownership of a majority of the voting securities of such entity or by
contract or otherwise) to elect a majority of the members of the board of
directors (or equivalent governing body) of such entity.
"CO-SELLER" shall have the meaning set forth in Section 5.1 hereof.
-----------
"DFJ HOLDERS" means, collectively, Draper Fisher Jurvetson Fund V,
L.P. and Draper Fisher Jurvetson Partners, LLC and any Affiliate or partner
of such entities who is directly or indirectly transferred Common Stock or
Common Stock Equivalents or any interest therein by any DFJ Holder.
"DRAGGING HOLDERS" shall have the meaning provided in Section 5.1.
-----------
"DRAG SALE" shall have the meaning provided in Section 5.1 hereof.
-----------
"EFFECTIVE TIME" means the time of the consummation of the Closing.
"EQUIVALENT NON-VOTING STOCK" shall have the meaning provided in
Section 4.1.
-----------
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated by the SEC thereunder.
"EXISTING STOCKHOLDERS AGREEMENT" shall have the meaning set forth in
the recitals hereto.
"FIRST OPTION" shall have the meaning provided in Section 4.2 hereof.
-----------
"FULLY-DILUTED COMMON STOCK" means, at any time of determination, the
then outstanding Common Stock of the Company plus (without duplication) all
shares of Common Stock issuable, whether at such time or upon the passage
of time or the occurrence of future events, upon the conversion, exercise
or exchange of all then outstanding Common Stock Equivalents. References
in this Agreement to "own",
<PAGE>
"owning" or "ownership" of Fully-Diluted Common Stock shall be deemed to be
references to ownership of Common Stock or securities, agreements or
instruments that provide, or may with passage of time or otherwise provide,
a right to acquire Voting Common Stock.
"FULLY-DILUTED VOTING COMMON STOCK" means, at any time of
determination, the then outstanding Voting Common Stock of the Company plus
(without duplication) all shares of Voting Common Stock issuable, whether
at such time or upon the passage of time or the occurrence of future
events, upon the conversion, exercise or exchange of all then outstanding
Voting Stock Equivalents. References in this Agreement to "own", "owning"
and "ownership" of Fully-Diluted Voting Common Stock shall be deemed to be
references to ownership of Voting Common Stock or securities, agreements or
instruments that provide, or may with passage of time or otherwise provide,
a right to acquire Voting Common Stock.
"GOLDMAN SACHS GROUP" means The Goldman Sachs Group, L.P., and its
successors and permitted assigns.
"GROUP" means, in the case of any Holder, such Holder and (i) all
Affiliates of such Holder, (ii) all partners of such Holder if such Holder
is a partnership, (iii) any Person to which such Holder transfers all or
substantially all of its assets or any entity into which such Holder merges
and (iv) in the case of a Holder that is an individual, the spouse and
lineal descendants of such Holder, any trust for the benefit of such spouse
or any such lineal descendant, or any other family member of such Holder.
"GS HOLDER" means Goldman Sachs Group and any Affiliate of such Person
to which Goldman Sachs Group, directly or indirectly, transfers Common
Stock or Common Stock Equivalents and any successive transferees thereafter
that are Affiliates of Goldman Sachs Group.
"GS OPTION" shall have the meaning set forth in Section 4.1 hereof.
-----------
"GS PREEMPTION NOTICE" shall have the meaning set forth in Section 4.1
-----------
hereof.
"GS PREEMPTION TRANSACTION" shall have the meaning set forth in
Section 4.1 hereof.
-----------
"HOLDER" means (i) a securityholder that, immediately prior to the
execution and delivery of this Stockholders Agreement, was a party to the
Existing Stockholders Agreement (which is being amended and restated
pursuant to this Stockholders Agreement), including but not limited to any
securityholder who, on or after the date of
<PAGE>
the Existing Stockholders Agreement but at or prior to the Closing,
executes a counterpart signature page thereto as contemplated by the Stock
Purchase Agreement referred to therein, (ii) any other securityholder (or
person who has entered into an agreement to acquire securities of the
Company) listed on the signature pages hereof, and (iii) any direct or
indirect transferee of any such Person who shall become a party to this
Stockholders Agreement.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"KEY EMPLOYEES" means each of Robert H. Lessin and Ronald W. Readmond.
"MAJORITY CAPITAL Z HOLDERS" means Capital Z Holders holding Common
Stock and/or Common Stock Equivalents representing a majority of the Fully-
Diluted Common Stock then held by all Capital Z Holders.
"MAJORITY DFJ HOLDERS" means DFJ Holders holding Common Stock and/or
Common Stock Equivalents representing a majority of the Fully-Diluted
Common Stock then held by all DFJ Holders.
"NON-RESPONDING HOLDER" shall have the meaning provided in Section 4.1
-----------
hereof.
"OFFER NOTICE" shall have the meaning provided in Section 4.1 hereof.
-----------
"OFFERED SECURITIES" shall have the meaning provided in Section 4.1
-----------
hereof.
"OPTION HOLDERS" shall have the meaning provided in Section 4.2
-----------
hereof.
"PARTICIPATION OFFER" shall have the meaning provided in Section 4.3
-----------
hereof.
"PERSON" or "PERSONS" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization or government or other agency or
political subdivision thereof.
"PREEMPTIVE RIGHTS OFFER" shall have the meaning set forth in Section
-------
4.1 hereof.
---
"PREEMPTIVE RIGHTS OFFER NOTICE" shall have the meaning set forth in
Section 4.1 hereof.
-----------
<PAGE>
"PREEMPTIVE RIGHTS TRANSACTION" shall have the meaning set forth in
Section 4.1 hereof.
-----------
"PURCHASE AGREEMENT" means the Purchase Agreement of even date
herewith, between the Company and Goldman Sachs Group.
"QUALIFIED IPO" means an underwritten public offering of Common Stock
pursuant to a registration statement under the Securities Act where both
(i) the proceeds to the Company (prior to deducting any underwriters'
discounts and commissions) equal or exceed Twenty-Five Million Dollars
($25,000,000) and (ii) the initial price per share at which such Common
Stock is sold to the public in such offering is at least $4.50 (subject to
equitable adjustment for stock splits, stock combinations,
recapitalizations and similar occurrences).
"REGULATION D" means Regulation D promulgated under the Securities Act
by the SEC.
"RESTRICTED OFFEREE" shall have the meaning set forth in Section 4.1
-----------
hereof.
"SEC" means the U.S. Securities and Exchange Commission.
"SECOND OPTION" shall have the meaning provided in Section 4.2 hereof.
-----------
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated by the SEC thereunder.
"STANDSTILL LIMIT" shall have the meaning provided in Section 3.1.
-----------
"STOCKHOLDERS AGREEMENT" means this Third Amended and Restated
Stockholders Agreement, as such from time to time may be amended.
"SUBSIDIARY" of any Person means (i) a corporation a majority of whose
outstanding shares of capital stock or other equity interests with voting
power, under ordinary circumstances, to elect directors, is at the time,
directly or indirectly, owned by such Person, by one or more Subsidiaries
of such Person or by such Person and one or more Subsidiaries of such
Person, and (ii) any other Person (other than a corporation) in which such
Person, a Subsidiary of such Person or such Person and one or more
Subsidiaries of such Person, directly or indirectly, at the date of
determination thereof, has (x) at least a majority ownership interest or
(y) the power to elect or direct the election of the directors or other
governing body of such Person.
<PAGE>
"TRANSFER" means any sale or other disposition, whether voluntary or
involuntary, of any Common Stock and/or Common Stock Equivalent or any
interest therein.
"TRANSFEROR" shall have the meaning provided in Section 4.2 hereof.
-----------
"TRANSFEROR NOTICE" shall have the meaning provided in Section 4.2
-----------
hereof.
"VOTING COMMON STOCK" means shares of the Common Stock, $.01 per value
per share, of the Company, and any capital stock into which such Common
Stock thereafter may be changed.
"VOTING STOCK" means any capital stock of the Company which possesses
the right to vote generally in the election of directors.
"VOTING STOCK EQUIVALENTS" means, at any time of determination,
without duplication with any other Voting Stock or Voting Stock
Equivalents, any security of the Company which is convertible, exercisable
or exchangeable by the holder thereof at the relevant time of determination
into or for, directly or indirectly, Voting Stock of the Company, whether
at such time or upon the passage of time or the occurrence of some future
event. For the avoidance of doubt, Voting Stock Equivalents shall not
include those shares of Class B Common Stock, shares of the Company's
Series E Preferred Stock or warrants convertible into shares of such Series
E Preferred or shares of such Class B Common, in each case that are
Beneficially Owned by any GS Holder.
SECTION 1.2 RULES OF CONSTRUCTION. Unless the context otherwise requires
---------------------
(1) a term has the meaning assigned to it;
(2) "or" is not exclusive;
(3) words in the singular include the plural, and words in
the plural include the singular;
(4) provisions apply to successive events and transactions;
and
(5) "herein," "thereof" and other words of similar import
refer to this Stockholders Agreement as a whole and not
to any particular Article, Section or other subdivision.
<PAGE>
ARTICLE 2
MANAGEMENT OF THE COMPANY AND CERTAIN ACTIVITIES
------------------------------------------------
SECTION 2.1 BOARD OF DIRECTORS.
------------------
2.1.1 Board Representation.
--------------------
(a) The Board of Directors of the Company shall initially consist
of nine (9) individuals. Subject to Section 2.1.3, (ii) the Majority DFJ Holders
-------------
will be entitled to designate one (1) director, and (ii) the Majority Capital Z
Holders will be entitled to designate two (2) directors; provided, however, that
-------- -------
if the size of the Board of Directors of the Company is increased, then the
Majority Capital Z Holders will be entitled to designate such additional number
of directors, if any, such that the total number of directors designated by the
Majority Capital Z Holders pursuant to this sentence shall not represent (as a
percentage of the total number of directors) less than the total percentage of
all shares of Fully-Diluted Common Stock represented by the shares of Fully-
Diluted Common Stock owned by the Capital Z Holders (in the event such
percentage would result in the Majority Capital Z Holders being entitled to any
fractional director, rounding down to the nearest whole number of directors).
The existence of the right, pursuant to this Section 2.1.1(a), on the part of
----------------
the Majority DFJ Holders and the Majority Capital Z Holders to designate certain
directors will in no way limit or impair the right of the Majority DFJ Holders
and the Majority Capital Z Holders to vote their shares of Voting Stock of the
Company as they see fit with respect to the election of persons to fill seats on
the Board of Directors other than the seats filled as a result of the
designation rights under this Section 2.1.1(a).
----------------
(b) Each Holder shall vote his or its shares of Voting Stock at
any regular or special meeting of stockholders of the Company or in any written
consent executed in lieu of such a meeting of stockholders and shall take all
other actions necessary to give effect to the agreements contained in this
Stockholders Agreement (including without limitation the election of persons
designated by the Majority DFJ Holders and/or the Majority Capital Z Holders to
be elected as directors as described in the preceding paragraph) and to ensure
that the Certificate of Incorporation and bylaws of the Company do not, at any
time hereafter, conflict in any respect with the provisions of this Stockholders
Agreement. In order to effectuate the provisions of this Section 2.1, each
-----------
Holder hereby agrees that when any action or vote is required to be taken by
such Holder pursuant to this Stockholders Agreement, such Holder shall use his
or its best efforts to call, or cause the appropriate officers and directors of
the Company to call, a special or annual meeting of stockholders of the Company,
as the case may be, or execute or cause to be executed a consent in writing in
lieu of any such meetings pursuant to Section 228(a) of the General Corporation
Law of the State of Delaware.
(c) From and after the Effective Time, the GS Holders shall have
the right to
<PAGE>
designate one individual to observe all meetings of the Board of Directors of
the Company and to receive concurrently with the Directors all notices of
meetings and all distributions of materials to such Board of Directors. In the
event that at any time there is or is created any executive, operating or other
similar committee or subcommittee of the Board of Directors, Goldman Sachs Group
shall have the right to designate an individual to observe the meetings of such
committee or subcommittee and to be included in all distributions of materials
distributed to the members of such committee or subcommittee. Goldman Sachs
Group shall have the right to appoint any successor to any such designee. Such
designee may be excluded from any meeting if (but only to the extent that) the
Board of Directors determines, on advice of counsel, that such exclusion is
necessary to preserve an otherwise available attorney-client privilege; provided
--------
that the Company shall use its best efforts to minimize the frequency and length
of any such exclusion and shall in any event keep such designee informed as to
the general nature and substance of all matters reviewed during the designee's
absence. Such designee shall be subject to the provisions of Section 8.4 to the
same extent as Goldman Sachs Group.
2.1.2 Vacancies. If, prior to his election to the Board of Directors of
---------
the Company pursuant to Section 2.1.1 hereof, any designee of the Majority DFJ
-------------
Holders or the Majority Capital Z Holders shall be unable or unwilling to serve
as a director of the Company, then the Majority DFJ Holders or the Majority
Capital Z Holders, as applicable, shall be entitled to designate a replacement
designee. If, following an election to the Board of Directors of the Company
pursuant to Section 2.1.1 hereof, any designee of the Majority DFJ Holders or
-------------
the Majority Capital Z Holders shall resign or be removed or be unable to serve
for any reason prior the expiration of his term as a director of the Company,
then the Majority DFJ Holders or the Majority Capital Z Holders, as applicable,
shall, within thirty (30) days of such event, notify the Board of Directors of
the Company in writing of a replacement designee, and either (i) the Holders
shall vote their shares of Voting Stock, at any regular or special meeting
called for the purpose of filling positions on the Board of Directors of the
Company or in any written consent executed in lieu of such a meeting of
stockholders, and shall take all such other actions necessary to ensure the
election to the Board of Directors of the Company of such replacement designee
to fill the unexpired term of the designee who such new designee is replacing or
(ii) the Board of Directors shall elect such replacement designee to fill the
unexpired term of the designee who such new designee is replacing. If the
Majority DFJ Holders or the Majority Capital Z Holders request that any of their
respective designees be removed as a director (with or without cause) by written
notice thereof to the Company, then each of the Holders shall vote all of its or
his Voting Stock in favor of, such removal upon such request.
2.1.3 Termination of Rights.
---------------------
(a) The right of the DFJ Holders to designate directors under
Section 2.1.1 and Section 2.1.2, and the obligation of the Holders to vote
- ------------- -------------
their shares as provided herein with respect to such designees, shall
terminate upon the first to occur of (i) the termination or expiration of this
Stockholders Agreement or Section 2.1.1(a), (ii) such time as the Majority DFJ
----------------
<PAGE>
Holders elect in writing to terminate their rights under Article 2, or (iii)
---------
such time as the DFJ Holders collectively cease to own at least five percent
(5%) of the Fully-Diluted Common Stock.
(b) The right of the Capital Z Holders to designate directors
under Section 2.1.1 and Section 2.1.2, and the obligation of the Holders to
------------- -------------
vote their shares as provided herein with respect to such designees, shall
terminate upon the first to occur of (i) the termination or expiration of this
Stockholders Agreement or Section 2.1.1(a), (ii) such time as the Majority
----------------
Capital Z Holders elect in writing to terminate their rights under this Article
-------
2, or (iii) such time as the Capital Z Holders collectively cease to own at
- -
least five percent (5%) of the Common Stock (assuming that all of the
outstanding preferred shares of the Company that are convertible into Common
Stock have been so converted). In addition, prior to the time that the right of
the Majority Capital Z Holders to designate directors is terminated in
accordance with the provisions of the immediately preceding sentence, the number
of directors that the Majority Capital Z Holders are entitled to designate will
be decreased from two (2) directors to one (1) director from and following the
time that the Capital Z Holders collectively cease to own at least fifteen
percent (15%) of the Common Stock (assuming that all of the outstanding
preferred shares of the Company that are convertible into Common Stock have been
so converted).
(c) The right of the GS Holders to designate an observer to
meetings of the Board of Directors or certain committees thereof under
Section 2.1.1 shall terminate upon the first to occur of (i) the termination or
- -------------
expiration of this Stockholders Agreement or this Section 2.1.3(c), (ii) such
----------------
time as the GS Holders elect in writing to terminate their rights under
Article 2, or (iii) such time as the GS Holders collectively cease to own at
- ---------
least five percent (5%) of the Fully-Diluted Common Stock.
2.1.4 Committee Representation. So long as the Capital Z Holders are
------------------------
entitled to designate any directors under Section 2.1.1, at least one (1) of the
-------------
directors designated by the Majority Capital Z Holders shall be permitted to
serve on each committee of the Board of Directors of the Company. So long as
the DFJ Holders are entitled to designate any director under Section 2.1.1, the
-------------
director designated by the Majority DFJ Holders shall be permitted to serve on
the Compensation Committee and the Audit Committee of the Board of Directors of
the Company.
2.1.5 Costs and Expenses. The Company will pay all reasonable out-of-
------------------
pocket expenses incurred by in connection with the participation by directors
and any designated observers in meetings of the Board of Directors (and
committees thereof) of the Company and the Boards of Directors (and committees
thereof) of any Subsidiaries of the Company.
2.1.6 Other Activities of the Holders; Fiduciary Duties. It is
-------------------------------------------------
understood and accepted that the Holders and their Affiliates have interests in
other business ventures which may be in conflict with the activities of the
Company and its Subsidiaries and that nothing in this Stockholders Agreement
shall limit the current or future business activities of the Holders and
<PAGE>
their Affiliates whether or not such activities are competitive with those of
the Company and its Subsidiaries. Except as may be expressly agreed by the
Company and a Holder, no Holder or any Affiliate of a Holder shall be under any
obligation to refer business of any type to the Company or its Affiliates or
Subsidiaries and no Holder (nor its respective officers, directors,
representatives, control persons, Affiliates or Subsidiaries) will be liable to
the Company or any other Holder for engaging in any business engaged in by the
Company or pursuing any corporate opportunity pursued by the Company or
acquiring or attempting to acquire any business the Company has attempted or
attempts to acquire. Except as provided in this Section 2.1.6, nothing in this
Stockholders Agreement, express or implied, shall relieve any officer or
director of the Company or any of its Subsidiaries, or any Holder, of any
fiduciary or other duties or obligations they may have to the Company's
stockholders. The Company and each of the other signatories hereto (other than
Goldman Sachs Group) hereby acknowledges that the GS Holders and any observer of
Board of Directors meetings designated by it or them have no fiduciary duties
with respect to the stockholders of the Company and that the status of any GS
Holder with respect to the Company is solely as a stockholder and that its
relationship to the Company is otherwise a contractual one.
ARTICLE 3
STANDSTILLS
-----------
SECTION 3.1 CAPITAL Z STANDSTILL.
--------------------
(a) For a period commencing upon the Closing and ending on the later
of (i) three (3) years after the Closing or (ii) if a Qualified IPO is
consummated within two years after the Closing, three years after the
consummation of such Qualified IPO, neither Capital Z nor Capital Z Partners,
Ltd., the ultimate general partner of Capital Z (the "Ultimate General
Partner") shall (nor shall the Ultimate General Partner permit any of its
Controlled Affiliates to), without the prior affirmative vote or written consent
of a majority of the directors of the Company (without counting as a director
for such purpose any director designated by the Capital Z Holders or the
proposed transferor or any Affiliate of either) directly or indirectly,
authorize or make a tender, exchange or other offer for, or purchase or
otherwise acquire, or agree to acquire, or obtain, directly or indirectly,
beneficial ownership (as defined in Rule 13d-3 promulgated under the Exchange
Act ("Beneficially Owned" or "Beneficial Ownership")) of any Common Stock or
------------------ --------------------
Common Stock Equivalents (except, in any case, by way of stock dividends or
other distributions or rights offerings made available to holders of any Common
Stock generally), if the effect of such acquisition would be to increase the
aggregate number of shares of Common Stock and Common Stock Equivalents then
Beneficially Owned by Capital Z and the Ultimate General Partner and its
Controlled Affiliates to an amount equal to or in excess of 25% of the total
Fully-Diluted Common Stock (the "Standstill Limit"). Notwithstanding the
----------------
foregoing, for the purposes of calculating the number of shares of Common Stock
and Common
<PAGE>
Stock Equivalents Beneficially Owned by Capital Z and the Ultimate General
Partner and its Controlled Affiliates, there shall be excluded from such
calculation any shares or other securities owned by any insurance company or
financial institution which is a Controlled Affiliate of the Ultimate General
Partner as part of such Controlled Affiliate's investment portfolio (and not
owned for the purpose of affecting control of the Company). Capital Z represents
and warrants to the Company that no single Person owns, together with its
Affiliates, in excess of 10% of the voting power of the Ultimate General
Partner.
(b) The provisions of this Section 3.1 shall terminate prior to
-----------
expiration, and Capital Z or the Ultimate General Partner and its Controlled
Affiliates shall be free to acquire Common Stock without regard to the
Standstill Limit, at such earlier time as (A) prior to the Qualified IPO, any
Person other than Capital Z and the Ultimate General Partner or any of its
Controlled Affiliates (and other than any Person acting in concert with Capital
Z or the Ultimate General Partner or any of its Controlled Affiliates) acquires
Beneficial Ownership of Common Stock or Common Stock Equivalents representing,
together with any Common Stock or Common Stock Equivalents already Beneficially
Owned by such Person and its Affiliates, at least 25% of the total Fully-Diluted
Common Stock or (B) following the Qualified IPO, the earlier of the date on
which (i) any Person other than Capital Z or the Ultimate General Partner or any
of its Controlled Affiliates (and other than any Person acting in concert with
Capital Z or the Ultimate General Partner or any of its Controlled Affiliates)
acquires Beneficial Ownership of Common Stock or Common Stock Equivalents
representing, together with any Common Stock or Common Stock Equivalents already
Beneficially Owned by such Person and its Affiliates, at least 25% of the total
Fully-Diluted Common Stock or (ii) any Person other than Capital Z or the
Ultimate General Partner or any of its Controlled Affiliates (and other than any
Person acting in concert with Capital Z or the Ultimate General Partner or any
of its Controlled Affiliates) notifies in writing the Company or its Board of
Directors, or publicly announces, that it has acquired or that it intends to
acquire or offer to acquire (including but not limited to any offer to acquire
by means of a tender offer) (and in connection therewith discloses, in a
Schedule 13D or 14D-1 (or any other successor schedule or form promulgated or
adopted for such purpose by the Securities and Exchange Commission) filed under
the Exchange Act, or otherwise, an intention to acquire or offer to acquire)
Beneficial Ownership of Common Stock or Common Stock Equivalents representing,
together with any Common Stock already Beneficially Owned by such Person and its
Affiliates, at least 25% of the total Fully-Diluted Common Stock (and does not,
prior to any acquisition by Capital Z or the Ultimate General Partner or any of
its Controlled Affiliates of any Common Stock that would otherwise be prohibited
by this Section 3.1, disclose in any statement of which Capital Z has or could
-----------
reasonably be expected to have knowledge of an intention not to proceed with
such acquisition); provided, that the Company reasonably believes that (i) such
--------
Person is financially capable of consummating such acquisition and (ii) such
Person has a serious and bona fide intention to consummate such acquisition.
(c) The Capital Z Holders agree that it or they shall not exercise
any preemptive right otherwise provided under Section 4.1 or any right of first
-----------
refusal otherwise
<PAGE>
provided under Section 4.2 if such exercise would violate the provisions of
-----------
Section 3.1(a) and cause Capital Z's and the Ultimate General Partner's and its
- --------------
Controlled Affiliates' aggregate Beneficial Ownership of Common Stock and Common
Stock Equivalents to exceed the Standstill Limit; provided, however, that any
-------- -------
exercise (or indication of intention to exercise) by another Holder of any
preemptive right under Section 4.1 or any right of first refusal under Section
----------- -------
4.2 which would result in such Holder and its Affiliates collectively
- ---
Beneficially Owning at least 25% of the total Fully-Diluted Common Stock will be
deemed to constitute an action which, pursuant to Section 3.1(b), will terminate
--------------
the provisions of this Section 3.1.
