<PAGE>
As filed with the Securities and Exchange Commission on May 18, 1999
Registration No. 333-74619
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 2
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.
Cravath, Swaine & Moore
Eduardo Vidal, Esq.
Morgan, Lewis & Bockius LLP Worldwide Plaza
101 Park Avenue 825 Eighth Avenue
New York, New York 10178 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 Proposed
Title of Each Class of Maximum Maximum
Securities to be Amount to Offering Price Aggregate Amount of
Registered be Registered(1) Per Share Offering Price(1)(2) Registration Fee
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share(3)...... 8,740,000 Shares $9.00 $78,660,000 (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 18, 1999
PROSPECTUS
7,600,000 Shares
[WIT CAPITAL 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 $7.00 and $9.00 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 1,140,000 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>
[Text: As we underwrite new public offerings, our customer
accounts, customer trading activity and Web site page views have grown each
month.]
[Bargraphs indicating number of customers, secondary
market trades per month and page impressions per month.]
[Logo of Wit Capital]
[Text: We are developing an e-Dealer/TM/ network of online brokerage firms whom
customers, once the network is operational, may purchase securities in
underwritten offerings in which we are the e-Manager/TM/. We now have
exclusive e-Dealer/TM/ agreements with 22 online brokerage firms whom
customers we believe accounted for 29% of online trading acitivity in the
fourth quarter of 1998.]
<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.
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. Unless otherwise indicated, all
information in this prospectus (1) reflects the conversion of all currently
outstanding shares of our common stock into Class C common stock to be effected
prior to the completion of this offering, (2) reflects a 7 for 10 reverse stock
split of our Class C common stock and our Series E preferred stock to be
effected prior to the completion of this offering, (3) reflects the automatic
conversion upon consummation of this offering of all outstanding shares of our
Series A, B, C and D preferred stock into an aggregate of 33,977,313 shares of
our Class C common stock and all outstanding shares of Series E preferred stock
into 11,666,667 shares of Class B common stock, and (4) assumes no exercise of
the underwriters' over-allotment option. Our common stock, our Class B common
stock and our Class C common stock are economically equivalent, but our Class B
common stock is non-voting and our Class C common stock is non-transferrable
until 180 days after the completion of this offering when it converts into our
common stock.
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. In 1998, our investment banking
revenue and our brokerage revenue represented 74% and 14% of our total
revenues, respectively. In the first quarter of 1999, our investment banking
revenue and our brokerage revenue represented 80% and 11% of our total
revenues, respectively. As our business develops and our client and customer
bases grow, these percentages may change, and, accordingly, they may not be
indicative of our future results.
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 should lead to more accurate pricing as
compared to the pricing of these securities under traditional methods that
focus primarily on institutional investor demand.
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 eighty public equity offerings, including sixty-two initial public
offerings. In nineteen 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 May 15, 1999, we were
participating as e-Manager in an additional sixteen 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
Class B common stock constituting approximately 16.7% of our outstanding stock
after completion of this offering and warrants exercisable for shares of Class
B common stock. If Goldman Sachs were to exercise these warrants, which will
become exercisable in October 2000, its ownership interest would increase to
approximately 24.7% 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.
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...................... 7,600,000 shares
Common Stock to be Outstanding after this
Offering................................. 69,952,251 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 up to 1,140,000 additional shares of common stock subject to a 30-
day option granted to the underwriters to cover over-allotments, if any.
(2) Based on the number of shares of all classes of our common stock currently
outstanding and to be issued as a result of the conversion of our
outstanding preferred stock upon consummation of this offering. Does not
include (a) 1,103,431 shares of Class C common stock and 5,637,295 shares
of Class B common stock issuable upon exercise of outstanding warrants, (b)
the 560,000 shares of Class C common stock that are referred to in
"Business--Legal Matters", (c) 153,247 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)
17,500,000 shares of Class C common stock reserved for issuance under our
Stock Incentive Plan, of which options to purchase 9,724,997 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......... $ (.33) $ (.41) $ (1.23) $ (.20) $ (.68)
Weighted average shares
outstanding used in
computing basic and
diluted net loss per
share.................. 5,378,167 7,303,013 7,140,123 7,056,095 7,245,889
Pro forma net loss per
share from continuing
operations(1).......... $ (.33) $ (.30) $ (.58) $ (.14) $ (.31)
Shares used in computing
pro forma basic and
diluted net loss per
share(1)............... 5,452,997 9,930,376 15,120,868 9,832,374 15,673,190
</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 the 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 11.7 million shares of Series E preferred stock and the
receipt of $24.9 million in net cash proceeds as well as the exercise of an
aggregate of 2,974,488 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 7,600,000 shares of
common stock in this offering (at an assumed offering price of $8.00) 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 $121,894
Working capital................................... 41,902 66,186 121,986
Total assets...................................... 50,292 75,192 130,992
Stockholders' equity.............................. 47,500 71,784 127,584
</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 at least through December 31, 2000.
As of March 31, 1999, we had cumulative losses 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 at least through December
31, 2000. 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
<PAGE>
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
9
<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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<PAGE>
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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<PAGE>
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.
The future sale of shares by our existing stockholders may adversely affect
our stock price. After completion of this offering, our existing stockholders
will own an aggregate of 62,352,251 shares of Class B and Class C common stock
and holders of options and warrants will have the right to acquire an
aggregate of 16,465,723 shares of Class B and Class C common stock. The number
of shares underlying these options and warrants represents approximately 19.1%
of the shares of all classes of our common stock that will be outstanding
after the completion of this offering, assuming the exercise of all of these
options and warrants. The holder of all outstanding shares of Class B common
stock has agreed not to sell or otherwise dispose of any of those shares until
180 days after the date of this prospectus. Shares of Class C common stock are
not transferrable until they convert into common stock 180 days after the
completion of this offering. Thereafter, all the shares of common stock into
which shares of Class C common stock are converted will be available for sale
in the public market, subject in some cases to compliance with the holding
period and volume and manner of sale limitations contained in Rule 144 under
the Securities Act. See "Shares Eligible for Future Sale" for a more detailed
description of the restrictions on selling shares after this offering.
This offering will cause immediate dilution.
Investors in this offering will experience immediate and substantial
dilution in the net tangible book value of $6.18 per share based on an assumed
initial public offering price of $8.00.
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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<PAGE>
USE OF PROCEEDS
Based upon an assumed offering price of $8.00, we estimate that we will
receive net proceeds from the sale of the 7,600,000 shares of common stock
offered through this prospectus (after deducting underwriting discounts and
commissions and estimated offering expenses) of $55.8 million ($64.3 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
allocated, we are conducting this offering at this time because we believe the
proceeds from this offering will be required for the development and expansion
of our business over the next two years 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 equity as of March 31, 1999, after
giving effect to (1) the sale of Series E preferred stock to Goldman Sachs,
(2) the exercise of an aggregate of 2,974,488 stock options by employees and
the related loans from us as described in "Certain Transactions--Loans to
Officers" subsequent to March 31, 1999 and (3) the conversion of all
outstanding preferred stock upon consummation of this offering, was $71.8
million, or $1.15 per share of common equity. Net tangible book value per
share is equal to our total tangible assets minus total liabilities divided by
the number of shares of common equity outstanding. After giving effect to the
sale of 7,600,000 shares of common stock offered through this prospectus at an
assumed initial public offering price of $8.00 per share (the mid-point of the
pricing 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 $127.6 million, or $1.82 per share of common
equity. This represents an immediate increase in net tangible book value as
adjusted of $0.67 per share to existing stockholders, and an immediate
dilution in net tangible book value as adjusted of $6.18 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................................ $8.00
Net tangible book value as of March 31, 1999 (after giving effect to
the sale of shares of preferred stock, the exercise of an aggregate
of 2,974,488 stock options by employees and the related loans from
us subsequent to March 31, 1999 and the conversion of all outstand-
ing preferred stock upon consummation of this offering)............. 1.15
Increase in net tangible book value attributable to new investors.... .67
Pro forma net tangible book value after this offering................ 1.82
-----
Dilution per share to new investors.................................. $6.18
=====
</TABLE>
The following table sets forth on an as adjusted basis, as of March 31,
1999, after giving effect to (1) the sale of Series E preferred stock to
Goldman Sachs, (2) the exercise of an aggregate of 2,974,488 stock options by
employees and the related loans from us as described in "Certain
Transactions--Loans to Officers" subsequent to March 31, 1999 and (3) the
conversion of all outstanding preferred stock upon consummation of this
offering, the number of shares of common equity 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 $8.00 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..... 62,352,251 89% $ 88,481,003 59% $1.42
New Investors............. 7,600,000 11 60,800,000 41 8.00
---------- ----- ------------ -----
Total..................... 69,952,251 100.0% 149,281,003 100.0%
========== ===== ============ =====
</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 as of March 31, 1999, as adjusted, would have
been $136.1 million, or $1.91 per share, which would result in dilution to the
new investors of $6.09 per share, and the number of shares held by the new
investors would increase to 8,740,000, or 12% of the total number of shares to
be outstanding after this offering, and the number of shares held by the
existing stockholders would be 62,352,251 shares, or 88% 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 16,465,723
shares of Class B and Class C common stock, 3,848,370 of which were then
exercisable, and we had also reserved up to an additional 4,220,567 shares of
Class C 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.
18
<PAGE>
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 Series E preferred stock subsequent to March 31, 1999 and
the receipt of $24.9 million in net proceeds; (2) the exercise of an
aggregate of 2,974,488 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 authorization of our Class B common stock and
Class C common stock; (5) the authorization of the class of common stock
offered by this prospectus and the conversion of all previously
outstanding shares of common stock into Class C common stock; and (6) the
conversion of all outstanding preferred stock into Class B and Class C
common stock upon consummation of this offering; and
. on a Pro Forma As Adjusted basis to reflect the sale of 7,600,000 shares
of common stock in this offering (at an assumed offering price of $8.00)
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, 13,176,468 issued and
outstanding, actual; none authorized,
issued and outstanding, pro forma and pro
forma as adjusted.......................... 132 -- --
Common stock, $.01 par value, none
authorized, issued and outstanding, actual;
500,000,000 shares authorized, none issued
and outstanding, pro forma; 500,000,000
shares authorized, 7,600,000 issued and
outstanding, pro forma as adjusted......... -- -- 76
Class B common stock, $.01 par value, none
authorized, issued and outstanding, actual;
75,000,000 shares authorized, 11,666,667
issued and outstanding, pro forma and pro
forma as adjusted.......................... -- 117 117
Class C common stock, $.01 par value, none
authorized, issued and outstanding, actual;
159,000,000 shares authorized, 50,685,584
issued and outstanding, pro forma and pro
forma as adjusted.......................... -- 507 507
Additional paid-in capital.................. 74,918 104,954 160,678
Notes receivable............................ (9,575) (15,334) (15,334)
Accumulated deficit......................... (18,460) (18,460) (18,460)
------- ------- --------
Total stockholders' equity................. 47,500 71,784 127,584
------- ------- --------
Total capitalization....................... $47,500 $71,784 $127,584
======= ======= ========
</TABLE>
This table excludes 10,828,428 shares of Class C common stock issuable upon
exercise of outstanding options and warrants and 5,637,295 shares of Class B
common stock issuable upon exercise of warrants. This table also excludes the
560,000 shares of Class C common stock that are referred to in "Business--
Legal Matters" and the 153,247 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 equity 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 Series E preferred
stock and the receipt of $24.9 million in net cash proceeds as well as the
exercise of an aggregate of 2,974,488 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 7,600,000 shares of common stock in this offering (at an assumed
offering price of $8.00) 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............. 326 503 900 231 51
Occupancy............. 42 201 237 42 90
Data processing and
communications....... 50 238 625 150 300
Technology
development.......... 532 511 1,156 51 336
Professional
services............. 283 330 878 94 681
Depreciation and
amortization......... 9 229 897 158 220
Brokerage and
clearance............ 2 6 186 14 261
Other................. 177 (352) 1,475 177 288
--------- --------- ---------- --------- ----------
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....... (0.33) (0.41) (1.23) (0.20) (0.68)
Weighted averaged
shares outstanding
used in basic and
diluted net loss per
common share
calculation.......... 5,378,167 7,303,013 7,140,123 7,056,095 7,245,889
Pro forma net loss per
share................ $ (.33) $ (.30) $ (.58) $ (.14) $ (.31)
Shares used in
computing pro forma
basic and diluted net
loss per share....... 5,452,997 9,930,376 15,120,868 9,832,374 15,673,100
</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 $121,894
Working capital......... 490 2,471 17,968 41,902 66,186 121,986
Total assets............ 2,655 5,837 22,296 50,292 75,192 130,992
Stockholders' equity.... 1,480 4,859 20,608 47,500 71,784 127,584
</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................ $ -- $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......................... $ -- $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 $ 54,000 $ 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 $ -- $ 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 $ 900,000 $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 $ 625,000 $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 $1,156,000 $ 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 $ 878,000 $ 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) $1,475,000 $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 by June 30, 1999, after
which we will promptly begin the new systems' testing. 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. Our costs to date related to our Year 2000 assessment and
remediation plans are $25,000, and we estimate that we will have additional
remediation costs of $100,000.