-----------
SECTION 3.2 GS STANDSTILL.
-------------
(a) For a period commencing upon the Closing and ending on the
later of (i) three (3) years after the Closing or (ii) if a Qualified IPO is
consummated within two years after the Closing, three years after the
consummation of such Qualified IPO, the GS Holders shall not (and shall not
permit any of its Controlled Affiliates to), without the prior affirmative vote
or written consent of a majority of the directors of the Company, directly or
indirectly, authorize or make a tender, exchange or other offer for, or purchase
or otherwise acquire, or agree to acquire, or obtain, directly or indirectly,
Beneficial Ownership of any Common Stock or Common Stock Equivalents (except, in
any case, by way of stock dividends or other distributions or rights offerings
made available to holders of any Common Stock generally and except pursuant to
Section 4.1.1(b)), if the effect of such acquisition would be to increase the
- ----------------
aggregate number of shares of Common Stock and Common Stock Equivalents then
Beneficially Owned by the GS Holder and its or their Controlled Affiliates to an
amount at least equal to the Standstill Limit.
(b) The provisions of this Section 3.2 shall terminate prior to
-----------
expiration, and Goldman Sachs Group and its Controlled Affiliates shall be free
to acquire Common Stock without regard to the Standstill Limit, at such earlier
time as (A) prior to the Qualified IPO, any Person other than Goldman Sachs
Group or any Controlled Affiliates thereof (and other than any Person acting in
concert with Goldman Sachs Group or any Controlled Affiliates thereof) acquires
Beneficial Ownership of Common Stock or Common Stock Equivalents representing,
together with any Common Stock or Common Stock Equivalents already Beneficially
Owned by such Person and its Affiliates, at least 25% of the total Fully-Diluted
Common Stock or (B) following the Qualified IPO, the earlier of the date on
which (i) any Person other than Goldman Sachs Group or any Controlled Affiliates
thereof (and other than any Person acting in concert with Goldman Sachs Group or
any Controlled Affiliates thereof) acquires Beneficial Ownership of Common Stock
or Common Stock Equivalents representing, together with any Common Stock or
Common Stock Equivalents already Beneficially Owned by such Person and its
Affiliates, at least 25% of the total Fully-Diluted Common Stock or (ii) any
Person other than Goldman Sachs Group or any Controlled Affiliates thereof (and
other than any Person acting in concert with Goldman Sachs Group or any
Controlled Affiliates thereof) notifies in writing the Company or its Board of
Directors, or publicly announces, that it has acquired or that it intends
<PAGE>
to acquire or offer to acquire (including but not limited to any offer to
acquire by means of a tender offer) (and in connection therewith discloses, in a
Schedule 13D or 14D-1 (or any other successor schedule or form promulgated or
adopted for such purpose by the Securities and Exchange Commission) filed under
the Exchange Act, or otherwise, an intention to acquire or offer to acquire)
Beneficial Ownership of Common Stock or Common Stock Equivalents representing,
together with any Common Stock already Beneficially Owned by such Person and its
Affiliates, at least 25% of the total Fully-Diluted Common Stock (and does not,
prior to any acquisition by Goldman Sachs Group or any Controlled Affiliates
thereof of any Common Stock that would otherwise be prohibited by this Section
-------
3.1, disclose in any statement of which Goldman Sachs Group has or could
- ---
reasonably be expected to have knowledge of an intention not to proceed with
such acquisition); provided, that the Company reasonably believes that (i) such
--------
Person is financially capable of consummating such acquisition and (ii) such
Person has a serious and bona fide intention to consummate such acquisition.
(c) The GS Holders agree that it or they shall not exercise any
preemptive right otherwise provided under Section 4.1 or any right of first
-----------
refusal otherwise provided under Section 4.2 if such exercise would violate the
-----------
provisions of Section 3.2(a) and cause the GS Holders' and their Controlled
--------------
Affiliates' aggregate Beneficial Ownership of Common Stock and Common Stock
Equivalents to exceed the Standstill Limit; provided, however, that any shares
-------- -------
of Common Stock or Common Stock Equivalents (and any securities into which such
shares or Common Stock Equivalents may be converted or exchanged) acquired or
proposed to be acquired by the GS Holders pursuant to acceptance of a GS Option
pursuant to Section 4.1.1(b) shall not be taken into account in any calculation
----------------
of the GS Holders' aggregate Beneficial Ownership for purposes of this Section
-------
3.2 and; provided, further, that any exercise (or indication of intention to
- --- -------- ------- ----
exercise) by another Holder of any preemptive right under Section 4.1 or any
-----------
right of first refusal under Section 4.2 which would result in such Holder and
-----------
its Affiliates collectively Beneficially Owning at least 25% of the total Fully-
Diluted Common Stock will be deemed to constitute an action which, pursuant to
Section 3.2(b), will terminate the provisions of this Section 3.2.
- -------------- -----------
ARTICLE 4
CERTAIN TRANSFER PROVISIONS
---------------------------
SECTION 4.1 PREEMPTIVE RIGHTS.
-----------------
4.1.1 Right to Participate in Future Issuances.
----------------------------------------
(a) In case the Company proposes at any time to issue or sell any
Common Stock or Common Stock Equivalents (the "Offered Securities"), the Company
------------------
shall, no later than twenty-five (25) days prior to the consummation of such
transaction (a "Preemptive Rights
<PAGE>
Transaction"), give notice in writing (the "Preemptive Rights Offer Notice") to
------------------------------
each Holder of such Preemptive Rights Transaction. The Preemptive Rights Offer
Notice shall describe the proposed Preemptive Rights Transaction, identify the
proposed purchaser, and contain an offer (the "Preemptive Rights Offer") to sell
-----------------------
to each Holder, at the same price and for the same consideration to be paid by
the proposed purchaser (provided, that, in the event any of such consideration
--------
is non-cash consideration, at the election of such Holder to whom the Preemptive
Rights Offer is made, such Holder may pay cash equal to the value of such non-
cash consideration), all or any part of such Holder's pro rata portion of the
Offered Securities (which shall be a percentage of the Offered Securities equal
to the percentage of all Fully-Diluted Common Stock then outstanding (or deemed
outstanding) that is represented by the Fully-Diluted Common Stock owned by such
Holder). If any Holder to whom a Preemptive Rights Offer is made fails to accept
(a "Non-Responding Holder") in writing the Preemptive Rights Offer by the
---------------------
fifteenth (15th) day after the Company's delivery of the Preemptive Rights Offer
Notice, such Non-Responding Holders shall have no further rights with respect to
the proposed Preemptive Rights Transaction, and the Company shall provide a
second Preemptive Rights Offer Notice to the Holders (other than the Non-
Responding Holders) containing a Preemptive Rights Offer to each such Holder to
purchase such Holder's pro rata portion (which shall be a percentage of the
Offered Securities that were offered to the Non-Responding Holders equal to the
percentage of all Fully-Diluted Common Stock then outstanding (or deemed
outstanding) and owned by the Holders other than the Non-Responding Holders,
that is represented by the Fully-Diluted Common Stock then outstanding (or
deemed outstanding) owned by such Holder) of the Offered Securities which were
not accepted by such Non-Responding Holders. If any Holder to whom a second
Preemptive Rights Offer is made fails to accept in writing the second Preemptive
Rights Offer by the fifth (5th) day after the Company's delivery of the second
Preemptive Rights Offer Notice thereto, the Company may, subject to the
provisions of Section 4.1.1(b), proceed with the proposed Preemptive Rights
----------------
Transaction, free of any right on the part of such Holder and any Non-Responding
Holders under this Section 4.1.1 in respect thereof. For purposes of Preemptive
-------------
Rights Offer Notices and Preemptive Rights Offers, if at the time of any
Preemptive Rights Offer Notice, a Holder to whom a Preemptive Rights Offer is
made holds only capital stock of the Company that is not Voting Stock, the
"Offered Securities" with respect to such Holder shall be securities of the
Company that do not constitute Voting Stock but are in every other respect
equivalent to the Offered Securities with respect to each other Holder
("Equivalent Non-Voting Stock").
---------------------------
(b) In case (i) the Company proposes at any time following the
Effective Time to issue or sell to any Person identified on Schedule 4.1 hereto
or any Affiliate of such a Person (a "Restricted Offeree") Offered Securities
------------------
(for purposes of this Section 4.1.1(b), "shares"), except in connection with a
----------------
merger or other transaction which results in a change in control of the Company,
which would result in such Person Beneficially Owning in excess of 5% of the
total Fully-Diluted Common Stock after giving effect to such issuance and sale,
(ii) a GS Holder is at such time the Beneficial Owner of Common Stock or Common
Stock Equivalents
<PAGE>
constituting not less than 10% of the Fully-Diluted Common Stock and (iii) (x)
the Company has made Preemptive Rights Offers with respect to the shares in
accordance with Section 4.1.1(a) and would be entitled, but for this Section
---------------- -------
4.1.1(b), to engage in the Preemptive Rights Transaction with respect to such
- --------
number of shares as any Non-Responding Holders and other Holders fail to accept
in accordance with the terms of Section 4.1.1(a), (y) the Company has not made a
----------------
Preemptive Rights Offer with respect to the shares pursuant to an exception to
the Company's obligation to do so under Section 4.1.2 and would, but for this
-------------
Section 4.1.1(b), be entitled to proceed with the issue or sale to a Restricted
- ----------------
Offeree or (z) Section 4.1.1(a) has been terminated in accordance with the terms
----------------
of this Agreement and the Company would, but for this Section 4.1.1(b), be
----------------
entitled to proceed with the issue or sale to a Restricted Offeree, then in any
such case the Company shall, not less than twenty (20) days (five (5) days in
the event that sub-clause (x) applies) prior to the proposed consummation of
such transaction (a "GS Preemption Transaction"), give notice in writing (a "GS
------------------------- --
Preemption Notice") to the GS Holders of such GS Preemption Transaction. The GS
- -----------------
Preemption Notice shall (i) specify the name of the Restricted Offeree, the
number of shares to be issued, the amount and type of consideration to be
received therefor, and the other material terms on which the Company proposes to
issue the shares that the Company would otherwise be permitted to issue and sell
to a Restricted Offeree and (ii) contain an offer to sell to the GS Holders all
of such shares (the "GS Option") at the same price per share and for
---------
consideration consisting of (x) cash equal to the amount of cash proposed to be
paid by the Restricted Offeree and (y) if any of the consideration to be paid by
the Restricted Offeree is non-cash consideration, either the same non-cash
consideration or, at the election of the GS Holders, cash having an equivalent
value to the non-cash consideration proposed to be paid by the Restricted
Offeree. The determination of equivalent value required by the preceding
sentence shall be made by a nationally recognized firm that regularly makes
appraisals of the type required, to be selected by mutual agreement of the
Company and the GS Holders and to be unaffiliated with such Persons, it being
understood that the fees and expenses of such firm shall be paid by the Company.
If the GS Holders (A) fail to notify the Company in writing within fifteen (15)
days (five (5) days in the event that subclause (x) of the first sentence of
this Section 4.1.1(b) applies) after receipt of the GS Preemption Notice that it
----------------
or they elect to accept all of the GS Option or (B) by written notice within
such 15-day (or 5-day) period reject the GS Option in whole, the Company may
issue all shares covered by the GS Preemption Notice and not accepted by the GS
Holders to the proposed transferee in accordance with the terms of such issue
set forth in the GS Preemption Notice; provided, however, that the consummation
-------- -------
of such issuance must occur no later than seventy-five (75) days after the date
the GS Preemption Notice was received by the Company or five (5) days after the
expiration or termination of any waiting period applicable to such transfer
pursuant to the HSR Act, whichever is later. If the GS Option is accepted in a
manner such that all shares covered by the GS Preemption Notice are to be
purchased, the Company shall issue all such shares (or Equivalent Non-Voting
Stock) to the accepting GS Holder within twenty (20) days after the date such
offer is accepted by the GS Holders, against delivery by the purchaser of the
consideration payable to the Company as set forth in the GS Preemption Notice;
provided that, if the HSR Act is applicable to the GS Option, such date shall be
- --------
extended to the date which is five days after the date the applicable waiting
<PAGE>
period expires or is terminated.
4.1.2 Exceptions to Preemptive Rights. Section 4.1.1 (a) shall not apply
------------------------------- -------------
to (i) issuances or sales of Common Stock or Common Stock Equivalents upon
exercise, conversion or exchange of any Common Stock Equivalent which, when
issued, was subject to or exempt from the preemptive rights provided under this
Section 4.1, (ii) shares of capital stock issued in a stock split or stock
- -----------
dividend or shares of capital stock or other securities distributed ratably or
sold to all holders of Common Stock on a per share equivalent basis, (iii)
issuances of Common Stock or Common Stock Equivalents pursuant to any exercise,
conversion or exchange of any Common Stock Equivalent that was outstanding as of
the date of this Stockholders Agreement, (iv) issuances of Common Stock
Equivalents pursuant to the Purchase Agreement, (v) issuances or sales of Common
Stock or Common Stock Equivalents pursuant to acquisitions or strategic
investments or corporate partnering transactions or relationships, (vi)
issuances of Common Stock or Common Stock Equivalents pursuant to a merger of
the Company or a Subsidiary of the Company into or with another entity or
pursuant to an acquisition by the Company or a Subsidiary of the Company of the
capital stock or assets of another business, (vii) compensatory issuances of
options, restricted stock or other equity rights to officers, employees,
directors or consultants of the Company with approval of the Board of Directors
of the Company, (viii) issuances or sales of Common Stock in a Qualified IPO,
(ix) issuances of Common Stock or Common Stock Equivalents pursuant to
commercial transactions approved by the Board of Directors of the Company
(including but not limited to equipment leases or bank lines of credit), or (x)
issuances of Common Stock or Common Stock Equivalents approved in advance by
holders of a majority of the Fully-Diluted Common Stock held by all Holders.
SECTION 4.2 RIGHT OF FIRST REFUSAL. If at any time a Holder other than a
----------------------
Key Employee (a "Transferor") has received a bona fide offer to purchase any or
all of the shares of Common Stock and/or Common Stock Equivalents beneficially
owned by the Transferor and such Transferor desires to accept such offer to
purchase, or if a Transferor otherwise proposes to Transfer for value any shares
of Common Stock and/or Common Stock Equivalents (for purposes of this Section
-------
4.2, "shares") to any Person, the Transferor shall, not less than thirty (30)
- ---
days prior to the anticipated closing of such Transfer, give written notice (the
"Transferor's Notice") to the Company and the other Holders of such proposed
-------------------
Transfer. The Transferor's Notice shall (i) specify the proposed transferee
thereof, the number of shares to be transferred, the amount and type of
consideration to be received therefor, and the other material terms on which the
Transferor proposes to Transfer the Common Stock and/or Common Stock
Equivalents, (ii) contain an undertaking by the proposed transferee, if
applicable, to honor any Participation Offer which is made in accordance with
the terms of Section 4.3 hereof, and (iii) contain the following offer:
-----------
The Transferor shall offer to sell (the "First Option") all such
------------
shares to the Company at the same price per share and for consideration
consisting of (x) cash equal to the amount of cash proposed to be paid by
the proposed transferee and
<PAGE>
(y) if any of the consideration to be paid by the proposed transferee is
non-cash consideration, either the same non-cash consideration or, at the
election of the Company, cash having an equivalent value to the non-cash
consideration proposed to be paid by the proposed transferee. The
determination of equivalent value required by the preceding sentence, as
well as the decision whether or not the Company will accept the First
Option, in any particular instance shall be made by a committee of the
Board of Directors of the Company, excluding therefrom any directors
designated by the Transferor or proposed transferee (or any Affiliate
thereof) utilizing any method and/or advisory assistance it deems
appropriate, and the Company shall give the Transferor and the other
Holders written notice of such determination within fifteen (15) days after
receipt of the Transferor's Notice. Notwithstanding the foregoing, in the
event the Transferor disputes the determination of equivalent value made
pursuant to the immediately preceding sentence, the Company shall engage a
nationally recognized investment banking firm to recompute the equivalent
value of the non-cash consideration offered by the Company pursuant to the
First Option, it being understood that the fees and expenses of such
investment banking firm shall be paid one-half by the Company and one-half
by the Transferor, and the investment banking firm's method of calculation
of equivalent value shall be used in determining the amount of non-cash
consideration permitted to be paid by the Company pursuant to the First
Option or by the Option Holders pursuant to the Second Option (in each
case, as defined below). If the Company (A) fails to notify the Transferor
in writing within fifteen (15) days after receipt of the Transferor's
Notice that it elects to accept the First Option or (B) by written notice
within such 15-day period rejects the First Option in whole or in part, the
Transferor shall offer to sell (the "Second Option") the shares not to be
-------------
so purchased to the other Holders (the "Option Holders") at the same price
--------------
per share and for consideration consisting of (x) cash in an amount equal
to the amount of cash proposed to be paid by the proposed transferee and
(y) cash or non-cash consideration, if any, having an equivalent value
(determined as provided above) with the non-cash consideration proposed to
be paid by the proposed transferee. The Option Holders may purchase the
shares so offered in the proportions upon which they mutually agree, or, if
they are unable to agree upon an allocation of such shares among
themselves, then in proportion to the number of shares of Fully-Diluted
Common Stock owned by each such Option Holder who wishes to participate in
the purchase of such shares pursuant to the Second Option. The Second
Option may be accepted by one or more of such Option Holders by written
notice delivered to the Transferor within thirty (30) days after receipt of
the Transferor's Notice; provided, however, that any Option Holder who
-------- -------
holds only capital stock of the Company that is not Voting Stock shall be
entitled to accept shares under a Second Option, subject to the exchange of
any Voting Stock or Voting Stock Equivalents thereby offered to Equivalent
Non-Voting Stock, and the Company shall cause such exchange.
<PAGE>
Unless, through exercise of the First Option and/or the Second Option, all
the securities proposed to be transferred in the Transferor's Notice are to
be acquired by the Company and/or the Option Holders, the Transferor may
transfer, subject to Section 4.3 hereof, all shares covered by the
-----------
Transferor's Notice to the proposed transferee in accordance with the terms
of such transfer set forth in the Transferor's Notice; provided, however,
-------- -------
that such transfer must occur no later than seventy-five (75) days after
the date the Transferor's Notice was received by the Company or five (5)
days after the expiration or termination of any waiting period applicable
to such transfer pursuant to the HSR Act, whichever is later. If the First
Option and/or the Second Option, as the case may be, is accepted in a
manner such that all shares covered by the Transferor's Notice are to be
purchased, the Transferor shall transfer all such shares (free of all liens
and encumbrances except this Agreement, all as reasonably determined by the
Company) to the respective purchasers thereof within twenty (20) days after
the date such offer is accepted by the Company and/or Option Holders,
whichever is later, against delivery by the purchaser of the consideration
payable to the Transferor as set forth in the Transferor's Notice; provided
--------
that, if the HSR Act is applicable to the First Option or the Second
Option, such date shall be extended to the date which is five days after
the date the applicable waiting period expires or is terminated.
SECTION 4.3 TAG-ALONG RIGHTS. In the event that a Transferor proposes, in
----------------
a single transaction or series of related transactions, to Transfer for value
Common Stock and/or Common Stock Equivalents representing (alone or together
with Common Stock and/or Common Stock Equivalents to be Transferred by other
Transferors in such transaction or series of related transactions) at least five
percent (5%) of the Fully-Diluted Common Stock, then the Transferor's Notice
delivered pursuant to Section 4.2 hereof shall also state (the "Participation
----------- -------------
Offer") that, in lieu of exercising the Second Option, each Option Holder may
- -----
request to have included in the proposed Transfer such Option Holder's pro rata
portion of the Common Stock and/or Common Stock Equivalents to be Transferred
(which shall be based on the number of shares of Common Stock and/or Common
Stock Equivalents held by the Transferor and any Option Holders exercising tag-
along rights under this Section 4.3 ) at the same per share price and for the
-----------
same consideration that the Transferor proposes to sell the Common Stock and/or
Common Stock Equivalents to be Transferred (it being understood that the price
to be paid for any Common Stock Equivalents will be based on the per share price
to be paid for the Common Stock less the exercise price or any other amount
payable upon exercise or conversion then applicable to such Common Stock
Equivalents). The Participation Offer shall be conditioned upon the execution
and delivery by each Option Holder that accepts the Participation Offer of all
agreements and other documents as the Transferor is required to execute and
deliver in connection with such proposed Transfer, reflecting the same per share
price and other terms as for the Transferor. If the First Option and/or Second
Option is not exercised with respect to all
<PAGE>
the securities proposed to be transferred by the Transferor and any Option
Holder shall accept the Participation Offer, the Transferor shall reduce, to the
extent necessary, the number of shares of Common Stock and Common Stock
Equivalents it otherwise would have sold in the proposed Transfer so as to
permit those Option Holders who have accepted the Participation Offer to sell
the number of shares of Common Stock and/or Common Stock Equivalents, if
applicable, that they are entitled to sell under this Section 4.3, and the
-----------
Transferor and such Option Holders shall transfer the number of shares of Common
Stock and/or, if applicable, Common Stock Equivalents specified in the
Participation Offer to the proposed transferee in accordance with the terms of
such Participation Offer. Notwithstanding the foregoing, if the transferee
refuses to purchase any Common Stock and/or Common Stock Equivalents, if
applicable, proposed to be sold by each Option Holder that accepts the
Participation Offer, the Transferor shall be prohibited from consummating the
Transfer in respect of which the Participation Offer was made.
SECTION 4.4 TRANSFERS BY KEY EMPLOYEES.
--------------------------
(a) Subject to Section 4.4(b), no Key Employees shall Transfer any
--------------
Common Stock and/or Common Stock Equivalents unless all of the Common Stock and
Common Stock Equivalents of the Company are being transferred as part of the
same transaction.
(b) Notwithstanding the provision of paragraph (a) of this Section
-------
4.4, following the consummation of a Qualified IPO, each of the two Key
Employees may Transfer in any given calendar year, the sum of (i) one half of
the number of securities he could sell into the public market during each
calendar quarter of such year under Rule 144 promulgated under the Securities
Act without registration under the Securities Act (prorated for the partial year
in which the Qualified IPO is consummated, and calculated assuming that such Key
Employee at all times is an "affiliate" of the Company for purposes of such
rule), plus (ii) if any Capital Z Holder Transfer of any of its shares
(including any disposition or distribution to any partner of such Capital Z
Holder, but excluding any Transfers between Capital Z Financial Services Fund
II, L.P. and Capital Z Financial Services Private Fund II, L.P.), that number of
his securities as represents the same percentage of the securities so
Transferred by such Capital Z Holder, plus, (iii) any amount of securities
permitted to be Transferred under this provision in a prior calendar year that
he did not so Transfer.
SECTION 4.5 EXCEPTIONS. In no event shall any exchange, reclassification,
----------
or other conversion of shares of Common Stock or Common Stock Equivalents into
any cash, securities, or other property pursuant to a recapitalization or a
merger or consolidation of the Company or any Subsidiary of the Company with,
any sale of all of the outstanding Common Stock and Common Stock Equivalents to,
or any sale or Transfer by the Company or any Subsidiary of the Company of all
or substantially all its assets to, any Person (a "Corporate Transaction")
---------------------
constitute a Transfer of shares of Common Stock or Common Stock Equivalents for
purposes of Section 4.2, Section 4.3, or Section 4.4 hereof. In addition,
----------- ----------- -----------
Section 4.2, Section 4.3 and Section 4.4 hereof shall not apply to any Transfer
- ----------- ----------- -----------
of Common Stock or Common Stock
<PAGE>
Equivalents by a Holder to a member of such Holder's Group; provided, however,
-------- -------
that, for purposes of Section 4.4, any member of a Key Employee's Group who
-----------
acquires securities of any Key Employee will itself be deemed (together with
such Key Employees transferor) to constitute a single Key Employee for purposes
of Section 4.4.
-----------
ARTICLE 5
DRAG ALONG RIGHTS
-----------------
SECTION 5.1 APPLICABILITY. In the event Holders who collectively own more
-------------
than fifty percent (50%) of the Fully-Diluted Common Stock propose to Transfer
for value in a bona fide sale to an unaffiliated third party on an arm's-length
---- ----
basis, in a single transaction or series of related transactions, Common Stock
and/or Common Stock Equivalents representing a majority of the Fully-Diluted
Common Stock in a case which the right of first refusal provided for in Section
-------
4.2 hereof has not been exercised with respect to all such Common Stock and/or
- ---
Common Stock Equivalents proposed to be Transferred (a "Drag Sale"), such
---------
Holders (the "Dragging Holders") shall have the right to require each non-
----------------
selling Holder (each, a "Co-Seller") to Transfer a portion of its Common Stock
---------
and/or Common Stock Equivalents which represents the same percentage of the
Fully-Diluted Common Stock held by such Co-Seller as the shares being disposed
of by the Dragging Holder represent of the Fully-Diluted Common Stock held
collectively by the Dragging Holders. (For example, if the Dragging Holders
collectively are selling fifty percent (50%) of their Fully-Diluted Common Stock
position, each Co-Seller shall be required to sell fifty percent (50%) of its
Fully-Diluted Common Stock position. All Common Stock or Common Stock
Equivalents (it being understood that the price to be paid for any Common Stock
Equivalents will be based on the per share price to be paid for the Common Stock
less the exercise price or any other amount payable upon exercise or conversion
then applicable to such Common Stock Equivalents) Transferred by Holders
pursuant to this Section 5.1 shall be sold at the same price and otherwise
-----------
treated identically with the Common Stock or Common Stock Equivalents being sold
by the Dragging Holders in all respects; provided, that the Co-Seller shall not
be required to make any representations or warranties in connection with such
Transfer other than representations and warranties as to (i) such Co-Seller's
ownership of his or its Common Stock and/or Common Stock Equivalents to be
Transferred free and clear of all liens, claims and encumbrances, (ii) such Co-
Sellers power and authority to effect such Transfer, and (iii) such matters
pertaining to compliance with securities laws as the transferee may reasonably
require except the transferee may not require that each Co-Seller be an
Accredited Investor.
SECTION 5.2 NOTICE OF SIGNIFICANT SALE. The Dragging Holders shall give
--------------------------
each Co-Seller at least thirty (30) days' prior written notice of any Drag Sale
as to which the Dragging Holders intend to exercise their rights under this
Section 5.2. If the Dragging Holders elect to exercise their rights under this
- -----------
Section 5.2, the Co-Sellers shall take such actions as may be
- -----------
<PAGE>
reasonably required and otherwise cooperate in good faith with the Dragging
Holders in connection with consummating the Drag Sale (including, without
limitation, the voting of Common Stock or other voting capital stock of the
Company to approve such Drag Sale). At the closing of such Drag Sale, each Co-
Seller shall deliver certificates for all shares of Common Stock and/or Common
Stock Equivalent to be sold by such Co-Seller, duly endorsed for transfer, with
the signature guaranteed, to the purchaser against payment of the appropriate
purchase price.
ARTICLE 6
TRANSFERS; CERTIFICATE LEGEND
-----------------------------
SECTION 6.1 TRANSFERS SUBJECT TO THIS AGREEMENT. Other than transfers to
-----------------------------------
the public pursuant to an effective registration statement or sales to the
public pursuant to Rule 144 promulgated under the Securities Act otherwise
permitted hereunder, each Holder will cause any proposed transferee of any
Common Stock or Common Stock Equivalent held by him or it to agree to take and
hold such Common Stock or Common Stock Equivalent subject to the provisions and
upon the conditions specified in this Stockholders Agreement and to become a
party to this Stockholders Agreement.
SECTION 6.2 CERTIFICATE LEGEND. Each share of Common Stock and/or Common
------------------
Stock Equivalent issued to each Holder or a subsequent transferee that is
required to be bound by this Stockholders Agreement shall include, in addition
to any other legend that may be required by agreement of the Holder, a legend in
the following form or a substantially similar form:
THIS SECURITY IS SUBJECT TO RESTRICTIONS ON TRANSFER, VOTING AND OTHER
TERMS AND CONDITIONS SET FORTH IN THE THIRD AMENDED AND RESTATED STOCKHOLDERS
AGREEMENT DATED AS OF APRIL 9, 1999, A COPY OF WHICH MAY BE OBTAINED FROM WIT
CAPITAL GROUP, INC. AT ITS PRINCIPAL EXECUTIVE OFFICES.
ARTICLE 7
TERMINATION
-----------
SECTION 7.1 TERMINATION. The provisions of this Stockholders Agreement
-----------
shall terminate on the date that is 10 years following the Effective Time;
provided, however, that (i) Sections 2.1.1(a), 2.1.1(b), 2.1.2, 2.1.3(a) and
- -------- ------- ----------------- -------- ----- --------
2.1.3(b), 2.1.4, 2.1.5, 4.1.1(a), 4.2 and 4.3, Article 5 and Sections 8.2 and
- -------- ----- ----- -------- --- --- --------- ------------
8.3 of this Stockholders Agreement shall terminate upon the consummation prior
- ---
to the expiration of such ten (10) year period of a Qualified IPO, (ii) Article
-------
<PAGE>
3 of this Stockholders Agreement will terminate at the time indicated therein,
- -
if applicable, prior to the expiration of such ten (10) year period, (iii)
Section 4.4 of this Stockholders Agreement shall terminate at the earlier of (x)
- -----------
the date on which the Capital Z holders cease to own, in the aggregate, at least
50% of the number of shares of Fully-Diluted Common Stock owned by the Capital Z
Holders immediately following consummation of the Closing, or (y) the date on
which the Capital Z Holders cease to own, in the aggregate, at least 10% of the
total Fully-Diluted Common Stock and (iv) Sections 2.1.1(c) and 2.1.3(c) and
----------------- --------
shall terminate on the date on which the GS Holders cease to own, in the
aggregate, at least 5% of the total Fully-Diluted Common Stock and Section
-------
4.1.1(b) will terminate on the date on which the GS Holders cease own, in the
- --------
aggregate, at least 10% of the total Fully-Diluted Common Stock.
ART
MISCELLANEOUS
-------------
SECTION 8.1 NOTICES. Any notices or other communications required or
-------
permitted hereunder shall be in writing, and shall be sufficiently given if made
by hand delivery, by telex, by telecopier or registered or certified mail,
postage prepaid, return receipt requested, addressed as follows or at such other
address as may be substituted by notice given as herein provided.
If to the Company:
Wit Capital Group, Inc.
826 Broadway
Sixth Floor
New York, New York 10003
Fax: (212) 253-4650
e-mail address: [email protected]
with copies to (which shall not constitute notice):
Orrick, Herrington & Sutcliffe LLP
30 Rockefeller Plaza
New York, New York 10112
' Attention: Martin H. Levenglick, Esq.
Fax: (212) 506-3730
e-mail address: [email protected]
If to any Holder, at its address listed on the signature pages hereof.
Any notice or communication hereunder shall be deemed to be have been given
or made
<PAGE>
as of the date so delivered if personally delivered; when answered back, if
telexed; when receipt is acknowledged, if telecopied, and five (5) calendar days
after mailing if sent by registered or certified mail (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee).
Failure to mail a notice or communication to a Holder or any defect in it
shall not effect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
SECTION 8.2 ISSUANCE OF ADDITIONAL STOCK. The Company will not issue any
----------------------------
additional Common Stock or Common Stock Equivalents (other than Common Stock
issuable upon the exercise, conversion or exchange of Common Stock Equivalents
that are outstanding as of the date hereof) if such issuance would result in the
acquiror thereof Beneficially Owning (immediately or following the exercise,
exchange or conversion of any security convertible into exchangeable for or
exercisable for any Common Stock or Common Stock Equivalents) at least one
percent (1%) of the Fully-Diluted Common Stock, unless such acquiror is a party
to this Stockholders Agreement or becomes a party to this Stockholders Agreement
at or prior to the time of such issuance by the Company.
SECTION 8.3 INFORMATION RIGHTS; BUDGETS.
---------------------------
(a) Information. The Company shall provide for each Holder the
-----------
following:
(i) General. The Company will permit each such Holder on
-------
reasonable notice to visit and inspect during normal business hours any of the
properties of the Company and to examine its books and records, and to discuss
with its officers the business and affairs of the Company, at such reasonable
times as such persons may desire without disruption of the Company's normal
business and affairs for any reasonable purpose relating to this investment in
the Company.
(ii) Quarterly Reports. As soon as available, but no later
-----------------
than 45 days after the end of each fiscal quarter of the Company, the Company
will provide to each Holder unaudited financial statements of the Company, which
shall include a statement of operations for such quarter and a balance sheet as
of the last day thereof, prepared in accordance with generally accepted
accounting principles, consistently applied.
(iii) Annual Reports. As soon as available, but no later than
--------------
90 days after the end of each fiscal year of the Company, the Company will
provide to each Holder audited financial statements of the Company, which shall
include a statement of cash flows and statements of operations for such fiscal
year and a balance sheet as at the last day thereof, each prepared in accordance
with generally accepted accounting principles, consistently applied, and
accompanied by the report of a "Big Five" accounting firm selected by the Board
of Directors by
<PAGE>
the Company, subject to the approval of the holders of at least a majority of
the Fully-Diluted Voting Common Stock (which approval shall not be unreasonably
withheld or delayed).
(b) Budget. With respect to each calendar year, the Company shall
------
prior to the commencement of each such calendar year, prepare a proposed budget
(the "Budget") of the Company (containing monthly and quarterly breakdowns of
income (loss), balance sheet items and cash flow) and an update five year
strategic plan of the company. The Budget shall be accepted as the Budget for
such fiscal year when it has been approved by the Board of Directors of the
Company. The Budget shall be reviewed by the Company periodically and all
changes therein and all material deviations therefrom shall be resubmitted to
the Board of Directors of the Company in advance and shall be accepted when
approved by the Board if Directors of the Company.
SECTION 8.4 CONFIDENTIALITY. Each Holder agrees to and shall keep strictly
---------------
confidential and will not disclose or divulge any confidential, proprietary or
secret information which such Holder has obtained in the course of the
negotiation and consummation of the transactions contemplated hereby or may
obtain from the Company, including, by way of example and not in limitation
thereof, financial statements, reports and other information and materials
submitted by the Company as required hereunder, unless required to be disclosed
by law or pursuant to any judgment, order, subpoena or decree of any court
having competent jurisdiction, or unless such information is already known to
the Holder or is or has become publicly known, or unless the Company gives its
written consent to the Holder's release of such information, except that such
written information may be provided to the Holder's lawyers, accountants or
other advisors; provided, such recipient is advised of the confidential nature
--------
of such information. Each Holder acknowledges that such information is for it
use solely in connection with evaluating its investment in the Company.
SECTION 8.5 EFFECTIVENESS. This Stockholders Agreement will become
-------------
effective on the Effective Date.
SECTION 8.6 GOVERNING LAW. THIS STOCKHOLDERS AGREEMENT SHALL BE GOVERNED
-------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
SECTION 8.7 SUCCESSORS AND ASSIGNS. This Stockholders Agreement shall be
binding upon the Company, each Holder and their respective successors and
permitted assigns. Notwithstanding anything to the contrary set forth in this
Stockholders Agreement, no Person who becomes a Holder as a result of the
Transfer to such Person by another Holder of securities subject to this
Agreement shall be entitled to any rights of a Holder under Article 4, unless
---------
the Company has consented in writing to such Transfer, which consent shall not
be unreasonably withheld; provided, however, that no such written consent shall
-------- -------
be required if the Transfer is to any member of such Holder's Group; if the
Transfer is permitted by an agreement to which the Company is a party; or if
such Transfer includes at least a majority of the Fully-Diluted Common
<PAGE>
Stock owned by such Holder and its Affiliates and the Company is given written
notice of such Transfer identifying the name and address of such transferee and
the securities being Transferred, provided, further, that the Company may refuse
-------- -------
such written consent (in a case where such written consent is required) if the
Board of Directors of the Company determines, in its reasonable discretion, that
the transferee is a direct competitor of the Company or has indicated an
intention to compete directly with the Company; provided, further, that under
-------- -------
all circumstances any permitted transferee shall have agreed in advance in
writing to be bound by and comply with this Agreement to the same extent as the
transferor. The provisions of this Section 8.7 shall not be construed as an
exception to or limitation of the provisions of Article 4.
---------
SECTION 8.8 DUPLICATE ORIGINALS. All parties may sign any number of copies
-------------------
of this Stockholders Agreement. Each signed copy shall be an original, but all
of them together shall represent the same agreement.
SECTION 8.9 SEVERABILITY. In case any provision in this Stockholders
Agreement shall be held invalid, illegal or unenforceable in any respect for any
reason, the validity, legality and enforceability of any such provision in every
other respect and the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 8.10 NO WAIVERS; AMENDMENTS.
----------------------
8.10.1 No failure or delay on the part of the Company or any Holder in
exercising any right, power or remedy hereunder shall operate as a waiver
hereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Company or
any Holder at law or in equity or otherwise.
8.10.2 Any provision of this Stockholders Agreement may be amended or
waived if, but only if, such amendment or waiver is in writing and is signed by
the Company and the Holders holding at least 66-2/3% of the Fully-Diluted Common
Stock; provided that no such amendment or waiver shall, (i) unless signed by the
Majority DFJ Holders or the Majority Capital Z Holders, as applicable, amend the
provisions of Section 2.1 applicable to such Majority DFJ Holders or Majority
-----------
Capital Z Holders, (ii) unless signed by the Majority Capital Z Holders, amend
the provisions of Section 3.1, (iii) unless signed by the GS Holders, amend the
-----------
provisions of Section 2.1 applicable to the GS Holders (including Section
----------- -------
2.1.6), the provisions of Section 3.2, Section 4.1.1(b) (or Section 4.1 insofar
----------- ---------------- -----------
as it relates to Section 4.1.1(b)) or Section 4.5, (iv) unless signed by Holders
----------------- -----------
holding at least 66-2/3% of the Fully-Diluted Common Stock held by all Holders,
amend the provisions of Section 4.1, Section 4.2 or Section 4.3 (or Section 4.5
----------- ----------- ----------- -----------
insofar as it relates to Section 4.1, Section 4.2 or Section 4.3), (v) unless
----------- ----------- -----------
signed by the Key Employees, amend the provisions of Section 4.4 (or Section 4.5
----------- -----------
insofar as it relates to Section 4.4), or (vi) unless signed by all of the
-----------
Holders affected, (A) amend the provisions of this Section 8.10.2
<PAGE>
(B) change the number of Holders which shall be required for the Holders or any
of them to take any action under this Section 8.10.2 or any other provision of
--------------
this Stockholders Agreement. Any such transferee who obtains such rights must
agree to be bound by the provisions of this Agreement.
SECTION 8.11 ENTIRE AGREEMENT. This Stockholders Agreement, which shall be
----------------
effective upon the Closing, contains the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior agreements and
understandings with respect to such subject matter, including, without
limitation, the Existing Stockholders Agreement, which, effective upon the
Closing, shall cease and terminate in its entirety and be of no further force or
effect; provided, however, that in the event that the Closing shall not occur,
-------- -------
then this Stockholders Agreement shall cease and terminate and be of no force or
effect and the Existing Stockholders Agreement shall continue in full force and
effect.
<PAGE>
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
CAPITAL Z FINANCIAL SERVICES
FUND II, L.P.
By: Capital Z Partners, L.P., its sole
general partner
By: Capital Z Partners, Ltd., its sole
general partners
By:
Name:
Title:
THE GOLDMAN SACHS GROUP, L.P.
By:
Name:
Title:
<PAGE>
ADDITIONAL INVESTORS:
By:
Name:
Title:
<PAGE>
Name and Addresses of Investors
- -------------------------------
- --------------------------------------
Investors
- --------------------------------------
Julian A. Brodsky
c/o ComCast Corporation
1500 Market Street
35th Floor
Philadelphia, PA 19102
- --------------------------------------
Don Caldwell
c/o Safeguard Scientific
435 Devon Park Drive, Bldg. 800
Wayne, PA 19087
- --------------------------------------
Jerry Callaghan
c/o Callaghan Partners
One World Financial Center
Suite 7967
New York, NY 10048
- --------------------------------------
Mitchell Cohen
P.O. Box 5027
Greenwich, CT 06831
- --------------------------------------
Edward H. Fleischrnan
c/o Linklaters Paines
1345 Avenue of the Americas
19/th/ Floor
New York, NY 10105
- --------------------------------------
Aaron W. Ford
43 Harding Road
Old Greenwich, CT 06870
- --------------------------------------
Russ D. Gerson
c/o Baines Gwinner N.A. Inc.
280 Park Avenue
New York, New York 10017
- --------------------------------------
Josh Huffard
95 Woodland Avenue
San Francisco, CA 94117
- --------------------------------------
Paul E. Kozloff
113 Leisure Court
Wyomissing, PA 19610
- --------------------------------------
<PAGE>
- --------------------------------------
Linda Lerner
One Salem Street #11
Swampscott, MA 01907
- --------------------------------------
Robert H. Lessin
Wit Capital Group, Inc.
826 Broadway, Sixth Floor
New York, NY 10003
- --------------------------------------
Michael J. Levitt
c/o Hicks, Muse, Tate & Furst Inc.
1325 Avenue of Americas
25/th/ Floor
New York, N.Y. 10019
- --------------------------------------
Highland Capital Partners IV
Limited Partnership
2 International Place
22nd Floor
Boston, MA 02110
- --------------------------------------
Highland Entrepreneurs' Fund
IV Limited Partnership
2 International Place
22nd Floor
Boston, MA 02110
- --------------------------------------
Steve McDermott
29 Red Coach Lane
Holmdel, NJ 07733
- --------------------------------------
Sarn Merrin
724 Fiflh Avenue, 3/rd/ Floor
New York, New York 10019
- --------------------------------------
John D. Nixon
9 Marlow Court
Riverside, Connecticut 06878
- --------------------------------------
Robert Smellick
Woodland Avenue
San Francisco, CA 94117
- --------------------------------------
Todd Tappin
c/o Goto.com
130 West Union Street
Pasadena, CA 91103
- --------------------------------------
Dr. Bruce Ungerleida
511 66/th/ Street North
St. Petersburg, FL 33710
- --------------------------------------
<PAGE>
- --------------------------------------
Brian E. Walsh
One Barron Place
New York, New York 10580
- --------------------------------------
Kunihiko Yogo
Koishikawa 3-27-16-806
Bunkyo-ku, Tokyo 112-0002
Japan
- --------------------------------------
Capital Z Financial Services
Fund II, L.P.
1 Chase Manhattan Plaza
44/th/ Floor
New York, New York 10005
- --------------------------------------
Capital Z Financial Services
Private Fund II, L.P.
1 Chase Manhattan Plaza
44/th/ Floor
New York, New York 10005
- --------------------------------------
Drapor Fisher Jurvetson Fund V, L.P.
400 Seaport Court, Suite 250
Redwood City, California 94063
Attn: Mr. John Fisher
- --------------------------------------
Draper Fisher Jurvetson Partners LLC
400 Seaport Court, Suite 250
Redwood City, California 94063
Attn: Mr. John Fisher
- --------------------------------------
DS Capital Group LLC
34 Doughty Blvd.
Lawrence, N.Y. 11559
Attn: Seth Fortgang
- --------------------------------------
FG-Wit
2187 Atlantic Street,
10/th/ Floor
Stamford, CT 06902
- --------------------------------------
MC Capital Inc.
520 Madison Avenue, 16/th/ Floor
New York, NY 10022
Attn: Ryuichi Sasaki
- --------------------------------------
SiliconValley, Inc.
850 Hansen Way, Suite 100
Palo Alto, CA 94306
Attn: Kogi Osawa
- --------------------------------------
<PAGE>
- --------------------------------------
MediaOne Interactive Services, Inc.
Attention: President
9000 East Nichols Avenue, Suite 100
Englewood, CO 80112
- --------------------------------------
Roccia Ventures L.L.P.
c/o Lorenzo Roccia
220 East 67/th/ Street
Apt. 14C
New York, NY 10021
- --------------------------------------
Pacific Mandarin I LTD
Suite 1108, Albion Plaza
2-6 Granville Road
Kowloon-Hong Kong
Attn: C.J. Wilson
- --------------------------------------
BNP/ COOPER NEFF GROUP INVESTORS
- --------------------------------------
Blake A. Banky
350 Harvest Lane
Haverford, PA 19041
- --------------------------------------
Richard W. Cooper
1007 Canterbury Lane
Villanova, PA 19085
- --------------------------------------
Brian P. DeGustino
53 Drummers Lane
Wayne, PA 19087
- --------------------------------------
Kevin P. Murphy
300 Shelbourne Road
Havertown PA 19083
- --------------------------------------
Roy S. Neff
1225 Farview Road
Villanova, PA 19085
- --------------------------------------
Alec H. Petro
2065 Gen. Alexander Drive
Malvern, PA 19355
- --------------------------------------
Thomas C. Piersanti, Jr.
10 Great Woods Lane
Malvem, PA 19353
- --------------------------------------
Stephen C. Soulas
686 Paine Drive
West Chester, PA 19382
- --------------------------------------
<PAGE>
- --------------------------------------
Andrew J. Sterge
124 Three Ponds Lane
Malvern, PA 19355
- --------------------------------------
Louis Werman
1954 N. Maud Ave.
Chicago, IL 60614
- --------------------------------------
ULTRA PARTNERS GP INVESTORS
- --------------------------------------
Robert Goodale
19 Perry Street
New York, NY 10014
- --------------------------------------
Joseph Rascoff Family Trust
110 West 57/th/ Street
15/th/ Floor
New York, New York 10019
- --------------------------------------
William Zysblat
110 West 57/th/ Street
7/th/ Floor
New York, New York 10019
- --------------------------------------
THE GOLDMAN SACHS GROUP, L.P.
85 Broad Street
New York, New York 10004
Attention: David J. Greenwald, Esq.
- --------------------------------------
<PAGE>
SCHEDULE 4.1
------------
. BankAmerica
. Bear, Stearns & Co. Inc.
. Chase
. Credit Suisse First Boston
. Deutsche Bank/Bankers Trust
. Donaldson Lufkin & Jenrette
. Fleet/BankBoston (Robertson Stephens)/*/
. Hambrecht & Quist
. J.P. Morgan & Co.
. Lehman Brothers
. Merrill Lynch & Co.