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. In 1998, our investment banking revenue and
our brokerage revenue represented 74% and 14% of our total revenues,
respectively. In the first quarter of 1999, our investment banking revenue and
our brokerage revenue represented 80% and 11% of our total revenues,
respectively. As our business develops and our client and customer bases grow,
these percentages may change, and, accordingly, they may not be indicative of
our future results.
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.
This information about individual investor interest in public offerings should
lead to more accurate pricing.
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
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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 eighty public equity offerings,
including sixty-two 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 May 15, 1999, we were participating in
sixteen 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>
Number of Shares Percentage of Total
Issuer Lead Manager Date Underwritten by Us Underwritten Shares
------------------------- ------------------------ ----------------- ------------------ -------------------
<C> <S> <C> <C> <C>
EarthWeb Inc. J.P. Morgan & Co. November 10, 1998 63,000 3%
MarketWatch.com, Inc. BT Alex. Brown and January 15, 1999 69,000 2%
Donaldson, Lufkin &
Jenrette
VerticalNet, Inc. Lehman Brothers February 10, 1999 70,000 2%
Prodigy Communications Bear, Stearns & Co. Inc. February 10, 1999 184,000 2%
Corporation
iVillage Inc. Goldman, Sachs & Co. March 18, 1999 57,500 1%
MiningCo.com, Inc. Bear, Stearns & Co. Inc. March 23, 1999 69,000 2%
OneMain.com, Inc. BT Alex. Brown March 24, 1999 402,500 4%
Globix Corporation Donaldson, Lufkin & March 22, 1999 35,000 1%
Jenrette
Network Appliance, Inc. Lehman Brothers March 31, 1999 55,000 2%
PLX Technology, Inc. Merrill Lynch & Co. April 5, 1999 135,000 4%
XOOM.com, Inc. Bear, Stearns & Co. Inc. April 8, 1999 200,000 4%
iTurf Inc. BT Alex. Brown and April 8, 1999 75,000 2%
Hambrecht & Quist
Net Perceptions, Inc. BancBoston Robertson April 22, 1999 125,000 3%
Stephens
SoftNet Systems, Inc. BT Alex. Brown April 22, 1999 103,500 3%
Mpath Interactive, Inc. BancBoston Robertson April 28, 1999 125,000 3%
Stephens
AppliedTheory Corporation Bear, Stearns & Co. Inc. April 30, 1999 163,300 3%
Flycast Communications BT Alex. Brown May 4, 1999 90,000 3%
Corporation
EarthWeb Inc. J.P. Morgan & Co. May 6, 1999 65,000 5%
Audible, Inc. Credit Suisse First In Registration -- --
Boston
barnesandnoble.com inc. Goldman, Sachs & Co. In Registration -- --
and Merrill Lynch & Co.
Blockbuster Inc. Salomon Smith In Registration -- --
Barney and Bear
Stearns & Co. Inc.
CAIS Internet, Inc. Bear, Stearns & Co. Inc. In Registration -- --
drkoop.com, Inc. Bear, Stearns & Co. Inc. In Registration -- --
Hoover's, Inc. J.P. Morgan and In Registration -- --
Lehman Brothers
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares Percentage of Total
Issuer Lead Manager Date Underwritten by Us Underwritten Shares
----------------------------- ------------------------ --------------- ------------------ -------------------
<C> <S> <C> <C> <C>
Internet Capital Group Merrill Lynch & Co. In Registration -- --
Mail.com, Inc. Salomon Smith Barney In Registration -- --
Medscape, Inc. Donaldson, Lufkin & In Registration -- --
Jenrette
MyPoints.com, Inc. BancBoston Robertson In Registration -- --
Stephens
StarMedia Network, Inc Goldman, Sachs & Co. 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, Inc. Dain Rauscher Wessels In Registration -- --
</TABLE>
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.
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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.
. 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
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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.
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,
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<PAGE>
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 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 11,666,667 shares of Series E preferred stock
for a purchase price of $25 million. Goldman Sachs also received 5,637,295
warrants to purchase Series E preferred stock. The warrants may be exercised
beginning in October 2000 at a per share exercise price equal to the average
of $2.14 and the initial public offering 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 153,247
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
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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,
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.
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
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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.
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.
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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."
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.
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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 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.
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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 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
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<PAGE>
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.
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 14% 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 1,000-square foot office for our investment banking
group in San Francisco. This lease expires in May 2000.
Legal Matters
We are not a party to any material legal proceedings. A person formerly
associated with us has asserted a right to purchase 560,000 shares of common
stock (now Class C common stock) at $1.43 per share. We believe the assertion
is without merit and intend to contest it if any lawsuit is filed against us.
These 560,000 shares have not been included in our financial statements or in
any of the share amounts included in this prospectus.
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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
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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.
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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 Western 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.
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<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.
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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.
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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 H. Flom and Edward J. Mathias. 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.
Joseph H. Flom has been a partner in the law firm of Skadden, Arps, Slate,
Meagher & Flom LLP for more than five years. Mr. Flom is currently a director
of The Warnaco Group, Inc. and the America-Israel Friendship League. He is a
Trustee of the Petrie Stores Liquidating Trust and also a Trustee of Mount
Sinai-NYU Medical Center and Health System. Mr. Flom received his law degree
from Harvard Law School.
Edward J. Mathias has been, for more than five years, a Managing Director of
The Carlyle Group, a global investment firm that he helped to establish. Prior
to joining the Carlyle Group, Mr. Mathias worked for T. Rowe Price from 1971
to 1993 during which time he served on its Board of Directors and was also a
member of its management committee. Mr. Mathias is currently a director of
Condor Technology Solutions, Inc., U.S. Office Products, Inc. and U.S.A.
Floral Products, Inc. He has an MBA from Harvard Business School.
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........ 35,000 $1.43 11/11/08
17,500 2.14 3/17/09
Joseph R. Hardiman.......... 35,000 1.43 11/11/08
17,500 2.14 3/17/09
Gilbert C. Maurer........... 35,000 1.43 11/11/08
17,500 2.14 3/17/09
Joseph Flom................. 35,000 1.43 11/11/08
Edward Mathias.............. 35,000 1.43 11/11/08
</TABLE>
44
<PAGE>
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.
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 -- $135,685 -- -- --
Ronald Readmond.......... 1999 250,000 250,000(1) -- -- --
Co-chief executive offi- 1998 146,000 -- -- 1,750,000 $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) -- 367,500 50,000(4)
President--digital trad-
ing 1998 -- -- -- -- --
facility
George Lieberman......... 1999 200,000 (1) -- 280,000 --
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 $50,000 under the
Annual Bonus Plan for Executives.
(2) Participates in the Annual Bonus Plan for the Investment Banking Group.
(3)Represents expense reimbursement in connection with commencement of his
employment.
(4)Represents compensation in connection with commencement of his employment.
45
<PAGE>
Stock Options
Option Grants. The following table sets forth information regarding stock
options granted under our stock option plans between January 1, 1998 and April
30, 1999 to the co-chief executive officers and the other four most highly
compensated executive officers. We have never granted stock appreciation
rights.
<TABLE>
<CAPTION>
Option Grants in Period Beginning January 1, 1998 and Ended April 30, 1999
-----------------------------------------------------------------------------
Individual Grants
-----------------------------------------------------------------------------
Percentage of
Total Options Potential Realizable
Granted to Employees Value at Assumed
(net of forfeitures) Annual Rates of
Number of in the period Stock Price
Securities Beginning Appreciation for
Underlying January 1, 1998 Exercise or Option Terms(4)
Options and Ended April 30, Base Price Expiration ---------------------
Name Granted(1) 1999(2) ($/Share)(3) Date 5% 10%
---- ---------- -------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert H. Lessin........ -- -- -- -- -- --
Ronald Readmond......... 1,750,000 14.9% $1.43 9/17/08 $4,072,237 $6,484,356
Andrew D. Klein......... -- -- -- -- -- --
Mark Loehr.............. -- -- -- -- -- --
Everett Lang............ 367,500 3.1 2.14 2/12/09 1,282,755 2,042,572
George Lieberman........ 280,000 2.4 2.14 1/1/09 977,337 1,556,245
</TABLE>
- --------
(1) Such options were granted pursuant to and in accordance with our Stock
Incentive Plan.
(2) Based on an aggregate of 11,760,000 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 values that could be achieved for the
respective options if exercised at the end of the option term. These
values 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 $8.00 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......... 1,561,000 -- $ 2,787,500 -- 280,000 -- $1,839,600
Andrew D. Klein......... -- -- -- -- -- -- --
Mark Loehr.............. -- -- -- -- -- -- --
Everett Lang............ 157,864 -- 338,281 -- 209,636 -- 1,228,467
George Lieberman........ 93,333 -- 200,000 -- 169,167 -- 991,319
</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 4,025,000 shares of common stock (now
Class C common stock) at $1.43 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 $1.43 per share. These shares vest as follows:
1,341,667 shares on June 8, 1998 and the remainder quarterly beginning July 1,
1998, at the rate of 223,612 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 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."
47
<PAGE>
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 1,561,000 shares of common stock (now
Class C 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 $1.43 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 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.
48
<PAGE>
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 875,000 shares of common stock (now
Class C common stock) at $2.14 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 $2.14 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
54,688 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 extended to Mr. Lang an interest-bearing loan in the amount of
$338,281 with which he has purchased 157,864 shares of common stock (now Class
C 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 $2.14 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.
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
49
<PAGE>
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 17,500,000 shares of 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 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 9,724,997 shares of our Class C common
stock, of which the options are vested with respect to 2,759,522 shares.
Following the conversion of our Class C common stock into common stock, all
stock options will be exercisable for common stock.
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.
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
50
<PAGE>
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 (now Class C 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..... 1,561,000 $2,787,500
Everett F.
Lang......... 157,864 338,281
George M.
Lieberman.... 93,333 200,000
Susan J.
Berkowitz.... 52,500 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 common stock reflected in this table were
subsequently converted into Class C common stock. All shares of Series A, B, C
and D preferred stock will convert automatically into an equal number of
shares of Class C common stock upon completion of this offering. All shares of
Class C common stock will automatically convert into shares of common stock
180 days after the completion of this offering. All shares of Series E
Preferred Stock will convert into an equal number of shares of Class B common
stock upon completion 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 $2.14 11,666,667 April 8, 1999
Capital Z Partners(2)... Series D Preferred 2.14 11,666,667 February 23, 1999
Draper Fisher
Jurvetson(3)........... Series D Preferred 2.14 933,333 March 8, 1999
Series D Preferred 2.14 233,333 December 8, 1998
Series C Preferred 1.43 3,500,000 September 17, 1998
Andrew D. Klein......... Common Stock 0.01 5,600,000 April 4, 1996
Robert H. Lessin........ Series D Preferred 2.14 91,000 December 8, 1998
Common Stock 1.43 35,000 April 13, 1998
Common Stock 1.43 4,025,000 August 3, 1998
Ronald Readmond......... Series A Preferred 1.43 70,000 January 29, 1998
Series A Preferred 1.43 21,000 April 30, 1997
Common Stock 1.43 1,561,000 April 30, 1999
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Price Share
Stockholder Capital Stock Per Share Amount Issuance Date
- ----------- ------------- --------- ------ -------------
<S> <C> <C> <C> <C>
Edward H. Fleischman...... Series D Preferred $2.14 23,333 December 8, 1998
Joseph R. Hardiman........ Series A Preferred 1.43 35,000 December 9, 1997
Mark Loehr................ Common Stock 2.14 875,000 March 5, 1999
M. Bernard Siegel......... Common Stock 1.43 35,000 April 5, 1999
Everett F. Lang........... Common Stock 2.14 157,864 April 30, 1999
George M. Lieberman....... Common Stock 2.14 93,333 April 30, 1999
Common Stock 2.14 17,500 April 14, 1999
Susan J. Berkowitz........ Common Stock 1.43 52,500 April 30, 1999
Common Stock 1.43 43,750 April 5, 1999
</TABLE>
- --------
(1) The Goldman Sachs Group, L.P. owns warrants to purchase up to 5,637,295
shares of Class B common stock. Goldman Sachs also has the right to
receive warrants to purchase an additional 153,247 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
483,021 shares of Series C preferred stock. These warrants will be
exercisable for Class C common stock during the 180-day period following
the completion of this offering and will be exercisable for common stock
thereafter.