. Morgan Stanley Dean Witter
. Paine Webber
. Salomon Smith Barney (Citigroup)
. SBC Warburg
. UBS
_____________________________
/*/ Fleet/Bank Boston (Robertson Stephens) will not be a "Restricted Offeree"
for purposes of Section 4.1.1(b) of the Stockholders Agreement in
connection with a proposal by the Company to issue securities of the
Company to Fleet/Bank Boston (Robertson Stephens) in return for its
provision of material assistance and services in connection with the
digital trading facility as described in the Company's Registration
Statement filed with the Securities Exchange Commission on March 18, 1999,
if such issuance has been approved by a majority of the independent
directors on the Company's Board of Directors.
<PAGE>
EXHIBIT 10.14
THIRD AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
DATED AS OF APRIL 9, 1999
AMONG
WIT CAPITAL GROUP, INC.
AND
EACH OF THE INVESTORS
IDENTIFIED HEREIN
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Section 1. Definitions 1
Section 2. Piggyback Registration 3
Section 3. Existing Investor Demand Registration 4
Section 4. Demand Registration 6
Section 5. Registration on Form S-3 8
Section 6. Filing Obligations of the Corporation 8
Section 7. Conditions to Registration Obligations 10
Section 8. Lock-up Agreement 10
Section 9. Information Provided by the Investors 10
Section 10. Rule 144 11
Section 11. Terms and Conditions of Registration 11
Section 12. Expenses 11
Section 13. Indemnification 12
Section 14. Termination 14
Section 15. Successors and Assigns 14
Section 16. Assignment 14
Section 17. Entire Agreement 14
Section 18. Notices 15
Section 19. Modifications; Amendments; Waivers 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Section 20. Counterparts 16
Section 21. Headings 16
Section 22. Governing Law 16
</TABLE>
<PAGE>
THIRD AMENDED AND RESTATED REGISTRATION RIGHTS
AGREEMENT, dated as of April 9, 1999, among WIT CAPITAL
GROUP, INC., a Delaware corporation (the
"Corporation"), and each of the persons or entities
-----------
identified on Schedule I hereto (collectively, the
----------
"Investors").
---------
The Corporation and certain of the Investors have entered into the
First Amended and Restated Registration Rights Agreement dated as of November
19, 1998. The Corporation and certain of the Investors entered into a Second
Amended and Restated Registration Rights Agreement dated as of February 23, 1999
(the "Existing Agreement"). The Corporation and the other parties to the
------------------
Existing Agreement (the "Existing Investors"), together with The Goldman Sachs
------------------
Group, L.P. (the "New Investor"), are entering into this Third Amended and
------------
Restated Registration Rights Agreement dated as of April 9, 1999 (this
"Agreement") in order to amend and restate the Existing Agreement, effective
- ----------
upon the closing of the purchase by the New Investor (the "Closing") of shares
-------
of the Corporation's Series E Preferred Stock, $.01 par value (the "Series E
--------
Preferred Stock") and warrants (the "Warrants") to purchase shares of Series E
- ---------------
Preferred Stock. The Existing Investors and the New Investor are sometimes
referred to herein as the "Investors."
---------
The Investors own or have the right to acquire (by the conversion of
preferred stock of the Corporation that is convertible into or upon exercise of
warrants exercisable for) Common Stock, $0.01 par value, of the Corporation (the
"Voting Common Stock") and Class B Common Stock, $0.01 par value, of the
-------------------
Corporation (the "Class B Common Stock" and, together with the Voting Common
--------------------
Stock, the "Common Stock"). The parties hereto deem it to be in their
------------
respective best interests to amend and restate the Existing Agreement in effect
upon the Closing, and to set forth the rights and obligations of the parties
hereto in connection with public offerings and sales of shares of Common Stock.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
obligations and agreements contained herein, the parties hereto hereby agree as
follows:
Section 1. DEFINITIONS. As used in this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Affiliate" shall means, with respect to any Person, any Person
---------
who, directly or indirectly, controls, is controlled by or is under common
control with that Person. For purposes of this definition, "control" when used
-------
with respect to any Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the
<PAGE>
ownership of voting securities, by contract or otherwise.
(b) "Capital Z" means, collectively, Capital Z Financial Services
---------
Fund II, L.P. and Capital Z Financial Services Private Fund II, L.P.
(c) "Capital Z Holders" means, collectively, Capital Z and any
-----------------
Affiliate or partner of Capital Z who is directly or indirectly transferred
Common Stock or Common Stock Equivalents or any interest therein by any Capital
Z Holder.
(d) "Commission" shall mean the Securities and Exchange Commission
----------
or any other Federal agency at the time administering the Securities Act.
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934
------------
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.
(f) "GS Holders" shall have the meaning ascribed to such term in
----------
the Stockholders Agreement.
(g) "Other Shares" shall mean at any time those Shares that do not
------------
constitute Primary Shares or Registrable Shares.
(h) "Person" or "person" means any individual, corporation,
------ ------
partnership, limited liability company, joint venture, association, joint-stock
company, trust, unincorporated organization or government or other agency or
political subdivision thereof.
(i) "Primary Shares" shall mean at any time all authorized but
--------------
unissued Shares.
(j) "Qualified Public Offering" means an underwritten public
-------------------------
offering of Common Stock pursuant to a registration under the Securities Act
where both (i) the proceeds to the Corporation (prior to deducting any
underwriters' discounts and commissions) equal or exceed Twenty-Five
<PAGE>
Million Dollars ($25,000,000) and (ii) the price per share at which such Common
Stock is sold in such offering is at least $4.50 (subject to equitable
adjustment for stock splits, stock combinations, recapitalizations and similar
occurrences).
(k) "Registrable Shares" shall mean Shares held by the Investors
------------------
that constitute Restricted Shares.
(l) "Restricted Shares" shall mean (A) the shares of Series C
-----------------
Preferred Stock, $.01 par value, of the Corporation issued to certain Investors
pursuant to the Stock Purchase Agreement, dated as of September 17, 1998, among
the Corporation and the Investors identified
<PAGE>
therein (the "Series C Stock Purchase Agreement"), (B) any shares of Common
---------------------------------
Stock issuable upon conversion of any such shares of Series C Preferred Stock,
(C) any shares of Series C Preferred Stock issued upon exercise of the DFJ
Warrants (as defined in the Series C Stock Purchase Agreement) and any shares of
Common Stock issuable upon conversion thereof, (D) the shares of Series D
Preferred Stock, $.01 par value, issued to certain Investors pursuant to (i) the
Series D Stock Purchase Agreement, dated as of February 23, 1999 (the "Capital Z
---------
Stock Purchase Agreement"), among the Corporation and the Investors parties
- ------------------------
thereto and (ii) the Series D Stock Purchase Agreement, dated as of November 19,
1998 among the Corporation and the Investors identified therein, (E) any shares
of Common Stock issuable upon conversion of any such shares of Series D
Preferred Stock, (F) the shares of Series E Preferred Stock issued to the New
Investor pursuant to the Purchase Agreement, dated as of the date hereof (the
"New Purchase Agreement"), between the Corporation and the New Investor, (G) any
----------------------
shares of Series E Preferred Stock issuable upon exercise of the Warrants issued
pursuant to the New Purchase Agreement, (H) any shares of Common Stock issuable
upon the conversion of such shares of Series E Preferred Stock or exercise of
such Warrants, whether at the time of issue of such shares of Series E Preferred
Stock or Warrants or with the passage of time or upon the occurrence of any
subsequent events, and (I) any securities received in respect thereof, that (x)
are held by the Investors and (y) theretofore have not been sold to the public
pursuant to a registration statement under the Securities Act or pursuant to
Rule 144.
(m) "Rule 144" shall mean Rule 144 promulgated under the Securities
--------
Act or any successor or complementary rule thereto.
(n) "Securities Act" shall mean the Securities Act of 1933 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.
(o) "Shares" shall mean shares of Common Stock.
------
(p) "Stockholders Agreement" shall mean the Third Amended and
----------------------
Restated Stockholders Agreement, of even date herewith, among the Corporation
and the other signatories thereto.
(q) "Transfer" shall include any disposition of any Restricted
--------
Shares or of any interest therein that 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. PIGGYBACK REGISTRATION.
----------------------
Subject to the terms and conditions set forth in this Agreement, if
the Corporation
<PAGE>
at any time following the consummation of its initial underwritten public
offering of Common Stock pursuant to a registration statement under the
Securities Act proposes for any reason to register 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 of
the Investors of its intention to so register such Shares and, upon the written
request, given within 20 days after delivery of such notice by the Corporation,
of any Investor to include in such registration Registrable Shares held by such
Investor (which request shall specify the number of Registrable Shares proposed
to be included in such registration by such Investor and shall state the
intended method of disposition of such Registrable Shares by the such Investor),
the Corporation shall use its reasonable 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. In the
event that the proposed registration by the Corporation is an underwritten
public offering of Common Stock, any request pursuant to this Section 2 to
register Registrable Shares shall specify that such Registrable Shares are to be
included in the underwriting on the same terms and conditions as the shares of
Common Stock, if any, otherwise being sold through underwriters under such
registration; provided, however, that if the managing underwriter advises the
-------- -------
Corporation in writing that the inclusion of all Registrable Shares proposed to
be included in such registration would interfere with the successful marketing
(including pricing) of Primary Shares or Other Shares proposed to be registered
by the Corporation, 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) if such registration is undertaken pursuant to the exercise
of demand registration rights granted by the Corporation to third parties
with respect to Other Shares, then:
(a) first, the Primary Shares; and
-----
(b) second, the Registrable Shares, requested to be
------
included in such registration, and the Other Shares that are to be
included by such third parties, pro rata based upon the number of
Registrable Shares and Other Shares requested to be included in such
registration; and
(ii) with respect a registration not undertaken pursuant to
demand rights described in subclause (i) above, then:
(a) first, the Primary Shares;
-----
(b) second, the Registrable Shares, requested to be
------
included in such registration, pro rata based upon the number of
--- ----
Registrable Shares requested to be included in such registration; and
<PAGE>
(c) third, the Other Shares that are to be included by
-----
third parties in such registration pursuant to the exercise of demand
registration rights granted by the Corporation to such third parties;
provided, that in the case of any such underwritten offering of Common Stock by
- --------
the Company that is in satisfaction of a demand registration pursuant to Section
4, the order for inclusion of Primary Shares, Registrable Shares and Other
Shares shall be as set forth in Section 4(c).
Section 3. EXISTING INVESTOR DEMAND REGISTRATION. On any date after the
-------------------------------------
six month period following the Qualified Public Offering, if the Corporation
shall be requested in writing by the holders of at least a majority of the
Restricted Shares then outstanding (an "Existing Holder Request") that are held
by the Existing Investors other than the Capital Z Holders (the "Existing
--------
Requisite Holders") to effect a registration under the Securities Act of
- -----------------
Registrable Shares, then the Corporation shall promptly give written notice of
such proposed registration to all holders of Registrable Shares and shall offer
to include in such proposed registration any Registrable Shares requested to be
included in such proposed registration by such holders who respond in writing to
the Corporation's notice within fifteen (15) days after delivery of such notice
(which request shall specify the number of Registrable Shares proposed to be
included in such registration). The Corporation shall promptly use its
reasonable best efforts to effect such registration under the Securities Act of
such Registrable Shares held by the Investors which the Corporation has been so
requested to register; provided, however, that the Corporation shall not be
-------- -------
obligated to effect any registration under this Section 3 except in accordance
with the following provisions:
(a) The Corporation shall not be obligated to use its reasonable best
efforts to file and cause to become effective (i) more than two registration
statements with respect to Registrable Shares held by the Existing Investors
initiated pursuant to this Section 3; provided, however, that any registration
-------- -------
proceeding begun pursuant to this Section 3 that is subsequently withdrawn at
the request of the Existing Investors shall count toward the two registration
statements which the Existing Investors have the right to cause the Corporation
to effect pursuant to this Section 3; provided further, however, that such
-------- ------- -------
withdrawn registration shall not be so counted if such withdrawal is based upon
material adverse information relating to the Corporation or its condition,
business, or prospects which is different from that generally known to the
Existing Investors at the time of their request or (ii) any registration
statement during any period in which any other registration statement pursuant
to which Shares are to be or were sold has been filed and not withdrawn or has
been declared effective within the prior 120 days;
(b) The Corporation may delay the filing or effectiveness of any
registration statement for a period of up to 120 days after the date of a
request for registration pursuant to this Section 3 if (i) at the time of such
request the Corporation is engaged, or has formal plans to engage within 60 days
of the time of such request, in an underwritten public offering of Shares
(including an offering contemplated by Sections 2, 4 and 5 hereof) or (ii) the
Corporation determines in good faith that (A) it is in possession of material,
non-public information
<PAGE>
concerning an acquisition, merger, recapitalization, consolidation,
reorganization or other material transaction by or of the Corporation or
concerning pending or threatened litigation and (B) disclosure of such
information would jeopardize any such transaction or litigation or otherwise
materially harm the Corporation or (iii) the Corporation shall furnish to the
Investors a certificate signed by the Chief Executive Officer or President of
the Corporation stating that, in the good faith judgment of the Board of
Directors of the Corporation, it would otherwise be seriously detrimental to the
Corporation and its investors for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement;
provided, however, that the Corporation may not exercise such deferral right
- -------- -------
pursuant to this subclause (iii) more than once in any twelve month-period.
(c) With respect to any registration pursuant to this Section 3 the
Corporation may include in such registration any Primary Shares or Other Shares;
provided, however, that if in an underwritten offering the managing underwriter
- -------- -------
advises the Corporation that the inclusion of all Registrable Shares, Primary
Shares and Other Shares proposed to be included in such registration would
interfere with the successful marketing (including pricing) of such shares, 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, pro rata among the holders
-----
thereof based on the ratio that the number of Registrable Shares requested
to be included by each holder pursuant to this Section 3 bears to the
aggregate number of Registrable Shares requested to be included by all
holders pursuant to this Section 3;
(ii) second, Primary Shares; and
------
(iii) third, the Other Shares.
-----
Those shares of Common Stock that are excluded from the underwritten public
offering pursuant to this Section 3(c) shall be withheld from the market by the
holders thereof for a period, not to exceed 180 days, which the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering.
Section 4. DEMAND REGISTRATION. On any date after the six month period
-------------------
following the Qualified Public Offering, if the Corporation shall be requested
in writing by either (i) GS Holders holding at least a majority of the
Restricted Shares then outstanding that are held by the GS Holders (the "GS
--
Requisite Holders") or (ii) Capital Z Holders holding at least a majority of
- -----------------
Restricted Shares then outstanding that are held by the Capital Z Holders (the
"Capital Z Requisite Holders") to effect a registration under the Securities Act
- ----------------------------
of Registrable Shares, then the Corporation shall promptly give written notice
of such proposed registration to all holders of Registrable Shares and shall
offer to include in such proposed registration any Registrable Shares requested
to be included in such proposed registration by such holders who respond in
writing to
<PAGE>
the Corporation's notice within fifteen (15) days after delivery of such notice
(which request shall specify the number of Registrable Shares proposed to be
included in such registration). The Corporation shall promptly use its
reasonable best efforts to effect such registration under the Securities Act of
such Registrable Shares which the Corporation has been so requested to register;
provided, however, that the Corporation shall not be obligated to effect any
- -------- -------
registration under this Section 4 except in accordance with the following
provisions:
(a) The Corporation shall not be obligated to use its reasonable best
efforts to file and cause to become effective (i) more than two
registration statements with respect to Registrable Shares initiated by the
GS Requisite Holders or more than two registration statements with respect
to Registrable Shares initiated by the Capital Z Requisite Holders pursuant
to this Section 4; provided, however, that any registration proceeding
-------- -------
begun pursuant to this Section 4 that is subsequently withdrawn at the
request of the GS Requisite Holders or the Capital Z Requisite Holders, as
the case may be, shall count toward the two registration statements which
the GS Requisite Holders or the Capital Z Requisite Holders, respectively,
have the right to cause the Corporation to effect pursuant to this Section
4; provided further, however, that such withdrawn registration shall not be
-------- ------- -------
so counted if such withdrawal is based upon material adverse information
relating to the Corporation or its condition, business, or prospects which
is different from that generally known to the GS Requisite Holders or the
Capital Z Requisite Holders, as the case may be, at the time of their
request or (ii) any registration statement during any period in which any
other registration statement pursuant to which Shares are to be or were
sold has been filed and not withdrawn or has been declared effective within
the prior 120 days;
(b) The Corporation may delay the filing or effectiveness of any
registration statement for a period of up to 120 days after the date of a
request for registration pursuant to this Section 4 if (i) at the time of
such request the Corporation is engaged, or has formal plans to engage
within 60 days of the time of such request, in an underwritten public
offering of Shares (including an offering contemplated by Sections 2, 3 and
5 hereof) or (ii) the Corporation determines in good faith that (A) it is
in possession of material, non-public information concerning an
acquisition, merger, recapitalization, consolidation, reorganization or
other material transaction by or of the Corporation or concerning pending
or threatened litigation and (B) disclosure of such information would
jeopardize any such transaction or litigation or otherwise materially harm
the Corporation or (iii) the Corporation shall furnish to the Investors a
certificate signed by the Chief Executive Officer or President of he
Corporation stating that, in the good faith judgment of the Board of
Directors of the Corporation, it would otherwise be seriously detrimental
to the Corporation and its investors for such registration statement to be
filed and it is therefore essential to defer the filing of such
registration statement; provided, however, that the Corporation may not
-------- -------
exercise such deferral right pursuant to this subclause (iii) more than
once in any twelve month-period.
(c) With respect to any registration pursuant to this Section 4, the
Corporation
<PAGE>
may include in such registration any Primary Shares or Other Shares; provided,
--------
however, that if in an underwritten offering the managing underwriter advises
- -------
the Corporation that the inclusion of all Registrable Shares, Primary Shares and
Other Shares proposed to be included in such registration would interfere with
the successful marketing (including pricing) of such shares, 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 GS Holders and
-----
the Capital Z Holders in such proportion as may be agreed between the GS
Requisite Holders and the Capital Z Requisite Holders or, if no such
agreement is reached within a reasonable time, then (x) with respect to the
Registrable Shares held by the GS Holders, the number of such Registrable
Shares multiplied by a fraction, the numerator of which is the number of
Registrable Shares beneficially owned by the GS Holders on a fully diluted
basis and the denominator of which is the number of Registrable Shares
beneficially owned on a fully diluted basis by the GS Holders and Capital Z
Holders and (y) with respect to the Registrable Shares held by the Capital
Z Holders, the number of such Registrable Shares multiplied by a fraction,
the numerator of which is the number of Registrable Shares beneficially
owned by the Capital Z Holders on a fully diluted basis and the denominator
of which is the number of Registrable Shares beneficially owned on a fully
diluted basis by the Capital Z Holders and GS Holders;
(ii) second, the Registrable Shares held by the Investors,
------
other than GS Holders and Capital Z Holders, pro rata among them based on the
--- ----
ratio that the number of Registrable Shares requested to be included by each
such Investor bears to the aggregate number of Registrable Shares to be included
by all such Investors;
(iii) third, Primary Shares; and
-----
(iv) fourth, the Other Shares.
------
Those shares of Common Stock that are excluded from the underwritten public
offering pursuant to this Section 4(c) shall be withheld from the market by the
holders of thereof for a period, not to exceed 180 days, which the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering.
Section 5. REGISTRATION ON FORM S-3. Anything contained in Sections 3 or 4
------------------------
to the contrary notwithstanding, at such time as the Corporation shall have
qualified for the use of Form S-3 promulgated under the Securities Act or any
successor form thereto, Investors holding Restricted Shares representing at
least 35% of all Restricted Shares then outstanding shall have the right to
request in writing five registrations on Form S-3 or such successor form of
Registrable Shares held by the Investors, which request or requests shall (i)
specify the number of Registrable Shares held by the Investors intended to be
sold or disposed of, (ii) state the
<PAGE>
intended method of disposition of such Registrable Shares held by the Investors
and (iii) relate to Registrable Shares having an anticipated aggregate offering
price of at least $500,000; provided, however, that the Corporation shall not be
-------- -------
obligated to file and cause to become effective any registration on Form S-3
within a period of six months after the effective date of any previous
registration statement filed by the Corporation pursuant to Sections 2, 3 or 4
or this Section 5. A requested registration on Form S-3 or any such successor
form in compliance with this Section 5 shall not count as a registration
statement initiated pursuant to Section 3 but shall otherwise be treated as a
registration statement initiated pursuant to, and shall, except as otherwise
expressly provided in this Section 5, be subject to Section 3.
Section 6. FILING OBLIGATIONS OF THE CORPORATION. In connection with any
-------------------------------------
registration of the Registrable Shares effected pursuant to Section 2, 3, 4 or
5 the Corporation shall:
(a) prepare and file the registration statement and such
amendments and supplements to the registration statement-and the prospectus or
offering circular used in connection therewith as may be necessary to keep the
registration statement current and effective for a period of 120 days (or sooner
if all securities covered by such registration statement have been earlier sold)
and to comply with the provisions of the Securities Act and the rules and
regulations thereunder with respect to the disposition of all the Registrable
Shares covered by the registration statement for the period required to effect
the distribution thereof, and to use its best efforts to make any corrections or
updates to the registration statement or prospectus as promptly as practicable;
(b) furnish to the selling Investors such number of copies of any
prospectus or offering circular, including a preliminary prospectus, and of a
full registration statement and exhibits in conformity with the requirements of
the Securities Act and rules and regulations thereunder, as the selling
Investors may reasonably request in order to facilitate the disposition of such
securities;
(c) use its best efforts to register or qualify the Registrable
Shares covered by the registration statement under the securities or blue sky
laws of such state jurisdictions (not to exceed ten (10)) of the United States
as the selling Investors may reasonably request, and accomplish any and all
other acts and things which may be necessary or advisable to permit sales in
such jurisdictions of such Registrable Shares; provided, however, that the
-------- -------
Corporation shall not be required to consent to general service of process for
all purposes, or to qualify as a foreign Corporation, in any jurisdiction where
it is not then qualified or to register or qualify the Registrable Shares
covered by such registration statement in any jurisdiction which would require
the Corporation to amend its certificate of incorporation or by-laws or covenant
or undertake to do any other act or make any other change regarding its
capitalization or share ownership prior to the effectiveness of such
registration or qualification;
(d) if such registration is an underwritten public offering, to
enter into an underwriting agreement in form and substance customary under the
circumstances, including (i)
<PAGE>
provisions for any "lock up" period, during which the sale of Shares and
securities convertible into Shares by the Corporation or its Affiliates will be
restricted, that may reasonably be required by the managing underwriter thereof,
but in no event longer than 180 days, and (ii) indemnification provisions and
procedures substantially identical to those set forth in Section 13;
(e) in connection with any underwritten public offering, obtain
opinions of counsel to the Corporation (which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to the managing
underwriters) addressed to each Investor participating in such underwritten
offering and the underwriters, covering such matters as are customarily covered
in opinions requested in primary underwritten offerings of equity and
convertible debt securities and such other matters as may be reasonably
requested by such Investors and underwriters (it being agreed that the matters
to be covered by such opinions shall include, without limitation, the absence
from the registration statement and the prospectus, including the documents
incorporated by reference therein, of an untrue statement of a material fact or
the omission of a material fact required to be stated therein or necessary to
make the statements therein not misleading);
(f) in connection with any underwritten public offering, obtain
"cold comfort" letters and updates thereof from the independent public
accountants of the Corporation (and, if necessary, from the independent public
accountants of any subsidiary of the Corporation or of any business acquired by
the Corporation for which financial statements and financial data are, or are
required to be, included in the relevant registration statement), addressed to
each Investor participating in such underwritten offering (if such Investor has
provided such letter, representations or documentation, if any, required for
such cold comfort letter to be so addressed) and the underwriters, in customary
form and covering matters of the type customarily covered in "cold comfort"
letters in connection with primary underwritten offerings;
(g) use its best efforts to cause the Registrable Securities to be
listed on or included for quotation on any stock exchange or trading system on
which the Common Stock then primarily trades; and
(h) if requested by any managing underwriter or underwriters of
Registrable Securities, participate and use its best efforts to cause its
executive officers to participate in any "roadshow" or other marketing
activities intended to aid in the successful disposition of the Registrable
Securities; provided, however, that this Section 6(h) shall not be applicable to
-------- -------
registrations undertaken in accordance with Section 5 hereof.