Agreement with Stockholders
Capital Z Partners and Draper Fisher Jurvetson, who are the beneficial
owners of 11,666,667 and 5,149,687 shares, respectively, of our Class C 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
11,666,667 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 1,652,000 and 4,151,000 shares,
respectively, of our Class C 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 equity (calculated as if all outstanding
options and rights are exercised and the related shares are issued).
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 equity (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 equity
(calculated as if all outstanding options and rights are exercised and
the related shares are issued). 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 equity
(calculated in a similar manner).
. If we intend to offer shares of our common equity, or other securities
convertible into our common equity, representing more than 5% of our
common equity (again calculated as if all outstanding options and rights
are exercised and the related common shares are issued) 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 equity (calculated, again, in a
similar manner).
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<PAGE>
. 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 700,000 shares of common stock (now
Class C common stock). 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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<PAGE>
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common equity 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 equity; (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 Equity 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... 11,666,667 18.7% 16.7%
One Chase Manhattan Plaza, 44th Floor
New York, NY 10005
Draper Fisher Jurvetson(3).................. 5,149,687 8.2 7.4
400 Seaport Court
Redwood City, CA 94063
John H.N. Fisher(4)......................... -- -- --
400 Seaport Court
Redwood City, CA 94063
Edward H. Fleischman(5)..................... 25,521 * *
Steven Gluckstern(6)........................ -- -- --
One Chase Manhattan Plaza, 44th Floor
New York, NY 10005
The Goldman Sachs Group, L.P.(7) ........... 11,666,667 18.7 16.7
85 Broad Street
New York, NY 10004
Joseph R. Hardiman(5)...................... 39,375 * *
Andrew D. Klein(8).......................... 4,378,338 7.0 6.3
Everett Lang(9)............................. 170,966 * *
Robert H. Lessin(10)........................ 4,641,000 7.4 6.6
George Lieberman (11)....................... 122,111 * *
Mark Loehr.................................. 875,000 1.4 1.3
Gilbert C. Maurer(5)........................ 4,375 * *
Adam Mizel(6)............................... -- -- --
One Chase Manhattan Plaza, 44th Floor
New York, NY 10005
Ronald Readmond(12)......................... 1,675,333 2.7 2.4
All executive officers and directors as a 13,019,830 20.8 18.6
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.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Includes warrants to purchase 483,021 shares of Series C preferred stock.
These warrants will be exercisable for an equal number of shares of Class
C common stock during the 180-day period following the completion of this
offering and will be exercisable for common stock thereafter.
(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 2,188 shares issuable upon exercise of options exercisable within
60 days. Also has an additional 30,625 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 5,637,295 shares of Series E preferred
stock, none of which is exercisable within 60 days. These warrants will be
exercisable for Class B common stock after this offering. Also has the
right to receive up to an additional 153,247 similar warrants in certain
circumstances after September 25, 1999. Class B common stock is not
entitled to vote for the election of directors, but will be automatically
converted into shares of common stock if transferred to a non-affiliate of
Goldman Sachs at any time following 180 days after the completion of this
offering.
(8) Does not include 21,013 shares owned by MMB Properties LLC of which Mr.
Klein is a director.
(9) Includes 13,102 which are exercisable within 60 days and excludes 196,534
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 11,278 shares issuable upon exercise of options exercisable
within 60 days. Also has an additional 157,889 options exercisable after
60 days.
(12) Includes 23,333 shares issuable upon exercise of options exercisable
within 60 days. Also has an additional 256,667 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 29,836,184, 47.8% and 42.7%.
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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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 500,000,000 shares of common stock,
$.01 par value, 75,000,000 shares of Class B common stock, $.01 par value,
159,000,000 shares of Class C common stock, $.01 par value and 30,000,000
shares of preferred stock, $.001 par value. Upon consummation of this
offering, there will be 7,600,000 shares of common stock, 11,666,667 shares of
Class B common stock and 50,685,584 shares of Class C common stock (assuming
no exercise of outstanding stock options and warrants and giving effect to the
issuance of 11,666,667 shares of Class B common stock and 33,977,313 shares of
Class C common stock upon the conversion of all outstanding preferred stock).
There will also be outstanding options and warrants to purchase an aggregate
of 16,465,723 shares of Class B and Class C 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 and Class C Common Stock
The holders of common stock and Class C 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 and Class C 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 and Class C 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 and Class C common
stock have no preemptive rights to purchase shares of our stock. Shares of
common stock and Class C common stock are not subject to any redemption
provisions, and shares of common stock are not convertible into any other
securities. All outstanding shares of common stock and Class C 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 C common stock will automatically convert into
common stock 180 days after the completion of this offering.
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 during the 180-day period following the
completion of this offering, these shares will automatically convert into an
equal number of shares of Class C common stock or, thereafter, 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
Following the automatic conversion of Class C common stock into common
stock, 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 six 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 voting class right
("Voting Class Right"), each share of Class C common stock includes one Voting
Class Right and each share of Class B common stock includes one nonvoting
class right ("Class B Common Right"). The Voting Class Rights and the Class B
Common Rights are referred to collectively herein as the "Rights". Each Voting
Class Right entitles its registered holder to purchase from us a unit
consisting of one one-hundredth of a share (a "Fractional Share") of Class 1
Series A Junior Participating Preferred Stock, par value $.001 per share, and
each Class B Common Right entitles the registered holder to purchase from us a
unit consisting of a Fractional Share of Class 2 Series A Junior Participating
Preferred Stock, par value $.001 per share (the Class 1 Series A Junior
Participating Preferred Stock and the Class 2 Series A Junior Participating
Preferred Stock collectively referred to as the "Preferred Shares"), at a
purchase price of $40.00 per Fractional Share (assuming an offering price of
$8.00 per share), subject to adjustment (the "Purchase Price").
Initially, the Voting Class Rights will be attached to all certificates
representing outstanding shares of common stock and Class C common stock and
the Class B Common Rights will be attached to all certificates representing
outstanding shares of Class B common stock, and no separate certificates for
the Rights ("Rights Certificates") will be distributed. The Voting Rights will
separate from the common stock and Class C common stock and the Class B Common
Rights will separate from the Class B common stock and a "Distribution Date"
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<PAGE>
will occur, with certain exceptions, upon the earlier of (i) ten 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 and Class C common stock (the date of the announcement being the
"Stock Acquisition Date"), or (ii) ten business days following the
commencement of a tender offer or exchange offer that would result in a
person's becoming an Acquiring Person.
However, as long as Capital Z Financial Services Fund II, L.P., together
with all of its affiliates and associates, does not become the beneficial
owner of 25% or more of all outstanding shares of common stock of all classes
(assuming the exercise of all outstanding options, rights and warrants to
acquire common stock), Capital Z, together with its affiliates and associates,
shall not be or become an Acquiring Person. Furthermore, as long as The
Goldman Sachs Group, L.P., together with all its affiliates and associates,
does not become the beneficial owner of 25% or more of all such outstanding
shares of common stock, Goldman Sachs, together with its affiliates and
associates, shall not be or become an Acquiring Person. In certain
circumstances, the Distribution Date may be delayed 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 common
stock.
Until the Distribution Date, (a) the Voting Class Rights will be evidenced
by the common stock certificates and Class C common stock certificates and the
Class B Common Rights will be evidenced by the Class B common stock
certificates and both will be transferred with and only with such common stock
certificates and Class C common stock certificates and such Class B common
stock certificates, as the case may be, (b) common stock certificates, Class C
common stock certificates and Class B common stock certificates will contain a
notation incorporating the Rights Agreement by reference and (c) the surrender
for transfer of any certificate for common stock will also constitute the
transfer of the Rights associated with either the common stock, Class C common
stock or the Class B common 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 holders of record of common stock, Class C common stock and Class
B 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 common stock, Class C common stock and
Class B common stock issued prior to the Distribution Date will be issued with
the appropriate Rights. Shares of common stock, Class C common stock and Class
B common stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with appropriate Rights. Except as otherwise determined by the Board of
Directors, no other shares of common stock, Class C common stock or Class B
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 and Class C common stock at a price and on terms that a majority
of the independent directors of our Board of Directors determines to be fair
to and otherwise in our best interests and the best interests of our
stockholders (a "Permitted Offer")), each holder of a Voting Class Right will
thereafter have the right to receive, upon exercise of such Right, a number of
shares of common stock and each holder of a Class B Common Right will
thereafter have the right to receive, upon exercise of such Right, a number of
shares of Class B common stock (or, in certain circumstances, cash, property
or other securities) having a Current Market Price (as defined in the Rights
Agreement) equal to approximately two times the exercise price of the Right.
Notwithstanding the foregoing, following the occurrence of any Triggering
Event, all Rights that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by or transferred to an Acquiring
Person (or by certain related parties) will be null and void in the
circumstances set forth in the Rights Agreement. However, 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.
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<PAGE>
In the event (a "Flip-Over Event") that, at any time from and after the time
an Acquiring Person becomes such, (i) our company is acquired in a merger or
other business combination transaction (other than certain mergers that follow
a Permitted Offer), or (ii) 50% or more of our assets or earning power is sold
or transferred, each holder of a Right (except Rights that are voided as set
forth above) shall thereafter have the right to receive, upon exercise, 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 common stock,
Class C common stock or Class B common stock, or the number of Fractional
Shares of Preferred Shares 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, the common stock, Class C
common stock or Class B common stock occurring prior to the Distribution Date.
The Purchase Price payable, and the number of Fractional Shares of Shares 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 Preferred Shares.
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 Preferred Shares that are not integral
multiples of a Fractional Share are required to be issued and, in lieu
thereof, an adjustment in cash may be made based on the market price of the
Preferred Shares 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, upon any exercise of Rights, a number
of Rights be exercised so that only whole shares of Preferred Shares will be
issued.
At any time until ten 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 $.01 per Right, payable, at our option, in cash,
shares of common stock, in the case of holders of Voting Class Rights, or
Class B common stock, in the case of holders of Class B Common Rights, or such
other consideration as the Board of Directors may determine. Immediately upon
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 $.01 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 and
Class C common stock then outstanding or the occurrence of a Flip-Over Event,
we may 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,
in the case of holders of Voting Class Rights, or Class B common stock, in the
case of holders of Class B Common Rights, and/or other equity securities
deemed to have the same value as one share of common stock, per Voting Class
Right, or one share of Class B common stock, per Class B Common Right, subject
to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder, including, without limitation, the right to vote or to
receive dividends. While the distribution of the Rights should not be taxable
to stockholders or to us, stockholders may, depending upon the circumstances,
recognize taxable income in the event that the Rights become exercisable for
our common stock or Class B common stock (or other consideration) or for the
common stock of the acquiring company as set forth above or are exchanged as
provided in the preceding paragraph.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of the Company 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 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.
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<PAGE>
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 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.
61
<PAGE>
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,
either Co-Chief Executive Officer 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
62
<PAGE>
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 completion of this offering, there will be outstanding 7,600,000
shares of common stock (8,740,000 shares if the underwriters exercise their
over-allotment option in full), 11,666,667 shares of Class B common stock and
50,685,584 shares of Class C common stock, assuming no exercise of outstanding
options and warrants. The 7,600,000 shares of common stock to be sold in this
offering, or 8,740,000 shares if the underwriters exercise their over-
allotment option in full, will be immediately eligible for sale in the public
market. Shares of Class C common stock are not transferable until they convert
into common stock 180 days following the completion of this offering.