Section 7. CONDITIONS TO REGISTRATION OBLIGATIONS. The Corporation shall
--------------------------------------
not be obligated to effect the registration of the Registrable Shares pursuant
to Sections 2, 3, 4 or 5 unless the Investors electing to participate consent to
customary conditions of a reasonable nature that are imposed by the Corporation,
including, but not limited to, the following:
<PAGE>
(a) conditions prohibiting the sale of Registrable Shares by the
Investors electing t o participate until the registration is effective;
(b) conditions requiring the Investors electing to participate to
comply with all applicable provisions of the Securities Act and the Exchange Act
including, but not limited to, the prospectus delivery requirements of the
Securities Act, and to furnish to the Corporation information about sales made
in such public offering;
(c) conditions prohibiting the Investors electing to participate
upon receipt of telegraphic or written notice from the Corporation that it is
required by law to correct or update the registration statement or prospectus
from effecting sales of the Registrable Shares until the Corporation has
completed the necessary correction or updating;
(d) conditions requiring the Investors electing to participate to
execute a power of attorney and custody arrangement with respect to Registrable
Shares to be registered prior to the filing of the registration statement; and
(e) if such registration is an underwritten public offering,
conditions requiring the Investors electing to participate to enter into an
underwriting agreement in form and substance customary under the circumstances.
Section 8. LOCK-UP AGREEMENT. In connection with the registration of
-----------------
shares of Common Stock under the Securities Act for sale to the public, the
Investors shall not dispose of any Restricted Shares (other than those shares of
Common Stock included in such registration pursuant to Sections 2, 3, 4 or 5)
without the prior written consent of the Corporation, for a period designated by
the Corporation in writing to the Investors, which period shall not last more
than 180 days after the effective date of such registration statement.
Notwithstanding the foregoing, to the extent that the Investors shall enter into
an underwriting agreement that contains provisions covering one or more issues
addressed in this Section 8, the provisions contained in such underwriting
agreement shall control as to the party or parties so entering into such
underwriting agreement.
Section 9. INFORMATION PROVIDED BY THE INVESTORS. Whenever under this
-------------------------------------
Agreement Registrable Shares are being registered, each Investor participating
in such registration shall, as a condition to the inclusion of Registrable
Shares held by such Investor in such registration, provide the Corporation on a
timely basis with such information and materials as the Corporation may
reasonably request in order to effect the registration of the Registrable
Shares.
Section 10. RULE 144. With a view to making available to the Investors the
--------
benefits of Rule 144 under the Securities Act, the Corporation agrees to use its
best efforts to make available adequate current public information with respect
to it within the meaning of, and as required pursuant to, Rule 144(c).
<PAGE>
Section 11. TERMS AND CONDITIONS OF REGISTRATION. In connection with any
------------------------------------
registration pursuant to (i) Section 2 of this Agreement, and subject to the
other terms and conditions of this Agreement, the Corporation shall in its sole
discretion determine the terms and conditions of such registration, including,
without limitation, the timing thereof; the scope of the offering contemplated
thereby (i.e., whether the offering shall be a combined primary offering and a
secondary offering or limited only to a secondary offering); the manner of
distribution of Registrable Shares; the period of effectiveness of registration
for permissible sales of Registrable Securities thereunder consistent with the
plan of distribution agreed upon by the Corporation and the Investors; and all
other material aspects of the registration and the registration process or (ii)
Sections 3 and 4 of this Agreement, and subject to the other terms and
conditions of this Agreement (including, without limitation, Sections 3(c) and
4(c)), the Corporation shall in its sole discretion determine the scope of the
offering contemplated thereby (i.e., whether the offering shall be a combined
primary offering and a secondary offering or limited only to a secondary
offering) and all other material aspects of the registration and the
registration process. In connection with any registration pursuant to this
Agreement, the Corporation may require that any offering of Shares under such
registration be underwritten, in which event (i) the managing underwriter shall
be selected by the Corporation and (ii) the inclusion of Registrable Shares in
such registration shall be conditioned upon each holder thereof entering into an
underwriting agreement in customary form with such underwriters participating in
such registration. In the event that the Investors exercising demand
registration rights pursuant to Sections 3 or 4 who or which hold a majority of
the Shares with respect to which such demand registration rights have been
exercised (the "Majority Requesting Holders") request that such offering of
Shares under such registration be underwritten, the Corporation will use its
reasonable best efforts to cause such registration to be so underwritten. In
connection with any underwriting, the managing underwriter shall be selected by
the Corporation with the consent of the Majority Requesting Holders, which
consent shall not be unreasonably withheld, delayed or conditioned; provided,
--------
however, that in the case of registrations effected pursuant to a request made
- -------
by the GS Requisite Holders under Section 4 hereof, the Requisite GS Holders
shall have the right to select the managing underwriter, which shall (unless the
Corporation agrees otherwise) be an Affiliate of the GS Holders.
Section 12. EXPENSES. All expenses incurred by the Corporation in
--------
effecting a registration and sale of Registrable Shares under this Agreement,
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, expenses incurred by the
--------
Corporation in marketing and assisting in the marketing of such Registrable
Shares, the fees, disbursements and expenses of managing underwriter or
underwriters, the fees and expenses of counsel and independent auditors
including fees of counsel and accountants incurred in connection with the
preparation of customary opinions of counsel and independent auditors, and the
reasonable fees and expenses (not to exceed $25,000) of one counsel for all
selling Investors (subject to the presentation of detailed statements therefor),
shall be borne by the
<PAGE>
Corporation; provided, however, that under all circumstances all underwriting
-------- -------
discounts, income and transfer taxes, if any, selling commissions and legal fees
and expenses of counsel to the Investors (other than as provided aforesaid)
participating in any registration under this Agreement shall not be borne by the
Corporation but shall be borne solely by such participating Investors in
proportion to the number of Registrable Shares held by such Investors and
included in such registration.
Section 13. INDEMNIFICATION.
---------------
(a) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Corporation shall
indemnify and hold harmless the Investors, and the officers, directors and other
Persons that may be deemed to control any Investor within the meaning of the
Exchange Act against any losses, claims, damages or liabilities, joint or
several (or actions in respect thereof), to which the Investors and such 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 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 the light of the circumstances under which they were made not
misleading, or any violation by the Corporation of the Securities Act or state
securities or "blue-sky" laws applicable to the Corporation and relating to
--------
action or inaction required of the Corporation in connection with such
registration or qualification under state securities or "blue-sky" laws;
--------
provided, however, that the Corporation 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 strict
conformity with written information furnished to the Corporation by any Investor
with respect to information regarding such Investor expressly for inclusion
therein.
(b) In connection with any registration of Registrable Shares
under the Securities Act pursuant to this Agreement, any Investor participating
in such registration shall, severally and not jointly, indemnify and hold
harmless (in the same manner and to the same extent as set forth in Section
13(a)) the Corporation, each director of the Corporation, each officer of the
Corporation who shall sign such registration statement, each underwriter, broker
or other Person acting on behalf of the Corporation and each Person who controls
any of the foregoing Persons within the meaning of the Securities Act with
respect to any statement or
<PAGE>
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 Share, if such statement or omission was made
in reliance upon and in strict conformity with written information furnished to
the Corporation or such underwriter by such Investor expressly for inclusion in
such registration statement, preliminary prospectus, final prospectus,
amendment, supplement or document, provided that the liability of any Investor
--------
under this Section 13(b) shall not exceed the aggregate proceeds received by
such Investor upon the sale of Registrable Shares by such Investor pursuant to
such registration.
(c) 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 13, 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 indemnified party in
connection with the defense thereof; provided, however, that an indemnified
-------- -------
party shall have the right to retain its own counsel, with the reasonable fees
and expenses to be paid by the indemnifying party, if such indemnified party
shall have reasonably concluded that representation of such indemnified party or
parties by the counsel retained by the indemnifying party or parties would be
inappropriate due to actual or potential differing interests between such
indemnified party or parties and any other party represented by such counsel in
such proceeding.
(d) If the indemnification provided for in this Section 13 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,
liability or action 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.
<PAGE>
Section 14. TERMINATION. This Agreement shall terminate and be of no
-----------
further force or effect when there shall not be any Restricted Shares, provided
--------
that the rights of the Investors and the obligations of the Corporation under
Sections 2, 3, 4 and 5 hereof shall earlier terminate and be of no further force
or effect with respect to any individual Investor, and the Corporation vis a vis
such individual Investor at such earlier time as such individual Investor and
its Permitted Transferees (as defined in Section 16) no longer holds any
Restricted Shares.
Section 15. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
----------------------
to the benefit of the Corporation and each of the Investors and the respective
successors, Permitted Transferees, heirs and legal representatives (as the case
may be) of the Corporation and the Investors.
Section 16. ASSIGNMENT. The rights granted pursuant to this Agreement may
----------
not be assigned or otherwise conveyed by any Investor or by any subsequent
transferee of any of such rights without the written consent of the Corporation,
which consent shall not unreasonably be withheld; provided, however, that no
-------- -------
such written consent shall be required if (a) the transfer is to any Affiliate
or partner of any Investor or if such transferee acquires at least a majority of
the capital stock of the Corporation owned by such Investor or (b) the transfer
of the Restricted Shares to such transferee is expressly permitted by the
Stockholders Agreement or any other agreement between the Corporation and any
Investor and such Shares will be Restricted Shares upon transfer to such
transferee (each, a "Permitted Transferee"); provided further, however, that the
-------------------- -------- ------- -------
Corporation may refuse such written consent (in a case where such consent is
required) if the Board of Directors determines, in its reasonable discretion,
that the transferee is a direct competitor of the Corporation or has indicated
an intention to compete directly with the Corporation; provided further,
-------- -------
however, that any such purchaser or transferee shall, as a condition to the
- -------
effectiveness of such transfer and/or assignment, be required to execute a
counterpart to this Agreement agreeing to become a party to this Agreement and
to be treated as an Investor hereunder, whereupon such purchaser or transferee
shall have the benefits of, and shall be subject to the restrictions contained
in, this Agreement. The rights granted pursuant to this Agreement with respect
to any Investor's Restricted Shares shall be deemed to be assigned subject to
the provisions of this Section 16 (with respect to such Restricted Shares) to
any Permitted Transferee of such Restricted Shares, unless the documentation
executed by the Investor to effect the transfer of such Restricted Shares
provides that rights under this Agreement are not being assigned to such
transferee. The term "Investor" shall be deemed to include any party to whom an
Investor's rights with respect to particular Restricted Shares have been
assigned in accordance with this Section 16.
Section 17. ENTIRE AGREEMENT. This Agreement, which shall be effective
----------------
upon the Closing, contains the entire agreement among the parties with respect
to the subject matter hereof and supersedes all prior and contemporaneous
arrangements or understandings with respect thereto, including, without
limitation, the Existing Agreement, which, effective upon the Closing, shall
cease and terminate in its entirety and be of no further force or effect;
provided,
- --------
<PAGE>
however, that in the event that the Closing shall not occur, then this
- -------
Agreement shall cease and terminate and be of no force or effect and the
Existing Agreement shall continue in full force and effect.
Section 18. NOTICES. All notices and other communications pursuant to
-------
this Agreement shall be in writing and deemed to be sufficient if delivered
personally, by telecopier, sent by nationally-recognized overnight courier or
mailed by registered or certified mail (return receipt requested), postage
prepaid, or by electronic mail, with a copy thereof to be sent by mail (as
aforesaid) within 24 hours of such electronic mail, to the parties at the
following address:
(a) if to the Corporation, to:
WIT Capital Group, Inc.
826 Broadway
Sixth floor
New York, NY 10003
Attention: Ronald Readmond
Telecopier: (212) 253-4650
e-mail address: [email protected]
with a copy to:
Orrick, Herrington & Sutcliffe, LLP
30 Rockefeller Plaza
New York, New York 10112
Attn: Martin H. Levenglick, Esq.
Telecopier: (212)506-3730
e-mail address: [email protected]
(b) if to any Investor, to such Investor at the address set forth on
Schedule I hereto;
- ----------
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, 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 and (iii) in the case of mailing,
on the third business day following that on which the piece of mail containing
such communication is posted. As used in this Section 18, "business day" shall
mean any day other than a day on which banking institutions in the State of New
York are legally closed for business.
Section 19. MODIFICATIONS; AMENDMENTS; WAIVERS. The terms and provisions
----------------------------------
of this
<PAGE>
Agreement may only be amended or waived either (a) with the written consent
of the (i) Corporation and (ii) Investors holding a majority, by voting power,
of the outstanding Restricted Shares then held by all Investors with respect to
all terms and provisions of this Agreement other than Section 4, which shall
require the consent of the Requisite GS Holders and the Requisite Capital Z
Holders or (b) in a writing by the party or parties against whom such amendment
or waiver is sought to be enforced.
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. GOVERNING LAW. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed wholly therein.
<PAGE>
[COUNTERPART SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED AS OF
APRIL 9, 1999]
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed and delivered as of the date first above
written.
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
INVESTORS:
By:
Name:
Title:
<PAGE>
[COUNTERPART SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED AS OF
APRIL 9, 1999]
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed and delivered as of the date first above
written.
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
INVESTORS:
By:
Name:
Title:
<PAGE>
[COUNTERPART SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED AS OF
APRIL 9, 1999.]
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be executed and delivered as of the date first above
written.
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
INVESTORS:
By:
Name:
Title:
<PAGE>
[COUNTERPART SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED AS OF
APRIL 9, 1999.]
ADDITIONAL INVESTORS:
By:
Name:
Title:
<PAGE>
Name and Addresses of Investors
-------------------------------
- -------------------------------------------
Investors
- -------------------------------------------
Julian A. Brodsky
c/o ComCast Corporation
1500 Market Street
35th Floor
Philadelphia, PA 19102
- -------------------------------------------
Don Caldwell
c/o Safeguard Scientific
435 Devon Park Drive, Bldg. 800
Wayne, PA 19087
- -------------------------------------------
Jerry Callaghan
c/o Callaghan Partners
One World Financial Center
Suite 7967
New York, NY 10048
- -------------------------------------------
Mitchell Cohen
P.O. Box 5027
Greenwich, CT 06831
- -------------------------------------------
Edward H. Fleischrnan
c/o Linklaters Paines
1345 Avenue of the Americas
19/th/ Floor
New York, NY 10105
- -------------------------------------------
Aaron W. Ford
43 Harding Road
Old Greenwich, CT 06870
- -------------------------------------------
Russ D. Gerson
c/o Baines Gwinner N.A. Inc.
280 Park Avenue
New York, New York 10017
- -------------------------------------------
Josh Huffard
95 Woodland Avenue
San Francisco, CA 94117
- -------------------------------------------
Paul E. Kozloff
113 Leisure Court
Wyomissing, PA 19610
- -------------------------------------------
<PAGE>
- -------------------------------------------
Linda Lerner
One Salem Street #11
Swampscott, MA 01907
- -------------------------------------------
Robert H. Lessin
Wit Capital Group, Inc.
826 Broadway, Sixth Floor
New York, NY 10003
- -------------------------------------------
Michael J. Levitt
c/o Hicks, Muse, Tate & Furst Inc.
1325 Avenue of Americas
25/th/ Floor
New York, N.Y. 10019
- -------------------------------------------
Highland Capital Partners IV
Limited Partnership
2 International Place
22nd Floor
Boston, MA 02110
- -------------------------------------------
Highland Entrepreneurs' Fund
IV Limited Partnership
2 International Place
22nd Floor
Boston, MA 02110
- -------------------------------------------
Steve McDermott
29 Red Coach Lane
Holmdel, NJ 07733
- -------------------------------------------
Sarn Merrin
724 Fiflh Avenue, 3/rd/ Floor
New York, New York 10019
- -------------------------------------------
John D. Nixon
9 Marlow Court
Riverside, Connecticut 06878
- -------------------------------------------
Robert Smellick
Woodland Avenue
San Francisco, CA 94117
- -------------------------------------------
Todd Tappin
c/o Goto.com
130 West Union Street
Pasadena, CA 91103
- -------------------------------------------
Dr. Bruce Ungerleida
511 66/th/ Street North
St. Petersburg, FL 33710
- -------------------------------------------
<PAGE>
- -------------------------------------------
Brian E. Walsh
One Barron Place
New York, New York 10580
- -------------------------------------------
Kunihiko Yogo
Koishikawa 3-27-16-806
Bunkyo-ku, Tokyo 112-0002
Japan
- -------------------------------------------
Capital Z Financial Services
Fund II, L.P.
1 Chase Manhattan Plaza
44/th/ Floor
New York, New York 10005
- -------------------------------------------
Capital Z Financial Services
Private Fund II, L.P.
1 Chase Manhattan Plaza
44/th/ Floor
New York, New York 10005
- -------------------------------------------
Drapor Fisher Jurvetson Fund V, L.P.
400 Seaport Court, Suite 250
Redwood City, California 94063
Attn: Mr. John Fisher
- -------------------------------------------
Draper Fisher Jurvetson Partners LLC
400 Seaport Court, Suite 250
Redwood City, California 94063
Attn: Mr. John Fisher
- -------------------------------------------
DS Capital Group LLC
34 Doughty Blvd.
Lawrence, N.Y. 11559
Attn: Seth Fortgang
- -------------------------------------------
FG-Wit
2187 Atlantic Street,
10/th/ Floor
Stamford, CT 06902
- -------------------------------------------
MC Capital Inc.
520 Madison Avenue, 16th Floor
New York, NY 10022
Attn: Ryuichi Sasaki
- -------------------------------------------
SiliconValley, Inc.
850 Hansen Way, Suite 100
Palo Alto, CA 94306
Attn: Kogi Osawa
- -------------------------------------------
<PAGE>
- -------------------------------------------
MediaOne Interactive Services, Inc.
Attention: President
9000 East Nichols Avenue, Suite 100
Englewood, CO 80112
- -------------------------------------------
Roccia Ventures L.L.P.
c/o Lorenzo Roccia
220 East 67/th/ Street
Apt. 14C
New York, NY 10021
- -------------------------------------------
Pacific Mandarin I LTD
Suite 1108, Albion Plaza
2-6 Granville Road
Kowloon-Hong Kong
Attn: C.J. Wilson
- -------------------------------------------
BNP/ COOPER NEFF GROUP INVESTORS
- -------------------------------------------
Blake A. Banky
350 Harvest Lane
Haverford, PA 19041
- -------------------------------------------
Richard W. Cooper
1007 Canterbury Lane
Villanova, PA 19085
- -------------------------------------------
Brian P. DeGustino
53 Drummers Lane
Wayne, PA 19087
- -------------------------------------------
Kevin P. Murphy
300 Shelbourne Road
Havertown PA 19083
- -------------------------------------------
Roy S. Neff
1225 Farview Road
Villanova, PA 19085
- -------------------------------------------
Alec H. Petro
2065 Gen. Alexander Drive
Malvern, PA 19355
- -------------------------------------------
Thomas C. Piersanti, Jr.
10 Great Woods Lane
Malvem, PA 19353
- -------------------------------------------
Stephen C. Soulas
686 Paine Drive
West Chester, PA 19382
- -------------------------------------------
<PAGE>
- -------------------------------------------
Andrew J. Sterge
124 Three Ponds Lane
Malvern, PA 19355
- -------------------------------------------
Louis Werman
1954 N. Maud Ave.
Chicago, IL 60614
- -------------------------------------------
ULTRA PARTNERS GP INVESTORS
- -------------------------------------------
Robert Goodale
19 Perry Street
New York, NY 10014
- -------------------------------------------
Joseph Rascoff Family Trust
110 West 57/th/ Street
15th Floor
New York, New York 10019
- -------------------------------------------
William Zysblat
110 West 57/th/ Street
7/th/ Floor
New York, New York 10019
- -------------------------------------------
THE GOLDMAN SACHS GROUP, L.P.
85 Broad Street
New York, New York 10004
Attention: David J. Greenwald, Esq.
- -------------------------------------------
<PAGE>
EXHIBIT 10.15
- --------------------------------------------------------------------------------
PURCHASE AGREEMENT
DATED AS OF
MARCH 26, 1999
BETWEEN
WIT CAPITAL GROUP, INC.
AND
THE GOLDMAN SACHS GROUP, L.P.
- --------------------------------------------------------------------------------
<PAGE>
WIT CAPITAL GROUP, INC.
As of March 26, 1999
The Goldman Sachs Group, L.P.
85 Broad Street
New York, New York 10004
PURCHASE AGREEMENT
------------------
Dear Ladies and Gentlemen:
The undersigned, WIT CAPITAL GROUP, INC., a Delaware corporation (the
"Corporation") hereby agrees with The Goldman Sachs Group, L.P. (the
-----------
"Purchaser"), as follows:
---------
1. CERTAIN FILINGS.
---------------
Prior to the Closing Date (as herein defined), the Corporation will
have filed with the Secretary of State of the State of Delaware (the "Secretary
---------
of State") (a) a Certificate of Amendment of the Certificate of Incorporation of
- --------
the Corporation in the form of EXHIBIT A attached hereto (the "Certificate of
--------- --------------
Amendment") (i) authorizing the issuance of up to 50,000,000 shares of Class B
- ---------
Common Stock, par value $.01 per share ("Class B Common Stock"), of the
--------------------
Corporation and (ii) increasing the number of authorized shares of preferred
stock, par value $.01 per share ("Preferred Stock"), of the Corporation to
---------------
104,000,000 and (b) a Certificate of Designations, Preferences and Rights, in
the form of EXHIBIT B attached hereto (the "Series E Certificate"), designating
--------- --------------------
a series of 24,938,870 shares of non-voting Preferred Stock to be known as
"Series E Preferred Stock" (the "Series E Preferred Stock"). The Company may
------------------------
amend the form of Exhibit B to eliminate the second sentence of Section 5
thereof (and make related conforming changes to the Transaction Documents);
provided that (i) provision is added to such Exhibit B for the automatic
- -------------
conversion of Series E Preferred Stock, upon occurrence of a Qualifying
Transfer, into shares of preferred stock substantially identical to the Series E
Preferred Stock but having the voting rights specified in the second sentence of
Section 5 of such Exhibit B, and (ii) the form of Exhibit B, as so revised, is
in all respects reasonably satisfactory to the Purchaser.
2. ISSUANCE AND SALE OF SECURITIES; CLOSING.
----------------------------------------
2.1 ISSUANCE OF PREFERRED SHARES AND WARRANTS.
-----------------------------------------
On the terms and subject to the conditions hereof, the Corporation has
authorized
<PAGE>
(a) the issuance at the Closing (as hereinafter defined) of an aggregate of
16,666,667 shares of Preferred Stock (such shares of Series E Preferred Stock
being sometimes hereinafter collectively referred to as the "Preferred Shares"),
----------------
(b) the issuance at the Closing of an aggregate of 8,053,279 warrants, each
representing the right to purchase one share of Series E Preferred Stock (the
"Warrants") and the issuance of up to 218,924 Additional Warrants (as
--------
hereinafter defined), if required by Section 7.4 hereof, at the exercise price
and on the other terms and conditions provided in the Warrant certificate, in
the form of EXHIBIT C attached hereto (the "Warrant Certificate"), and (c) the
--------- -------------------
reservation of an aggregate of 8,272,203 shares of Series E Preferred Stock (the
"Reserved Preferred Shares") for issuance upon exercise of the Warrants and
-------------------------
24,938,870 shares of Class B Common Stock and 24,938,870 shares of Voting Common
Stock, in each case, for issuance upon conversion or exercise of (i) the
Preferred Shares and (ii) the Reserved Preferred Shares or the Warrants (the
"Reserved Common Shares").
----------------------
2.2 AGREEMENT TO PURCHASE AND SELL SHARES.
-------------------------------------
At the Closing, upon the terms and subject to the conditions
hereinafter set forth, (a) the Corporation will sell to the Purchaser and the
Purchaser shall purchase from the Corporation 16,666,667 Preferred Shares at a
purchase price of $1.50 per Preferred Share, and (b) the Corporation will issue
to the Purchaser 8,053,279 Warrants in consideration for such purchase of the
Preferred Shares and the Purchaser's agreements set forth herein, in the
Stockholders' Agreement, dated as of April 8, 1999 (the "Stockholders'
Agreement"), among the Corporation and the other signatories listed therein, in
substantially the form of EXHIBIT D, and in the Supplemental Agreement, dated as
---------
of April 8, 1999 (the "Supplemental Agreement"), between the Corporation and the
----------------------
Purchaser, in substantially the form attached hereto as EXHIBIT E, and certain
---------
cash consideration.
2.3 THE CLOSING.
-----------
The closing (the "Closing") hereunder with respect to the Preferred
Shares and the Warrants will take place at the offices of Sullivan & Cromwell,
125 Broad Street, New York, New York 10004 on the date of the execution of this
Agreement or, if later, the date that is one business day following the
satisfaction or waiver of all conditions to the Closing set forth in Sections 6
and 7 hereof (other than any such conditions which, by their terms, cannot be
satisfied until the Closing), or at such other time and place as the Corporation
and the Purchaser may agree. The date on which the Closing occurs is referred as
to the "Closing Date."
------------
2.4 DELIVERY OF SHARES TO THE PURCHASER.
-----------------------------------
At the Closing, the Corporation shall deliver to the Purchaser (a) a stock
certificate representing 16,666,667 Preferred Shares and (b) a Warrant
Certificate representing 8,053,279 Warrants, in each case registered in the
name of "The Goldman Sachs Group, L.P." and dated the Closing Date, against
receipt by the Corporation of a certified check payable to the
-3-
<PAGE>
Corporation, or a wire transfer of immediately available funds, to an account
designated by the Corporation, in either case in an amount equal to $25,000,000.
3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION.
-------------------------------------------------
The Corporation hereby represents and warrants to the Purchaser as
follows:
3.1 ORGANIZATION.
------------
(a) The Corporation is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. The Corporation
has all requisite corporate power and authority to own and lease its properties,
to carry on its business as presently conducted and to carry out the
transactions contemplated hereby. The Corporation is qualified to do business as
a foreign corporation in the State of New York and is not qualified to do
business as a foreign corporation in any other jurisdiction and the failure to
be so qualified in any such other jurisdiction will not have a material adverse
effect on the Corporation's business or financial condition.
(b) The Corporation has only one operating subsidiary, Wit Capital
Corporation, a New York corporation and has one wholly-owned non-operating
subsidiary, BidPlus Corporation, a New York corporation (collectively, the
"Subsidiaries"). Each Subsidiary has all requisite corporate power and
------------
authority to own and lease its respective properties, to carry on its respective
business as presently conducted and to carry out the transactions contemplated
hereby. Each Subsidiary is qualified to do business as a foreign corporation in
those jurisdictions in which such qualification is necessary in order to
undertake its respective business and is not qualified to do business as a
foreign corporation only in such other jurisdictions in which the failure to be
so qualified will not have a material adverse effect on such Subsidiary's
business or financial condition.
3.2 CAPITALIZATION.
--------------
The authorized capital stock of the Corporation immediately prior to
the consummation of the Closing shall, subject, in each case following the date
hereof, to (i) any grant of options to directors, officers, employees or
consultants approved by the Board of Directors of the Corporation, (ii) the
exercise or exchange of any options or warrants outstanding on the date hereof
(or options or warrants granted as contemplated by subclause (i) above) for
capital stock of the Corporation, and (iii) the issuance of Common Stock (as
defined herein) upon conversion of any Preferred Stock (as hereinafter defined)
outstanding on the date hereof, consist of:
-4-
<PAGE>
(a) 184,000,000 shares of Common Stock, $.01 par value ("Voting
------
Common Stock") of which (i) 18,823,524 shares will be validly issued and
- ------------
outstanding, fully paid and nonassessable, (ii) 8,997,952 shares are reserved
for issuance upon conversion of the Series A Convertible Preferred Stock, $.01
par value, of the Corporation (the "Series A Preferred Stock"), (iii) 2,304,982
------------------------
shares are reserved for issuance upon conversion of the Series B Convertible
Preferred Stock, $.01 par value, of the Corporation (the "Series B Preferred
------------------
Stock"), (iv) 7,445,000 shares are reserved for issuance upon conversion of the
- -----
Series C Preferred Stock, $.01 par value, of the Corporation (the "Series C
--------
Preferred Stock"), (v) 31,333,334 shares are reserved for issuance upon
- ---------------
conversion of the Series D Preferred Stock, $.01 par value, of the Corporation
(the "Series D Preferred Stock"), (vi) 25,000,000 will be reserved for issuance
------------------------
upon any transfer of shares of Class B Common Stock, or upon any conversion of
shares of Series E Preferred Stock or exercise of Warrants, in each case that
may become convertible into or exercisable for shares of Voting Common Stock,
(vii) 1,248,800 shares will be reserved for issuance upon exercise of the
warrants identified on Schedule 3.2 other than the DFJ Warrants (as hereinafter
defined) and (viii) 19,885,428 shares will be reserved for issuance to
employees, officers, directors and consultants pursuant to the Corporation's
1996 Stock Option Plan (the "Plan");
----
(b) 25,000,000 shares of Class B Common Stock, of which (i) no shares
will be issued and outstanding and (ii) 24,938,870 shares are reserved for
issuance upon conversion of the Series E Preferred Stock and exercise of the
Warrants; and
(c) 104,000,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"), of which (i) 10,000,000 shares are designated as Series A
Preferred Stock, of which 8,997,952 shares are validly issued and outstanding,
fully paid and non-assessable, (ii) 3,000,000 shares are designated as Series B
Preferred Stock, of which 2,304,982 shares are validly issued and outstanding,
fully paid and non-assessable, (iii) 7,445,000 shares are designated Series C
Preferred Stock, (A) of which 5,902,750 shares will be validly issued and
outstanding, fully paid and non-assessable, (B) of which 852,220 shares are
designated but are not issued (and are not subject to issuance) and (C) of which
690,030 shares are reserved for issuance upon exercise of Stock Subscription
Warrants issued by the Corporation to Draper Fisher Jurvetson Partners, LLC and
Draper Fisher Jurvetson Fund V, L.P (collectively, the "DFJ Warrants"), (iv)
31,333,334 shares are designated Series D Preferred Shares, of which 31,333,334
shares are validly issued and outstanding, fully paid and non-assessable and (v)
25,000,000 shares are designated Series E Preferred Stock, of which 16,666,667
are authorized for issuance at the Closing and 8,272,203 shares are reserved for
issuance upon exercise of the Warrants.
Except pursuant to this Agreement and the Third Amended and Restated Agreement,
dated as of April 8, 1999 (the "Stockholders' Agreement"), among the Corporation
-----------------------
and the other signatories thereto, in substantially the form attached hereto as
Exhibit D, and except for Common Stock issuable (x) upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, (y) pursuant to options granted or to be granted under
the Plan in the ordinary course of business consistent with past
-5-
<PAGE>
practice or (z) as set forth on Schedule 3.2 or pursuant to the Series E
Certificate, there are no (i) outstanding warrants, options, agreements,
convertible securities or other commitments or instruments pursuant to which the
Corporation is or may become obligated to issue or sell any shares of capital
stock or other securities of the Corporation, (ii) preemptive or similar rights
to purchase or otherwise acquire shares of capital stock of the Corporation
pursuant to any provision of law, the Certificate of Incorporation or Bylaws of
the Corporation or any agreement to which the Corporation is party or otherwise
or (iii) obligation (contingent or otherwise) of the Corporation to purchase,
redeem or otherwise acquire any shares of its capital stock or any interest
therein or to pay any dividend or make any other distribution in respect
thereof. Schedule 3.2 sets forth a list of the record holders, immediately prior
to the Closing, of (a) all of the issued and outstanding shares of capital stock
of the Corporation, (b) all outstanding options granted under the Plan and (c)
all outstanding warrants to purchase capital stock of the Corporation. The
conversion, exercise or exchange of any security of the Corporation outstanding
on the date hereof, in accordance with the terms of the applicable agreement or
instrument governing the issuance of such security, shall not give rise to an
adjustment to the Conversion Price (in each case as defined in Section 3D of the
applicable Certificate of Designations, Rights and Preferences of the Series A
Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or
the Series D Preferred Stock) pursuant to the terms of each such Certificate of
Designations, Rights and Preferences or the exercise price of any outstanding
warrant, option or other right to acquire capital stock of the Company.
(d) Upon the purchase and sale of the Preferred Shares and the
Warrants described herein, the Purchaser will hold at least 21.7% of the fully
diluted common stock of the Corporation, assuming for purposes of this Section
3.2(d) the conversion of all securities convertible at any time into shares of
the Corporation's common stock and the exercise of all options or warrants or
other rights to purchase or receive shares of the Corporation's common stock.
3.3 SUBSIDIARIES.
------------
Each of the outstanding shares of capital stock of each Subsidiary is
duly authorized, validly issued, fully paid and nonassessable and all such
shares are owned by the Corporation free and clear of any lien, pledge, security
interest, claim or other encumbrance.
3.4 AUTHORIZATION.
-------------
The execution, delivery and performance by the Corporation of this
Agreement, the Warrant Certificate, the Stockholders' Agreement, the Third
Amended and Restated Registration Rights Agreement, dated as of April 8, 1999
(the "Registration Rights Agreement"), among the Corporation and the other
-----------------------------
signatories thereto, in substantially the form attached hereto
-6-
<PAGE>
as EXHIBIT F, and the Supplemental Agreement (all of such Agreements,
---------
collectively, the "Transaction Documents") and the consummation of the
---------------------
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of the Corporation; this Agreement has
been, and at Closing the Stockholders' Agreement, the Registration Rights
Agreement and the Supplement Agreement shall have been duly executed and
delivered by the Corporation; and this Agreement constitutes and the
Stockholders' Agreement, the Registration Rights Agreement and the Supplemental
Agreement will, upon execution and delivery by the other requisite parties
thereto and upon the Closing, constitute, and the Warrant Certificate will, upon
execution and delivery by the Corporation upon the Closing, constitute the valid
and binding obligations of the Corporation, enforceable in accordance with their
respective terms, except as limited by (A) applicable bankruptcy, insolvency,
moratorium, fraudulent conveyance or similar laws relating to or affecting the
rights and remedies of creditors and debtors and (B) equitable principles
generally, regardless of whether such principles are considered in a proceeding
at equity or at law. The execution, delivery and performance of each of the
Transaction Documents, and compliance with the provisions hereof and thereof by
the Corporation will not (a) violate in any material respect any law or statute
or order, judgment or decree of any court, administrative agency or other
governmental body applicable to the Corporation, any Subsidiary or their
respective properties or assets, (b) except as set forth on Schedule 3.4 and
subject to the approval of the amendment of the Certificate of Incorporation
contemplated by Section 1 by the requisite vote or consent of the stockholders
of the Corporation and the filing of the Certificate of Amendment with Secretary
of State, conflict in any respect with or result in any breach of any of the
terms or provisions or constitute (with due notice or lapse of time, or both) a
default under the Certificate of Incorporation or By-laws of the Corporation or
any Subsidiary, or any note, indenture, mortgage, lease agreement or other
material agreement, contract or instrument to which the Corporation or any
Subsidiary is a party or by which either of them or any of their respective
properties or assets may be bound or affected, or (c) result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Corporation or any
Subsidiary.
3.5 NO CONSENT OR APPROVAL REQUIRED.
-------------------------------
Except as provided in Section 1 and as set forth on Schedule 3.5, no
authorization, consent, approval or other order of, or declaration to or filing
with, any governmental agency or body or other person or entity is required for
the valid authorization, execution and delivery by the Corporation of this
Agreement or any of the other Transaction Documents or for the performance by
the Corporation of its obligations hereunder or thereunder or the offer, sale or
issuance of the Preferred Shares, the Warrants, the Reserved Common Shares or
the Reserved Preferred Shares or the consummation of the transactions
contemplated hereby or thereby.
-7-
<PAGE>
3.6 AUTHORIZATION OF PREFERRED SHARES AND WARRANTS.
----------------------------------------------
(a) The issuance, sale and delivery of the Preferred Shares have been
duly authorized by all requisite corporate action of the Corporation; and the
Preferred Shares will, upon the filings contemplated by Section 1 hereof, be
duly authorized and duly reserved for issuance pursuant to this Agreement, and
when issued, sold and delivered in accordance with the terms of this Agreement
and the Series E Certificate, the Preferred Shares will be validly issued and
outstanding, fully paid and nonassessable and will not be subject to preemptive
or other similar rights of the stockholders of the Corporation or others and,
except as set forth in this Agreement or in the Stockholders' Agreement, will be
free and clear of all liens, charges, restrictions, claims and encumbrances.
(b) The issuance, sale and delivery of the Warrants have been duly
authorized by all requisite corporate action of the Corporation; and the
Warrants will, upon the filings contemplated by Section 1 hereof, be duly
authorized and duly reserved for issuance pursuant to this Agreement, and when
executed, sold and delivered in accordance with the terms of this Agreement and
the Warrant Certificate, the Warrants will be duly executed and delivered by
the Corporation and constitute the valid and binding obligations of the
Corporation, enforceable in accordance with their terms, except as limited by
(A) applicable bankruptcy, insolvency, moratorium, fraudulent conveyance or
similar laws relating to or affecting the rights and remedies of creditors and
debtors and (B) equitable principles generally, regardless of whether such
principles are considered in a proceeding at equity or at law, and will not be
subject to preemptive or other similar rights of the stockholders of the
Corporation or others and, except as set forth in this Agreement and the
Stockholders' Agreement, will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed.
3.7 AUTHORIZATION OF RESERVED PREFERRED SHARES AND RESERVED COMMON
--------------------------------------------------------------
SHARES.
------
(a) The Reserved Preferred Shares will, upon the filings contemplated
by Section 1 hereof, be duly authorized and duly reserved for issuance upon
exercise of the Warrants in accordance with the terms thereof. When and if
issued, sold and delivered in accordance with the terms of the Warrants, the
Reserved Preferred Shares will be duly authorized, validly issued and
outstanding, fully paid and nonassessable, and will not be subject to preemptive
or other similar rights of the stockholders of the Corporation or others.
(b) The Reserved Common Shares will, upon the filings contemplated by
Section 1 hereof, be duly authorized and duly reserved for issuance upon
conversion or exercise of Preferred Shares and Warrants. When and if issued,
sold and delivered in accordance with the terms of the Series E Certificate or
the Warrants, as the case may be, the Reserved Common Shares will be duly
authorized, validly issued and outstanding, fully paid and nonassessable and
will not be subject to preemptive or other similar rights of the stockholders of
the Corporation or
-8-
<PAGE>
others and, except as set forth in this Agreement or in the Stockholders'
Agreement, will be free and clear of all liens, charges, restrictions, claims
and encumbrances.
3.8 FINANCIAL STATEMENTS; LIABILITIES; CHANGES.
------------------------------------------
(a) Attached hereto as Schedule 3.8 are the audited consolidated
balance sheet of the Corporation and the Subsidiaries as at December 31, 1998,
and the related audited consolidated statements(s) of income (loss) and cash
flows for the year then ended (collectively, the "Financial Statements"),
--------------------
prepared by the Corporation and compiled by Arthur Anderson LLP, the
Corporation's certified public accountants (the "Accountants"). Except as
-----------
disclosed on Schedule 3.8 hereto, the Financial Statements present fairly the
financial condition and the results of operations of the Corporation and the
Subsidiaries, taken as a whole as of the dates and for the periods indicated in
accordance with generally accepted accounting principles ("GAAP") consistently
----
applied through all relevant periods.
(b) Except as set forth on Schedule 3.8 hereto, since December 31,
1998, there has been no material adverse change in the assets, liabilities,
financial condition, business, operations or prospects of the Corporation or any
Subsidiary.
3.9 AGREEMENTS.
----------
Schedule 3.9 hereto sets forth a true and complete list of all
contracts, agreements, instruments, understandings or arrangements to which the
Corporation or any Subsidiary is a party or by which it is bound (i) that
involve liabilities or obligations of, or payments by or to the Corporation or
any Subsidiary or otherwise have a value in excess of $50,000, (ii) that involve
the license to or from the Corporation or any Subsidiary of any intellectual
property rights (other than licenses of, or licenses arising from purchases of,
"off-the-shelf" or other standard products), (iii) between the Corporation or
any Subsidiary and any of their respective officers, directors, employees or
consultants, (iv) that restricts the Corporation or any Subsidiary from engaging
in any aspect of its business or competing in any line of business in any
geographic area, (v) that pertain to the formation of "e-syndicates", (vi) that
pertain to the provision of technology services or (vii) that provide for the
payment of bonuses or other deferred or special compensation to an employee or
employees".
3.10 LITIGATION.
----------
Except as set forth on Schedule 3.10, there are no actions, suits,
proceedings or investigations pending nor, to the knowledge of the Corporation,
threatened against the Corporation or any Subsidiary by or before any court or
governmental agency. The foregoing includes actions pending or, to the
knowledge of the Corporation, threatened involving the prior
-9-
<PAGE>
employment of any of the Corporation's or any Subsidiary's respective employees,
their use in connection with the Corporation's or any Subsidiary's respective
business of any information or techniques allegedly proprietary to any of their
former employers, or their obligations under any agreements with prior
employers.
3.11 COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS.
-------------------------------------------------
(a) Except as set forth on Schedule 3.11, and except in each case
for such matters as would not have a material adverse effect on its assets,
liabilities, financial condition, business, operations or property, each of the
Corporation and the Subsidiaries (i) has at all times since its respective time
of organization conducted its respective business and is conducting its
respective business in compliance in all material respects with all Applicable
Laws (as defined below), (ii) has, and each of its employees has, all licenses,
permits, qualifications, registrations, memberships and authorizations of, and
made all filings with, Governmental Authorities (as defined below) necessary for
the conduct of its business as currently conducted (collectively, the
"Permits"), and (iii) has at all times made and maintained records relating to
-------
its business which comply in all material respects with Applicable Law and which
accurately reflect all transactions in reasonable detail, including without
limitation all books, ledgers, files, reports, plans and operating records
whether maintained on electronic or magnetic media or otherwise (collectively,
the "Records"). The Permits are in full force and effect, and no material
-------
violations have been recorded in respect of any of the Permits, and no
proceeding is pending or, to the knowledge of the Corporation, threatened to
revoke or limit any of the Permits, with only such exceptions as would not have
a material adverse effect on its assets, liabilities, financial condition,
business, operations or property. Schedule 3.11 sets forth a list of each
material Permit.
(b) Neither the Corporation, any Subsidiary nor any "associated
person" of the Corporation or any Subsidiary is ineligible pursuant to (S)15(b)
of the Securities Exchange Act of 1934 to serve as a broker-dealer or as an
"associated person" of a registered broker-dealer. Neither the Corporation nor
any Subsidiary is engaged in any activity that would require it to be registered
as an investment advisor under the Investment Advisers Act of 1940 or as a
futures commission merchant under the Commodity Exchange Act.
(c) Prior to the date hereof, neither the Corporation nor any
Subsidiary has engaged in any trading of exchange-traded futures or options on
futures for proprietary accounts or any accounts over which it has discretionary
authority.
(d) Except (i) as set forth in Schedule 3.11, (ii) for such matters
as would not have a material adverse effect on the assets, liabilities,
financial condition, business, operations or property of the Company or any
Subsidiary, or (iii) for normal examinations conducted by a Governmental
Authority in the ordinary course of business of the Corporation and its
-10-
<PAGE>
Subsidiaries, since its respective time of organization, no Governmental
Authority has initiated any investigation, inquiry or proceeding into the
business or operations of the Corporation or its Subsidiaries or any employees
of the foregoing and, to the knowledge of the Corporation, there is no
reasonable basis for any such investigation, inquiry or proceeding. There is no
unresolved violation or exception by any Governmental Authority, in each case as
to which the Corporation or any Subsidiary has received written notice or which
has been specifically identified to it by such Governmental Authority, with
respect to any report or statement by any Governmental Authority relating to any
examination of any of the Corporation or its Subsidiaries or any employees of
the foregoing and, to the knowledge of the Corporation, there is no reasonable
basis for any such investigation, inquiry or proceeding. There is no unresolved
violation or exception by any Governmental Authority, in each case as to which
the Corporation or its Subsidiaries has received written notice or which has
been specifically identified to it by such Governmental Authority, with respect
to any report or statement by any Governmental Authority relating to any
examination of any of the Corporation or its Subsidiaries.
(e) Each of the Corporation and its Subsidiaries have in place
accounting controls, policies and procedures sufficient to ensure that their
transactions are recorded in a manner which permits the preparation of financial
statements in accordance with GAAP and applicable regulatory accounting
requirements. Each of the Corporation and the Subsidiaries have, since their
respective times of organization, made all filings required to be made by them
with any Governmental Authority.
(f) All sales and marketing materials used by the Corporation and
the Subsidiaries in the conduct of their respective businesses comply in all
material respects with Applicable Law, with only such exceptions as would not
have a material adverse effect on their respective assets, liabilities,
financial condition, business, operations or property.
(g) For the purposes of this Agreement, (i) "Applicable Law" means
any and all federal and state statutes, laws, rules, regulations, codes and
ordinances of any Governmental Authority, in each case as amended and in effect
from time to time and (ii) "Governmental Authority" means any federal, national
or state government, political subdivision thereof or governmental or regulatory
authority, agency, board, bureau, commission, court or self-regulatory
organization.
3.12 PATENTS, TRADEMARKS, ETC.
-------------------------
Schedule 3.12 hereto sets forth a list of all domestic and foreign
patents, patent applications, trademarks, trademark applications, service marks,
service mark applications, trade names and copyrights owned by or registered in
the name of the Corporation or any Subsidiary, or with respect to which the
Corporation or any Subsidiary is a licensor or licensee (and all applications
therefor that are in the process of being prepared by or on behalf of the
Corporation or any Subsidiary). The Corporation and each of its Subsidiaries,
owns or possesses adequate
-11-
<PAGE>
licenses or other rights to use all patents, trademarks, service marks, trade
names, copyrights, manufacturing processes, formulae, trade secrets, customer
lists and know-how (collectively, "Intellectual Property") necessary to the
conduct of their respective businesses as presently conducted. No claim is
pending and neither the Corporation nor any Subsidiary has received written
notice from any third party to the effect that the operations of the Corporation
or any Subsidiary infringe upon or conflict with the asserted rights of any
person under any Intellectual Property. No claim is pending and neither the
Corporation nor any Subsidiary has received written notice from any third party
to the effect that any such Intellectual Property used under color of ownership
or licensed by the Corporation or any Subsidiary, or which the Corporation or
any Subsidiary uses or otherwise believes it has the right to use is invalid or
unenforceable by the Corporation or any Subsidiary. To the knowledge of the
Corporation, all technical information developed by and belonging to the
Corporation or any Subsidiary that has not been patented has been kept
confidential. Neither the Corporation nor any Subsidiary has granted or assigned
to any other person or entity any right to sell or provide the services offered
by the Corporation or any Subsidiary. Anything contained herein to the contrary
notwithstanding, no representation or warranty is being made hereunder by the
Corporation with respect to any content or information accessible through
hyperlinks from the Corporation's Web site on the Internet to third party Web
sites on the Internet or such third party's Intellectual Property or other
rights of any person related to such content or information.