Following this conversion, all of these shares will be immediately available
for sale in the public market, subject to the holding period and volume and
manner of sale limitations contained in Rule 144 under the Securities Act.
Goldman Sachs, which holds all 11,666,667 outstanding shares of Class B common
stock and warrants to purchase an additional 5,637,295 shares of Class B
common stock (which will become exercisable in October 2000), has agreed not
to sell or dispose of any of those shares until 180 days after the date of
this prospectus. Thereafter, if Goldman Sachs transfers any shares of Class B
common stock to a non-affiliate of Goldman Sachs, those shares will convert
automatically into shares of common stock which will then be available for
sale in the public market, subject to the holding period, volume and manner of
sale limitations contained in Rule 144. In addition, we currently have
outstanding a total of 10,828,428 options and warrants, which, until 180 days
following the completion of this offering, will entitle their holders to
purchase shares of Class C common stock that are subject to the transfer
restrictions discussed above. When these transfer restrictions expire, these
options and warrants will entitle their holders to purchase shares of common
stock, which will be available for sale in the public market, subject to the
holding period and volume and manner of sale limitations contained in Rule
144.
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 greater of (1) 1% of the then outstanding
shares of common stock (approximately 699,523 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
63
<PAGE>
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.
Following the automatic conversion of Class C common stock into common
stock, some stockholders 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............................................................ 7,600,000
=========
</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 1,140,000 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 the e-Dealer agreements, 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.
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 thirty-three filed public offerings of equity
securities, of which twelve 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.
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
66
<PAGE>
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>
The accompanying consolidated financial statements of Wit Capital Group, Inc.
have been prepared to give effect to the planned reverse stock split described
in Note 14. When this reverse stock split becomes effective, we expect to
issue the following report.
/s/Arthur Andersen LLP
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.
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;
13,176,468, 11,264,600 and
7,056,095 shares issued and
outstanding at March 31, 1999,
December 31, 1998 and 1997,
respectively...................... 131,765 112,647 70,561
Additional paid-in capital......... 74,918,108 39,534,657 9,786,065
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 93,573 877,822 329,334 282,806
Technology
development.......... 335,795 50,900 1,155,959 511,076 532,265
Data processing and
communications....... 299,611 150,303 625,231 237,608 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............. 51,006 230,880 899,899 503,379 326,114
Other................. 288,110 176,740 1,474,128 (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................. $ (0.68) $ (0.20) $ (1.23) $ (0.41) $ (0.33)
Diluted............... (0.68) (0.20) (1.23) (0.41) (0.33)
WEIGHTED AVERAGE SHARES
USED IN THE COMPUTATION
OF NET LOSS PER SHARE:
Basic................. 7,245,889 7,056,095 7,140,123 7,303,013 5,378,167
Diluted............... 7,245,889 7,056,095 7,140,123 7,303,013 5,378,167
</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................. -- 79,311 3,174,563 -- -- -- 3,253,874
Issuance of Series A
Preferred Stock....... 2,500 -- 497,500 -- -- -- 500,000
Repurchase and
retirement of common
stock................. -- (3,500) (496,500) -- -- -- (500,000)
Net loss............... -- -- -- (1,773,970) -- -- (1,773,970)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1996...... 2,500 75,811 3,175,563 (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 (3,500) (1,500) -- -- -- --
Repurchase and
retirement of common
stock................. -- (1,750) (248,250) -- -- -- (250,000)
Net loss............... -- -- -- (2,992,581) -- -- (2,992,581)
-------- -------- ----------- ------------ ----------- --------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1997...... 77,200 70,561 9,786,065 (4,766,551) -- (308,000) 4,859,275
Issuance of common
stock................. -- 1,836 262,115 -- -- -- 263,951
Issuance of common
stock for note
receivable............ -- 40,250 5,709,750 -- (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...... 271,391 112,647 39,534,657 (13,560,441) (5,750,000) -- 20,608,254
Issuance of common
stock................. -- 1,268 213,773 -- -- -- 215,041
Issuance of common
stock for notes
receivable............ -- 17,850 3,807,150 -- (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 $131,765 $74,918,108 $(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
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 $nil; United
States Treasury bills of $nil, $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 525,000 shares of common stock.
The software was recorded at $1,125,000 representing management's estimate of
the fair value of the 525,000 shares of common stock at $2.14 per share.