3.13 EMPLOYEES.
---------
To the knowledge of the Corporation, no employee of the Corporation or
any Subsidiary is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with the Corporation or any Subsidiary or any
other party as a result of the nature of the business presently conducted or
proposed to be conducted by the Corporation or any Subsidiary. Neither the
Corporation nor any Subsidiary has any collective bargaining agreement covering
any of its respective employees. Except for the Plan or as set forth on Schedule
3.13 attached hereto, neither the Corporation nor any Subsidiary has a written
employee benefit plan presently in force with respect to profit-sharing,
pensions, stock options, equity rights or other similar benefits.
3.14 TAXES.
-----
Except as set forth on Schedule 3.14, the Corporation and each
Subsidiary has filed all tax returns when due and paid all taxes shown thereon
to be due, if any, that are required to have been filed on or before the Closing
with appropriate Federal, state, foreign, county and local governmental agencies
or instrumentalities, including any and all payroll and withholding taxes,
except where the failure to do so would not have a material adverse effect upon
the business of the Corporation or any Subsidiary. Neither the Corporation nor
any Subsidiary has
-12-
<PAGE>
been advised in writing (a) that any of its returns, Federal, state or other,
have been or are being audited as of the date hereof, or (b) of any deficiency
in assessment or proposed adjustment to its Federal, state or other taxes. The
Corporation and each Subsidiary have complied with all Federal, state, foreign
and local information reporting requirements and have retained appropriate
documentation of such compliance. The Corporation currently estimates that its
consolidated Federal net operating loss from inception of the Corporation
through December 31, 1998 was approximately $13,180,000. As of the date of this
Purchase Agreement, such net operating loss carryforward is not subject to the
limitations of Section 382 of the Internal Revenue Code of 1986, as amended.
3.15 TITLE TO PROPERTIES.
-------------------
Neither the Corporation nor any Subsidiary owns any real property and
all other properties (if any) owned by the Corporation are owned outright free
and clear of mortgages, pledges, security interests, liens, charges and other
encumbrances, except (a) liens for current taxes not yet due and (b) minor
imperfections of title, if any, not material in amount and not materially
detracting from the value or impairing the use of the property subject thereto
or impairing the operations or proposed operations of the Corporation or any
Subsidiary.
3.16 REGISTRATION RIGHTS.
-------------------
Except as provided in the Second Amended and Restated Registration
Rights Agreement, dated as of February 23, 1999, among the Corporation and each
of the investors parties thereto and, as of the Closing, the Registration
Rights Agreement, or as set forth on Schedule 3.16, the Corporation is not under
any contractual obligation to register any of its outstanding securities.
3.17 AGREEMENTS REGARDING CONFIDENTIAL INFORMATION, PROPRIETARY
----------------------------------------------------------
INFORMATION AND INTELLECTUAL PROPERTY.
- -------------------------------------
Except as set forth on Schedule 3.17, the Chief Executive Officer and
each key employee of the Corporation has executed and delivered an agreement
with the Corporation with respect to non-disclosure, non-competition and
assignment of inventions.
3.18 SECURITIES OFFERINGS.
--------------------
(a) Subject to the accuracy of the Purchaser's representations and
warranties made in Section 4 hereof to the Corporation, (i) the offer, sale and
issuance of the Preferred Shares to the Purchaser in conformity with the terms
of this Agreement, (ii) the offer and issuance of the Warrants to the Purchaser
in conformity with the terms of this Agreement and the
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<PAGE>
Warrant Certificate, (iii) the issuance to the Purchaser of the Reserved
Preferred Shares issuable upon conversion of the Warrants and (iv) the issuance
to the Purchaser of the shares of the Reserved Common Shares issuable upon
conversion of the Preferred Shares and the Warrants, each constitute
transactions exempt from the registration requirements of Section 5 of the
Securities Act, and the registration or qualification requirements of any
applicable state securities or "blue sky" laws.
(b) With respect to each offering, sale and issuance of securities
heretofore made by the Corporation and its Subsidiaries, each such offering,
sale and issuance of securities constituted a transaction exempt from the
registration requirements of Section 5 of the Securities Act, and the
registration or qualification requirements of any applicable state securities or
"blue sky" laws. Each such offering, sale and issuance was undertaken in
compliance with all applicable securities laws.
3.19 USE OF PROCEEDS.
---------------
The Corporation intends to utilize the net proceeds from the sale of
the Preferred Shares for general corporate purposes.
3.20 BROKERS AND FINDERS.
-------------------
Except as set forth on Schedule 3.20, no person or entity acting on
behalf or under the authority of the Corporation is or will be entitled to any
broker's, finder's, or similar fee or commission in connection with the
transactions contemplated by this Agreement.
3.21 DISCLOSURE.
----------
To the knowledge of the Corporation, neither this Agreement nor any
Exhibit or Schedule hereto (when read together), contains an untrue statement of
material fact or omits to state a material fact necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading. Except for (i) information relating to this Agreement and
the transactions contemplated hereby and (ii) the ongoing development of the
business of the Corporation and its Subsidiaries as contemplated therein, and
taking into account the preliminary nature of the prospectus included therein,
the Registration Statement of the Corporation filed with the Securities and
Exchange Commission (the "SEC") on March 18, 1999 on Form S-1 (the "Registration
------------
Statement") does not contain an untrue statement of a material fact or omit to
- ---------
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The parties agree
that any changes to the Registration Statement in response to comments of the
SEC staff will not be presumed to be, or not to be, material. "Wit Capital
Group, Inc. Financial Projections 1999-2001" dated June, 1998, February 16, 1999
and March, 1999 and supplied to the Purchaser (the
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<PAGE>
"Other Projections") were prepared by the Corporation in good faith and the
-----------------
financial projections and other estimates contained in the Other Projections
were prepared by the Corporation based on its experience in the industry and on
assumptions of fact and opinion as to future events that the Corporation, at the
date of the Other Projections, believed to be reasonable, but which the
Corporation cannot and does not assure or guarantee, or otherwise represent or
warrant as to, the attainment of in any manner. Nothing contained in this
Section 3.21 shall diminish or derogate from any of the other representations
and warranties of the Corporation contained in this Section 3.
3.22 NO PREEMPTIVE RIGHTS.
--------------------
None of (i) the Corporation's issuance of the Preferred Shares, (ii)
the Corporation's authorization and reservation of the Reserved Preferred
Shares, (iii) the Corporation's issuance of the Warrants, (iv) the Corporation's
authorization and reservation of the Reserved Common Preferred Shares, (v) the
Corporation's issuance of Preferred Shares upon the exercise of the Warrants,
(vi) the Corporation's issuance of shares of its Common Stock upon conversion of
the Preferred Shares and/or exercise of the Warrants, (vii) the execution and
delivery of the Warrant Certificate, (viii) the Corporation's issuance of Voting
Common Stock upon transfer of Shares of Class B Common Stock or (ix) the
entering into on the part of the Corporation of any of the Transaction Documents
or any of the other agreements and transactions contemplated herein or therein
or otherwise entered into between the Corporation and the Purchaser in
connection herewith or therewith will create or vest any preemptive or other
similar rights, or cause any adjustment in the number of securities issuable
pursuant to, or the conversion or exercise price of, any outstanding rights, to
purchase, acquire or subscribe to shares in the Corporation or securities
convertible into shares of the Corporation by any of the beneficial holders of
shares of the Corporation or any securities convertible into, or exercisable
for, shares of capital stock of the Corporation.
3.23 YEAR 2000 COMPLIANCE . The Corporation and the Subsidiaries
---------------------
have each undertaken a year 2000 compliance program which is on schedule to
assure that the software and hardware operated by the Corporation and the
Subsidiaries are capable of providing uninterrupted functionality to recognize,
record, store, process and present calendar dates falling on or after January 1,
2000 and date-dependent data in substantially the same manner and with the same
functionality as such software and hardware recognizes, records, stores,
processes and presents calendar dates prior to January 1, 2000 and date-
dependent data as of the date hereof. To the knowledge of the officers of the
Corporation, after due inquiry, each supplier, vendor, customer, financial
institution or other organization with which the Corporation or any Subsidiary
conducts business has remedied or will remedy on a timely basis its own Year
2000 issues, except to the extent that any failure to remedy by any such
supplier, vendor, customer, financial institution or other organization would
not reasonably be expected to have a material adverse affect on the assets,
liabilities, financial condition, business or results of operations of the
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<PAGE>
Corporation or any Subsidiary. Prior to the date hereof, the Corporation has
discussed with the Purchaser the material steps that the Corporation and the
Subsidiaries have taken to become Year 2000 compliant and the costs the
Corporation expects to incur in connection therewith. There are no existing
circumstances or contemplated changes in any information systems of the
Corporation or any Subsidiary that would reasonably be expected to have a
material adverse affect on the assets, liabilities, financial condition,
business or results of operations or prospects of the Corporation or any
Subsidiary.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
-----------------------------------------------
The Purchaser hereby represents and warrants to the Corporation as
follows:
4.1 AUTHORIZATION.
-------------
The execution, delivery and performance by the Purchaser of each of
the Transaction Documents to which it is a party and the consummation of the
transactions contemplated thereby have been duly authorized by all requisite
action on the part of the Purchaser, and this Agreement has been duly executed
and delivered by the Purchaser; at the Closing the Stockholders' Agreement, the
Supplemental Agreement and the Registration Rights Agreement will be duly
executed and delivered by the Purchaser and this Agreement constitutes, and upon
execution and delivery by the Purchaser, the Stockholders' Agreement, the
Supplemental Agreement and the Registration Rights Agreement, will constitute,
the valid and binding obligations of such the Purchaser enforceable in
accordance with their respective terms, except as limited by (A) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws relating to or affecting the rights and remedies of creditors and
debtors and (B) equitable principles generally, regardless of whether such
principles are considered in a proceeding at equity or at law.
4.2 INVESTMENT INTENT.
-----------------
The Purchaser is acquiring the Preferred Shares and the Warrants for
investment and not with a view to, or for resale in connection with, any
distribution thereof, nor with any present intention of distributing or
reselling the same or any part thereof.
4.3 RESTRICTED SECURITIES.
---------------------
The Purchaser understands (i) that the Preferred Shares and the
Warrants have not been and will not be, and any Reserved Preferred Shares issued
upon exercise of the Warrants and any Reserved Common Shares issued upon
conversion of the Preferred Shares or the Warrants, will not be, registered
under the Securities Act or registered or qualified under any applicable state
securities or "blue-sky" laws by reason of their issuance in transactions exempt
from the registration requirements of the Securities Act or registration or
qualification
-16-
<PAGE>
requirements any applicable state securities or "blue-sky" laws, (ii) that the
Preferred Shares, any Reserved Preferred Shares issuable upon conversion
thereof, and any Reserved Common Shares issuable upon conversion of the
Preferred Shares or the Warrants must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or registered or
qualified under any applicable state securities or "blue-sky" laws or is exempt
from such registration, (iii) that the Corporation is under no obligation to so
register any Preferred Shares or Warrants or, except as provided in the
Registration Rights Agreement, any Reserved Preferred Shares or Reserved Common
Shares issuable upon conversion thereof and (iv) that the certificate(s)
evidencing the Preferred Shares, the Warrants and Reserved Preferred Shares or
Reserved Common Shares issuable upon conversion thereof, will be imprinted with
a legend that prohibits the transfer substantially as set forth in Section 8(b)
hereof unless they are registered or such registration is not required.
4.4 ACCESS TO INFORMATION; EXPERIENCE.
---------------------------------
The Purchaser has been furnished with or has had access during the
course of this transaction and prior to the Closing to all information necessary
to enable the Purchaser to evaluate the merits and risks of a prospective
investment in the Corporation and the Purchaser has had an opportunity to
discuss with representatives of the Corporation the business and financial
affairs of the Corporation and the terms and conditions of the offering and to
obtain such additional information, to the extent that the Corporation possesses
such information or could acquire it without unreasonable effort or expense,
necessary to verify the accuracy of the information to which the Purchaser has
had access and all questions raised by the Purchaser have been answered to the
full satisfaction of the Purchaser. The Purchaser has conducted its own
investigation and analysis of the business and its investment in the Preferred
Shares and the Warrants. The Purchaser has substantial experience in evaluating
and investing in private placement transactions of securities in companies
similar to the Corporation so that it is capable of evaluating the merits and
the risks of its investment in the Corporation and has the capacity to protect
its own interests in making its investment in the Corporation. The Purchaser can
afford to suffer a complete loss of the cash consideration paid in respect of
its investment in the Preferred Shares and the Warrants.
4.5 RULE 144.
--------
The Purchaser understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to such person)
promulgated under the Securities Act ("Rule 144") depends on the satisfaction of
various conditions and that, if applicable, Rule 144 may only afford the basis
for sales under certain circumstances only in limited amounts.
4.6 SPECULATIVE INVESTMENT.
----------------------
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<PAGE>
The Purchaser understands that the Corporation has a limited financial
and operating history, that the Preferred Shares and the Warrants are a
speculative investment which involve a high degree of financial risk, and that
there is no assurance of any economic, income or tax benefit from such
investment.
4.7 ACCREDITED INVESTOR.
-------------------
The Purchaser is an "accredited investor" (as such term is defined in
Rule 501 of Regulation D promulgated under the Securities Act).
5. CONDITIONS TO OBLIGATIONS OF THE PURCHASER AT THE CLOSING UNDER THIS
--------------------------------------------------------------------
AGREEMENT.
- ---------
The obligation of the Purchaser to purchase and pay for the Preferred
Shares and the Warrants on the Closing Date, is subject to the satisfaction of
the following conditions on or prior to the Closing Date:
5.1 CORPORATE PROCEEDINGS; CONSENTS; ETC.
-------------------------------------
All corporate and/or other proceedings to be taken by the Corporation,
its officers, directors and stockholders and all waivers and consents to be
obtained by the Corporation in connection with the transactions contemplated by
this Agreement, the Warrant Certificate, the Stockholders' Agreement, the
Supplement Agreement and the Registration Rights Agreement shall have been taken
or obtained.
5.2 BLUE SKY MATTERS.
----------------
All consents, approvals, qualifications and/or registrations required
to be obtained or effected under any applicable state securities or "blue-sky"
laws in connection with the execution and delivery of the Preferred Shares and
the Warrants shall have been obtained or effected.
5.3 STOCKHOLDERS' AGREEMENT.
-----------------------
The Stockholders' Agreement shall have been executed and delivered by
all of the parties thereto (including the Corporation) and shall have become
effective.
5.4 REGISTRATION RIGHTS AGREEMENT.
-----------------------------
The Registration Rights Agreement shall have been executed and
delivered by all of the parties thereto (including the Corporation) and shall
have become effective.
-18-
<PAGE>
5.5 SUPPLEMENTAL AGREEMENT.
----------------------
The Supplemental Agreement shall have been executed and delivered by
the parties hereto and shall have become effective.
5.6 FILINGS.
-------
(a) The Certificate of Amendment shall have been filed with the
Secretary of State.
(b) The Series E Certificate shall have been filed with the Secretary
of State.
5.7 REPRESENTATIONS, WARRANTIES AND COVENANTS.
-----------------------------------------
Each representation and warranty of the Corporation shall be true and
correct in all material respects as of the Closing Date as if made on and as of
such date (other than representations and warranties that expressly speak only
as of a prior date); the Corporation shall have complied in all material
respects with its covenants and agreements to be performed at or prior to the
Closing; and the Corporation shall have delivered to the Purchaser an officer's
certificate of the Corporation certifying as to the foregoing matters.
5.8 NO LITIGATION.
-------------
No litigation or other formal proceeding shall have been instituted or
threatened seeking to enjoin any of the transactions contemplated hereby or
seeking damages in respect thereof, and no injunction or temporary restraining
order shall have been issued with respect to any of the transactions
contemplated hereby.
5.9 CAPITAL Z INVESTMENT.
--------------------
The closing of all of the transactions contemplated by that certain
Stock Purchase Agreement, dated as of February 23, 1998, among the Corporation
and the investors parties thereto, shall have been completed and the Corporation
shall have received cash proceeds therefrom in the amount of $25,000,000.01,
less expenses.
6. CONDITIONS TO OBLIGATIONS OF CORPORATION AT THE CLOSING UNDER THIS
------------------------------------------------------------------
AGREEMENT.
- ---------
The obligations of the Corporation to issue and sell the Preferred
Shares and to issue the Warrants on the Closing Date is subject to the
satisfaction of the following conditions on or prior to the Closing Date:
6.1 CORPORATE PROCEEDINGS; CONSENTS; ETC.
-------------------------------------
-19-
<PAGE>
All limited partnership and/or other proceedings, if any, to be taken
by the Purchaser and its partners and all waivers and consents to be obtained by
the Purchaser in connection with the transactions contemplated hereby shall have
been taken or obtained.
6.2 BLUE SKY MATTERS.
----------------
All consents, approvals, qualifications and/or registrations required
to be obtained or effected under any applicable state securities or "blue-sky"
laws in connection with the execution and delivery of the Preferred Shares shall
have been obtained or effected.
6.3 STOCKHOLDERS' AGREEMENT.
-----------------------
The Stockholders' Agreement shall have been executed and delivered by
the Requisite Parties and the Purchaser and shall have become effective.
6.4 REGISTRATION RIGHTS AGREEMENT.
-----------------------------
The Registration Rights Agreement shall have been executed and
delivered by the Requisite Parties and the Purchasers and shall have become
effective.
6.5 SUPPLEMENTAL AGREEMENT.
----------------------
The Supplemental Agreement shall have been executed and delivered by
each of the parties and shall have become effective.
6.6 NO LITIGATION.
-------------
No litigation or other formal proceeding shall have been instituted or
threatened seeking to enjoin any of the transactions contemplated hereby or
seeking damages in respect thereof, and no injunction or temporary restraining
order shall have been issued with respect to any of the transactions
contemplated hereby.
6.7 REPRESENTATIONS, WARRANTIES AND COVENANTS.
-----------------------------------------
Each representation and warranty of the Purchaser shall be true and
correct in all material respects as of the Closing Date as if made on and as of
such date (other than representations and warranties that expressly speak only
as of a prior date); Purchaser shall have complied in all material respects with
its covenants and agreements to be performed at or prior to the Closing, and the
Purchaser shall have delivered to the Corporation an officer's certificate of
-20-
<PAGE>
the Purchaser certifying as to the foregoing matters.
6.8 PAYMENT OF PURCHASE PRICE.
-------------------------
The Purchaser shall have delivered the Purchase Price.
7. COVENANTS.
---------
7.1 NONDISCLOSURE AND INVENTION ASSIGNMENT AGREEMENT.
------------------------------------------------
(a) The Corporation shall require each future employee of the
Corporation, as a condition to the employment of such employee, to execute and
deliver a non-disclosure, noncompetition and assignment of inventions agreement
in such form as shall be approved by the Board of Directors.
(b) The Corporation shall require each future consultant of the
Corporation, as a condition to the engagement of such consultant, to execute and
deliver a non-disclosure agreement in such form as shall be approved by the
Board of Directors.
7.2 EFFORTS. The Corporation, on the one hand, and the Purchaser, on
-------
the other hand, shall use commercially reasonable efforts to effectuate as
promptly as practicable those conditions to Closing contained in Sections 5 and
6, respectively, that are within their respective control.
7.3 PUBLIC DISCLOSURE OF TRANSACTIONS.
---------------------------------
(a) The Corporation shall not, without the prior consent of the
Purchaser, directly or indirectly issue any public disclosure (including
employee communications) with respect to this Agreement or the investment by
Purchaser pursuant to this Agreement, except as may be required by Applicable
Law, in which case the Corporation shall issue any required statement only after
consulting with the Purchaser and furnishing such disclosure to the Purchaser
prior to such consultation.
(b) The Purchaser and the Corporation shall mutually agree on a press
release and "tombstone" advertisement regarding the investment by Purchaser
pursuant to this Agreement. The Purchaser agrees that it shall place and shall
pay the costs of placing such an advertisement.
7.4 ADDITIONAL WARRANTS.
-------------------
The Corporation has advised the Purchaser that a former employee (the
"Former Employee"), has asserted that he remains entitled to his rights under
certain options covering up
-21-
<PAGE>
to 800,000 shares of Voting Common Stock (the "Disputed Options"). The
Corporation has further advised the Purchaser that the Disputed Options have
been validly terminated and that the Former Employee has no rights thereunder.
The Corporation and the Purchaser agree that if by September 25, 1999,
there has not been a Final Resolution (as hereinafter defined) that the Disputed
Options were validly terminated and that the Former Employee has no rights
thereunder, the Corporation shall promptly issue to the Purchaser a warrant
certificate, substantially in the form of the Warrant Certificate, representing
218,924 Warrants (the "Additional Warrants"). If there has been a Final
Resolution that the Disputed Options were validly terminated and that the Former
Employee has no rights thereunder, the Corporation shall have no obligation to
issue any Additional Warrants under this Section 7.4. If there is a Final
Resolution by September 25, 1999 that some but not all of the Disputed Options
were validly terminated and the Former Employee is entitled to rights under some
but not all of the Disputed Options, the number of Additional Warrants to be
issued under this Section 7.4 shall be appropriately adjusted. See Schedule 7.4
for an example of this computation.
There shall be no additional consideration payable in respect of the
issuance of any Additional Warrants under this Section 7.4. The Corporation
shall use its best efforts to cause all of its representations and warranties
contained in Sections 3.4, 3.5, 3.6, 3.7, 3.18 and 3.22 of this Agreement to be
true and correct, as to the Additional Warrants and the securities of the
Corporation issuable upon exercise thereof, as of the date on which such
Additional Warrants are issued.
If there shall not have been a Final Resolution with respect to the
validity of the termination of the Disputed Options on or prior to September 25,
1999 and Additional Warrants are issued and at any time prior to the exercise of
such Additional Warrants there shall be Final Resolution that the Disputed
Options were validly terminated and that the Former Employee has no rights under
the Disputed Options or that some but not all of the Disputed Options were
validly terminated and that the Former Employee has rights under some but not
all of such Disputed Options, the Purchaser shall return to the Corporation for
cancellation Additional Warrants in a number that results in a net issuance by
the Corporation of total Additional Warrants equal to the number of Additional
Warrants that the Purchaser would have received if such Final Resolution had
occurred by September 25, 1999.
"Final Resolution" for purposes of this Section 7.4 shall mean a final
nonappealable order of a court of competent jurisdiction or a written, final
settlement agreement binding upon the Corporation and the Former Employee.
Additional Warrants shall be included in the definition of "Warrants" for all
purposes of this Agreement and the Transaction Documents.
If less than 218,924 Additional Warrants are issued under this Section
7.4, the
-22-
<PAGE>
Corporation shall not issue any of the Series E Preferred Stock reserved for
issuance in respect of the exercise of any of the Additional Warrants that are
not issued.
8. TRANSFER OF SECURITIES.
----------------------
(a) RESTRICTIONS ON TRANSFER. The Purchaser acknowledges that the
------------------------
Preferred Shares, the Warrants, the Reserved Preferred Shares issuable upon
exercise of the Warrants and the Reserved Common Shares issuable upon conversion
of the Preferred Shares and the Reserved Preferred Shares or upon exercise of
the Warrants have not been and will not be registered under the Securities Act,
that such shares are being or will be issued pursuant to an exemption from
registration under the Securities Act and that such shares constitute
"restricted securities" under Rule 144. Accordingly, the Preferred Shares and
the Warrants held by the Purchaser, the Reserved Preferred Shares issuable upon
exercise of the Warrants and the Reserved Common Shares issuable upon conversion
or exercise of the Preferred Shares and the Warrants, when issued, shall not be
sold, transferred, assigned, pledged, encumbered or otherwise disposed of (each,
a "Transfer") except upon the conditions specified in this Section 8 (which
--------
provides for certain additional restrictions on transfer), which conditions are
intended to ensure compliance with the provisions of the Securities Act and this
Agreement.
(b) RESTRICTIVE LEGEND. Each certificate for Series E Preferred
------------------
Stock, Warrants and Class B Common Stock issued to the Purchaser at Closing or
issued hereafter upon conversion or exercise of such securities, and each
certificate for any such securities issued to subsequent transferees of any such
certificate shall (unless otherwise permitted by the provisions of Sections 8(c)
and 8(d)) be stamped or otherwise imprinted with a legend in substantially the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE SECURITIES OR "BLUE-SKY" LAWS.
THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.
ADDITIONALLY, THE TRANSFER OF THESE SECURITIES IS SUBJECT TO THE
CONDITIONS SPECIFIED IN SECTION 8 OF THE PURCHASE AGREEMENT DATED AS
OF MARCH 26, 1999, BETWEEN WIT CAPITAL GROUP, INC. AND THE GOLDMAN
SACHS GROUP, L.P., AND NO TRANSFER OF THESE SECURITIES SHALL BE VALID
OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED. THIS SECURITY
IS SUBJECT TO RESTRICTIONS ON TRANSFER,
-23-
<PAGE>
VOTING AND OTHER TERMS AND CONDITIONS SET FORTH IN THE THIRD AMENDED
AND RESTATED STOCKHOLDERS AGREEMENT DATED AS OF APRIL 8, 1999 (THE
"STOCKHOLDERS AGREEMENT"), A COPY OF WHICH MAY BE OBTAINED FROM WIT
CAPITAL GROUP, INC. AT ITS PRINCIPAL EXECUTIVE OFFICES.
IF THIS CERTIFICATE IS OWNED BY A "GS HOLDER" (AS SUCH TERM IS DEFINED
IN THE STOCKHOLDERS AGREEMENT), THE TRANSFER OF THESE SECURITIES IS
SUBJECT TO THE CONDITIONS SPECIFIED IN SECTION 13 OF THE SUPPLEMENTAL
AGREEMENT DATED AS OF APRIL 8, 1999 BETWEEN WIT CAPITAL GROUP, INC.
AND THE GOLDMAN SACHS GROUP, L.P. UPON THE FULFILLMENT OF ALL
APPLICABLE CONDITIONS, WIT CAPITAL GROUP, INC. HAS AGREED TO DELIVER
TO THE HOLDER HEREOF A NEW CERTIFICATE, NOT BEARING THIS LEGEND, FOR
THE SECURITIES REPRESENTED HEREBY REGISTERED IN THE NAME OF THE HOLDER
HEREOF.
(c) NOTICE OF TRANSFER. The Purchaser agrees, prior to any Transfer
------------------
of Preferred Shares, Warrants, Reserved Preferred Shares issuable upon exercise
of Warrants or Reserved Common Shares issuable upon conversion of Preferred
Shares and Warrants to give written notice to the Corporation of the Purchaser's
intention to effect such Transfer and to comply in all other respects with the
provisions of this Section 8. Each such notice shall describe the manner and
circumstances of the proposed Transfer and shall be accompanied by the written
opinion, addressed to the Corporation, of counsel for the holder of such shares,
stating that in the opinion of such counsel (which opinion and counsel shall be
reasonably satisfactory to the Corporation), such proposed Transfer does not
involve any transaction requiring registration or qualification of such shares
under the Securities Act or the securities or "blue-sky" laws of any relevant
state of the United States; provided, however, that no such opinion of counsel
-------- -------
shall be necessary for a Transfer pursuant to Rule 144. The Purchaser shall
thereupon be entitled to Transfer such shares in accordance with the terms of
the notice delivered by it to the Corporation. Each certificate or other
instrument evidencing the securities issued upon the Transfer of any such shares
(and each certificate or other instrument evidencing any untransferred balance
of such shares) shall bear the legend set forth in Section 8 unless (a) in such
opinion of counsel registration of any future Transfer is not required by the
applicable provisions of the Securities Act and applicable state securities or
"blue-sky" laws or (b) the Corporation shall have waived the requirement of such
legends; provided, however, that such legend shall not be required on any
-------- -------
certificate or other instrument evidencing the securities issued upon such
Transfer in the event such Transfer shall be made in compliance with the
requirements of Rule 144. The Purchaser shall not Transfer any Preferred Shares,
Warrants, Reserved Preferred Shares issuable
-24-
<PAGE>
upon exercise of Warrants or Reserved Common Preferred Shares issuable upon
conversion or exercise of Preferred Shares and Warrants until such opinion of
counsel has been given (unless waived by the Corporation or unless such opinion
is not required in accordance with the provisions of this Section 8).
(d) REMOVAL OF LEGENDS, ETC. Notwithstanding the foregoing
------------------------
provisions of this Section 8, the restrictions imposed by this Section 8 upon
the transferability of any shares of the capital stock of the Corporation held
by the Purchaser shall cease and terminate when (a) any such shares are sold or
otherwise disposed of pursuant to an effective registration statement under the
Securities Act or as otherwise contemplated by Section 8(c) and, pursuant to
Section 8(c), the securities so transferred are not required to bear the legend
set forth in Section 8(b) or (b) the holder of such shares has met the
requirements for Transfer of such shares pursuant to subparagraph (k) of Rule
144. Whenever the restrictions imposed by this Section 8 shall terminate with
respect to any security held by the Purchaser hereunder, as herein provided, the
Purchaser shall be entitled to receive from the Corporation, without expense, a
new certificate representing such security not bearing the restrictive legend
set forth in Section 8(b) and not containing any other reference to the
restrictions imposed by this Section 8.
9. CONFIDENTIALITY.
---------------
The Purchaser agrees to and shall keep strictly confidential and will
not disclose or divulge any confidential, proprietary or secret information
which the Purchaser has obtained in the course of the negotiation and
consummation of the transactions contemplated hereby or may obtain from the
Corporation, including, by way of example and not in limitation thereof,
financial statements, reports and other information and materials submitted by
the Corporation as required hereunder, unless required to be disclosed by law or
pursuant to any judgment, order, subpoena or decree of any court having
competent jurisdiction, or unless such information is already known to the
Purchaser or is or becomes publicly known, or unless the Corporation provides
its written consent to the Purchaser's release of such information, except that
no such written consent shall be required (and the Purchaser shall be free to
release such information) (i) if such information is to be provided to the
Purchaser's officers, directors, lawyers, accountants, or partners, or (ii) in
respect of oral communications made to regulatory or self-regulatory authorities
to which Affiliates of the Purchaser are subject. The Purchaser acknowledges
that such information is for its use solely in connection with evaluating its
investment in the Corporation.
10. EXPENSES; BROKERS.
-----------------
(a) The Corporation, on the one hand, and Purchaser on the other
hand, shall bear its own expenses in connection with the preparation for and
consummation of the transactions contemplated by this Agreement.
(b) Each party hereto shall indemnify and hold each other party
hereto
-25-
<PAGE>
harmless from and against any claims, liabilities, damages or expenses incurred
by such party arising from the breach of the representation and warranty made by
such party hereunder with respect to brokers' or finders' fees (or any facts or
circumstances constituting such breach).
11. NOTICES.
-------
All notices, advices and communications to be given or otherwise made
to any party to this Agreement shall be deemed to be sufficient if contained in
a written instrument delivered in person or by telecopier or duly sent by first
class registered or certified mail, return receipt requested, postage prepaid,
or by overnight courier, or by electronic mail, with a copy thereof to be sent
by mail (as aforesaid) within 24 hours of such electronic mail, addressed to
such party at the address set forth below or at such other address as may
hereafter be designated in writing by the addressee to the addresser listing all
parties:
(a) if to the Corporation, to:
WIT Capital Group, Inc.
826 Broadway
Sixth Floor
New York, NY 10003
Attention: Ronald W. Readmond
Telecopier: (212) 253-4650
e-mail address: [email protected]
with a copy to:
Orrick, Herrington & Sutcliffe LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Martin H. Levenglick, Esq.
Telecopier: (212) 506-3730
e-mail address: [email protected]
-and-
(b) if to the Purchaser, to:
The Goldman Sachs Group, L.P.
85 Broad Street
New York, NY 10004
-26-
<PAGE>
Attention: David J. Greenwald, Esq.
Telecopier: (212) 357-5505
e-mail address: [email protected]
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Attention: Robert E. Buckholz, Jr., Esq.
Telecopier: (212) 558-3588
or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, 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 and (iii) in the case of mailing,
on the third business day following that on which the piece of mail containing
such communication is posted. As used in this Section 11, "business day" shall
mean any day other than a day on which banking institutions in the State of New
York are legally closed for business.
12. SUCCESSORS AND ASSIGNS.
----------------------
Except as otherwise expressly provided herein, this Agreement shall
bind and inure to the benefit of the parties hereto and the respective
successors and permitted assigns of the parties hereto. Neither this Agreement,
nor the rights and obligations hereunder, is assignable by any party hereto
(except to a successor-in-interest by operation of law) without the prior
written consent of the Corporation, except that the Purchaser may assign its
rights and obligations hereunder to any wholly-owned subsidiary or to any
successor in interest without consent.
13. AMENDMENTS.
----------
The terms and provisions of this Agreement may only be amended or
waived either (a) with the written consent of the Corporation and the Purchaser
or (b) in a writing by the party or parties against whom such amendment or
waiver is sought to be enforced.
14. ENTIRE AGREEMENT.
----------------
This Agreement and the other writings referred to herein or delivered
pursuant
-27-
<PAGE>
hereto which form a part hereof contain the entire agreement among the parties
with respect to the subject matter hereof and supersede all prior and
contemporaneous arrangements or understandings with respect thereto.
15. TERMINATION.
-----------
This Agreement may be terminated by either party if the other is in
material breach of this Agreement and such breach is not cured within ten days
following the delivery of written notice thereof. This Agreement may be
terminated by the Purchaser or by the Corporation if the Closing has not
occurred by May 31, 1999; provided, that the party seeking to exercise such
--------
termination right is not, at such time, in material breach of this Agreement.
Any termination right under this Section 15 may be exercised only by the
delivery of written notice of such termination by the terminating party to the
other party. No termination pursuant to this Section 15 will relieve any part of
liability for its prior breach.
16. 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.
17. 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.
18. GOVERNING LAW.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed wholly therein.
-28-
<PAGE>
[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Purchase
Agreement to be executed as of the date first written above.
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
THE GOLDMAN SACHS GROUP, L.P.
By:
Name:
Title:
-29-
<PAGE>
SCHEDULES
TO
STOCK PURCHASE AGREEMENT
DATED AS OF MARCH 26, 1999
BETWEEN WIT CAPITAL GROUP INC.
AND THE GOLDMAN SACHS GROUP, L.P.
Except with respect to Schedule 3.9, if, and to the extent, any information
that may be disclosed on any Schedule to the Stock Purchase Agreement is
contained on any other Schedule, such information shall be deemed to be included
on all Schedules on which such information may be included. The information on
Schedule 3.9 shall not be deemed to be included on any other Schedule. The
Company shall have until April 2, 1999 to review the disclosure on Schedule 3.9
to determine whether any of the information on said Schedule 3.9 should have
been included on any other Schedule and shall have until that date to furnish to
the Purchaser any other Schedule revised to include such information from
Schedule 3.9; provided that prior to the Closing the Company shall take whatever
steps are required to permit it to bring down its representations and warranties
to the Closing as required by Section 5.7 of the Purchase Agreement on the basis
of the Schedules in the form that they are attached to the Purchase Agreement at
the time of execution (and with the disclosures on Schedule 3.9 not being deemed
to be included on any other Schedule) and without regard to any revised
Schedules that the Company may deliver to the Purchaser on or prior to April 2,
1999.
The inclusion of any information on any Schedule shall not be deemed to be
an admission or acknowledgment by Wit Capital Group, Inc. (the "Company") that
such information is material to or outside the ordinary course of business of
the Company. Nothing herein constitutes an admission of liability or obligation
of the Company or an admission against the Company's interest. All capitalized
terms used and not otherwise defined herein shall have the meanings ascribed
thereto in the Stock Purchase Agreement.
<PAGE>
SCHEDULE 7.4
------------
The number of Additional Warrants issued to the Purchaser shall, after giving
effect to the number of Disputed Options not validly terminated, enable the
Purchaser to maintain fully-diluted ownership of 21.7% (based on the number of
fully-diluted common shares outstanding immediately after the Closing and the
number of Disputed Options not validly terminated). The formula for calculating
the number of Additional Warrants is as follows:
0.217 = 24,719,946 + AW
---------------------
113,906,746 + DO + AW
where DO is the number of Disputed Options that are not validly terminated and
AW is the number of Additional Warrants. 24,719,946 is the number of Series
Preferred E Shares and Warrants owned by the Purchaser, and 113,906,746 is the
number of fully-diluted common shares outstanding immediately after the Closing.
For example, if a Final Resolution determines that 200,000 Disputed Options were
validly terminated and that 600,000 Disputed Options were not validly
terminated, the Company would issue to the Purchaser 163,497 Additional
Warrants, calculated as follows:
0.217 = 24,719,946 + AW
--------------------------
113,906,746 + 600,000 + AW
0.217*(114,506,746+AW)=24,719,946+AW
24,847,964+0.217*AW=24,719,946+AW
0.783*AW=128,018
AW=163,497
-31-
<PAGE>
___________________________________
FIRST AMENDMENT TO
PURCHASE AGREEMENT
Dated as of April 9, 1999
between
Wit Capital Group, Inc.
and
The Goldman Sachs Group, L.P.
___________________________________
<PAGE>
FIRST AMENDMENT TO
PURCHASE AGREEMENT
This FIRST AMENDMENT TO PURCHASE AGREEMENT (this "Amendment") is
---------
entered into as of April 9, 1999 and is by and between Wit Capital Group, Inc.
(the "Corporation") and The Goldman Sachs Group, L.P. (the "Purchaser").
----------- ---------
W I T N E S S E T H
-------------------
WHEREAS, the parties hereto (the "Parties") are the parties to that
certain Purchase Agreement dated as of March 26, 1999 (the "Purchase
Agreement"); and
WHEREAS, the Parties wish to amend the Purchase Agreement as
hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and on the terms and
subject to the conditions herein set forth, the Parties, intending to be bound,
hereby agree as follows:
Section 1. Definitions. Capitalized terms not otherwise defined
-----------
herein shall have the meanings ascribed to such terms in the Purchase Agreement.
Section 2. Amendment of Purchase Agreement. The Purchase Agreement
-------------------------------
is hereby amended as follows:
(a) Section 2.2 of the Purchase Agreement is hereby amended by
deleting the words "as of the date hereof" in the sixth and eighth lines of such
Section and replacing each such occurrence of such words with the words "as of
the Closing Date".
(b) Section 3.2(a) of the Purchase Agreement is hereby amended by
deleting the number "50,000,000" occurring in the tenth line of such Section and
replacing therewith the number "25,000,000" and by replacing the number
"20,000,000" in the fifteenth line of such section and replacing such number
with the number "19,885,428".
(c) Section 3.2(b) of the Purchase Agreement is hereby amended by
deleting the number "50,000,000" occurring in the first line of such Section and
replacing such number with the number "25,000,000".
<PAGE>
(d) Section 3.2(c) of the Purchase Agreement is hereby amended by
deleting the words "as of the date hereof" in the second line of such Section
and replacing such words with the words "as of the Closing Date".
(e) Section 3.4 of the Purchase Agreement is hereby amended by
deleting the term "as of the date hereof" in the third line of such Section and
replacing such words with the words "as of the Closing Date".
(f) Section 3.20 of the Purchase Agreement is hereby amended by
deleting the first word of such Section and replacing such word with the words
"Except as set forth on Schedule 3.20, no".
(g) Section 7.4 of the Purchase Agreement is hereby amended by
inserting the words "a warrant certificate, substantially in the form of the
Warrant Certificate, representing" between the word "Purchaser" and the number
"218,924" in the fourth line of the second paragraph of such Section.
(h) The term "Transaction Documents", as used in the Purchase
Agreement, shall refer to each of (i) the Purchase Agreement, (ii) this
Amendment, (iii) the Warrant Certificate, (iv) the Stockholders Agreement, (v)
the Registration Rights Agreement, (vi) the Supplemental Agreement, (vii) the
Registration Rights Forbearance Agreement, dated the Closing Date, among the
Purchaser, CFM Consulting, Inc., Lloyd H. Feller, Robert H. Lessin, Mark Loehr,
Robert Mendelson and the Corporation, (viii) the Letter Agreement, dated the
Closing Date, between the Corporation and the Purchaser relating to the
reservation by the Corporation of certain shares of its capital stock and (ix)
the Settlement Agreement and Release, dated April 8, 1999, among the
Corporation, CFM Consulting, Inc. and Andrew D. Klein.
(i) Section 8(b) of the Purchase Agreement is hereby amended by
deleting the term "April __, 1999" from the seventeenth line of the first
subparagraph of such Section and from the fifth line of the second subparagraph
of such Section and replacing each such occurrence of such term with the term
"April 9, 1999".
(j) The disclosure schedules to the Purchase Agreement are hereby
deleted in their entirety and replaced with the disclosure schedules attached
hereto as Annex A.
Section 3. Effect. Except as amended hereby, the Purchase Agreement
------
shall remain in full force and effect in all respects.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARITIES HEREUNDER SHALL BE DETERMINED
IN
-3-
<PAGE>
ACCORDANCE WITH SUCH LAWS.
Section 5. Counterparts. This Amendment may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
-4-
<PAGE>
IN WITNESS WHEREOF, the Parties have hereunto signed their names in
the space provided below.
Wit Capital Group, Inc.
By: _________________________
Name:
Title:
The Goldman Sachs Group, L.P.
By: _________________________
Name:
Title:
<PAGE>
Wit Capital Group, Inc.
826 Broadway
Sixth Floor
New York, New York 10003
April 9, 1999
The Goldman Sachs Group, L.P.
85 Broad Street
New York, New York 10004
Ladies and Gentlemen:
Reference is made to the Purchase Agreement (the "Purchase Agreement"),
dated as of March 26, 1999, between Wit Capital Group, Inc. ("Wit") and The
Goldman Sachs Group, L.P. ("GS Group"). The parties hereto intended that the
Purchase Agreement provide that Wit would be obligated to authorize, reserve and
keep reserved for issuance (i) 50,000,000 shares of its Class B Common Stock for
issuance upon conversion of shares of the Series E Preferred Stock and (ii)
50,000,000 shares of Common Stock for issuance upon conversion of shares of the
Class B Common Stock and Series E Preferred Stock. The authorization of the
Class B Common Stock requires an amendment to Wit's Certificate of
Incorporation, which, in turn, requires the approval of the shareholders of Wit.
Wit has sought authorization from its shareholders for the authorization of
25,000,000 shares of Class B Common Stock. The parties hereto acknowledge that
obtaining shareholder authorization for the number of shares of Class B Common
Stock originally specified in the Purchase Agreement could materially delay the
Closing. In order to prevent a delay of the Closing to obtain such shareholder
approval, GS Group has agreed to modify the Purchase Agreement to require that
Wit reserve 25,000,000 shares of Common Stock and 25,000,000 shares of Class B
Common Stock in consideration of the agreements and covenants of Wit herein
contained.
In consideration of the premises set forth above, Wit hereby covenants and
agrees that it shall not issue any securities or undertake any stock split,
stock dividend or like dividend or distribution, recapitalization or similar
stock issuance (each, a "Stock Issuance Transaction") if the number of shares of
Common Stock or Class B Common Stock issuable as a result of such Stock Issuance
Transaction upon the conversion of the outstanding shares of the Series E
Preferred Stock and exercise of the outstanding Warrants, when added to the
number of outstanding shares of Class B Common Stock (such sum being the "Total
Number of Common
<PAGE>
Equivalents"), exceeds the number of authorized shares of Class B Common Stock
or the number of shares of Common Stock reserved for issuance upon the
conversion of the Preferred Stock and Class B Common Stock and exercise of the
Warrants unless, in each case, Wit takes all necessary corporate action
(including obtaining shareholder approval and amending its certificate of
incorporation) to increase the number of authorized shares of Common Stock,
Class B Common Stock, or both, as necessary, such that the number of authorized
shares of Class B Common Stock and the number of shares of Common Stock so
reserved for issuance equals or exceeds the Total Number of Common Equivalents.
Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Purchase Agreement.
This Agreement shall bind and inure to the benefit of the parties hereto.
The parties hereto may not assign their rights and obligations hereunder without
obtaining the prior written consent of the other party; provided, however, that
-------- -------
Wit may assign its rights and obligations hereunder to a wholly-owned subsidiary
as part of a corporate reorganization pursuant to which such subsidiary will
conduct the business theretofore conducted by Wit and GS Group may assign its
rights and obligations hereunder to any Affiliate or to any entity to which it
transfers all or substantially all of its assets or to any entity into which it
merges. The rights and obligations of GS Group hereunder shall inure to its
successors.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARITIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
This Agreement and the Transaction Documents constitute the entire
agreement and understanding, and supersede all prior agreements and
understandings (both written and oral) with respect to the subject matter hereof
between GS Group on the one hand and Wit on the other hand.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return this letter to us, and upon acceptance hereof by you this letter shall
constitute a binding agreement between you and us.
Very truly yours,
THE GOLDMAN SACHS GROUP, L.P.
By:
Name:
Title:
Accepted as of the date hereof:
WIT CAPITAL GROUP, INC.
By:
Name:
Title:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
- -------------------------------
New York, New York
May 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1999 AND DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 DEC-31-1998
<CASH> 41,193,606 18,110,146
<RECEIVABLES> 1,917,342 632,264
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 781,627 758,293
<PP&E> 2,559,356 2,229,916
<TOTAL-ASSETS> 50,292,208 22,296,406
<SHORT-TERM> 0 0
<PAYABLES> 0 0
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
485,392 271,391
<COMMON> 188,235 160,923
<OTHER-SE> 46,826,031 20,175,940
<TOTAL-LIABILITY-AND-EQUITY> 50,292,208 22,296,406
<TRADING-REVENUE> 0 0
<INTEREST-DIVIDENDS> 191,670 182,880
<COMMISSIONS> 434,207 294,454
<INVESTMENT-BANKING-REVENUES> 3,122,420 1,515,105
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 6,558,126 4,444,271
<INCOME-PRETAX> (4,882,166) (8,759,809)
<INCOME-PRE-EXTRAORDINARY> (4,882,166) (8,759,809)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,900,166) (8,793,890)
<EPS-PRIMARY> (0.47) (0.86)
<EPS-DILUTED> (0.47) (0.86)
</TABLE>