Effective December 31, 1996, the founder of GTI agreed to exchange 350,000 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 175,000 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 525,000 shares of common stock of WCG has been accounted for
as a stock repurchase at $1.43 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 210,000 shares of common stock at $1.43 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
4,025,000 shares of common stock at $1.43 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 $1.43 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 1,785,000 shares of common stock at
$2.14 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 $2.14 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 the
series of preferred stock is entitled to convert such share into 0.7 shares of
common stock at any time. In addition, each share of preferred stock will
automatically convert into 0.7 shares 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 $4.29 per share for each Series A and B and $6.43 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.......... 7,245,889 7,056,095 7,140,123 7,303,013 5,378,167
Dilutive effect of common
stock equivalents....... -- -- -- -- --
--------- --------- --------- --------- ---------
Weighted average shares
used in computation of
diluted net loss per
share................. 7,245,889 7,056,095 7,140,123 7,303,013 5,378,167
========= ========= ========= ========= =========
</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 12,308,680, 2,836,960, 8,347,023, 2,706,114 and
231,538 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 14,000,000 and 9,100,000 shares were 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.............. 8,154,822 $1.47 3,267,772 $1.66 1,509,197 $1.64 -- $ --
Granted................ 5,057,500 2.14 5,834,500 1.49 1,904,700 1.59 1,509,197 1.64
Exercised.............. 16,683 1.43 5,950 1.71 -- -- -- --
Forfeited.............. 416,500 1.44 941,500 1.56 146,125 3.54 -- --
Outstanding, end of
period................. 12,779,139 1.74 8,154,822 1.47 3,267,772 1.66 1,509,197 1.64
Options exercisable, end
of period.............. 3,797,326 1.49 3,437,535 1.43 1,801,865 1.64 369,436 1.84
</TABLE>
The range of exercisable prices for the options outstanding and the options
exercisable is $.36--$3.57 and the weighted average is $1.74. 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........... $ (.68) $ (.81) $ (.20) $ (.21)
Diluted......... $ (.68) $ (.81) $ (.20) $ (.21)
<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........... $ (1.23) $ (1.30) $ (.41) $ (.45) $ (.33) $ (.34)
Diluted......... $ (1.23) $ (1.30) $ (.41) $ (.45) $ (.33) $ (.34)
</TABLE>
F-12
<PAGE>
WIT CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. WARRANTS OUTSTANDING
The Company has 1,322,181 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.............. 1,322,181 $1.50 221,900 $1.84 148,400 $2.06 -- $ --
Granted............... 105,000 1.43 1,100,281 1.43 73,500 1.43 148,400 2.06
Exercised............. 35,000 1.43 -- -- -- -- -- --
Forfeited............. 70,000 0.36 -- -- -- -- -- --
Outstanding, end of
period................. 1,322,181 1.56 1,322,181 1.50 221,900 1.84 148,400 2.06
Warrants exercisable,
end of period.......... 1,307,598 1.56 1,302,348 1.50 179,435 1.91 142,800 2.00
</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 560,000 shares of common stock at $1.43 per share. In the
opinion of management, such assertion is without merit, and the Company
intends to contest any lawsuit filed against it. These 560,000 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 11,666,667 were designated
to Series E Preferred Stock and 5,790,542 were reserved for issuance upon
exercise of warrants to purchase Series E Preferred Stock.
In April 1999, the Company issued 11,666,667 shares of Series E Preferred
Stock to a third party for $25,000,000. This third party also received
warrants to purchase 5,637,295 shares of Series E Preferred Stock.
14. REVERSE STOCK SPLIT AND OTHER CAPITAL STOCK TRANSACTIONS (Unaudited)
In May 1999, the Board of Directors approved the conversion of its
outstanding common stock into a newly created Class C Common Stock, subject to
stockholder approval. The Board of Directors also authorized the creation of a
new class of common stock to be sold in the Company's initial public offering,
subject to stockholder approval.
In May 1999, the Board of Directors approved a 7 for 10 reverse stock split
of its Class C Common Stock and Series E Preferred Stock, subject to
stockholder approval. Accordingly, all references in the financial statements
to the number of common and Series E Preferred shares and to common per share
amounts have been retroactively restated to reflect this reverse split.
Upon approval of the reverse stock split, the conversion rate of Series A,
B, C and D Preferred Stock into Class C Common Stock will be 1.43 to 1.
In May 1999, the Company authorized an additional 391,000,000 shares of
common stock, increasing the number of authorized common shares to 734,000,000
of which 500,000,000 represent shares of common stock (the "Common Stock"),
75,000,000 represent shares of non-voting Class B Common Stock (the "Class B
Common Stock") and 159,000,000 represent voting Class C Common Stock (the
"Class C Common Stock"). Additionally, the Company authorized 30,000,000
shares of preferred stock.
The Common Stock, the Class B Common Stock and the Class C Common Stock are
economically equivalent except that the Class B Common Stock is non-voting and
the Class C Common Stock is not transferable until it converts to Common Stock
at the earlier of 180 days after the consummation of an initial public
offering of the Company's Common Stock or February 1, 2000.
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
------ ------------ -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................. $ 9,180,804 $ 549,640
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; 11,264,600 and
7,056,095 shares issued and outstanding at December
31, 1998 and 1997, respectively..................... 112,647 70,561
Additional paid-in capital........................... 39,534,657 9,786,065
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.............................. 746,048 503,379 326,114
Depreciation and amortization.......... 659,259 153,184 9,438
Data processing and communications..... 414,181 186,940 49,599
Professional services.................. 415,443 86,478 255,574
Occupancy.............................. 237,334 200,673 41,889
Other.................................. 1,362,916 (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................. -- 79,311 3,174,563 -- -- -- 3,253,874
Issuance of Series A
Preferred Stock....... 2,500 -- 497,500 -- -- -- 500,000
Repurchase and
retirement of
common stock.......... -- (3,500) (496,500) -- -- -- (500,000)
Net loss............... -- -- -- (1,773,970) -- -- (1,773,970)
-------- --------- ----------- ------------ ----------- ----------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1996...... 2,500 75,811 3,175,563 (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 (3,500) (1,500) -- -- -- --
Repurchase and
retirement of
common stock.......... -- (1,750) (248,250) -- -- -- (250,000)
Net loss............... -- -- -- (2,992,581) -- -- (2,992,581)
-------- --------- ----------- ------------ ----------- ----------- -----------
STOCKHOLDERS' EQUITY,
December 31, 1997...... 77,200 70,561 9,786,065 (4,766,551) -- (308,000) 4,859,275
Issuance of common
stock................. -- 1,836 262,115 -- -- -- 263,951
Issuance of common
stock for
note receivable....... -- 40,250 5,709,750 -- (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 $ 112,647 $39,534,657 $(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...... 659,259 153,184 9,438
(Increase) decrease in operating
assets-
Prepaid expenses................... (139,584) (132,659) --
Other assets....................... (101,275) 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
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............................................................. 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
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.
7,600,000 Shares
[WIT CAPITAL LOGO]
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....................................................... *
-------
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.
The Underwriting Agreement, 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. 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 5,600,000 shares of common stock (now
Class C 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.
700,000 shares of common stock (now Class C common stock) for a purchase
price of $10,000.
(3) On September 30, 1996, we issued 525,000 shares of our common stock
(now Class C 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 934,064 shares of common
stock (now Class C common stock) to accredited investors, including one of
our directors, for $1.43 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 350,000 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 175,000 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 $1.43 per share. These shares will be
converted into 5,213,566 shares of Class C 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 280,000 shares of Class C
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 455,000 shares of Class C 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 210,000
shares of our common stock (now Class C 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 350,000 shares of
Class C 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 4,025,000 shares of common stock
(now Class C common stock) at $1.43 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 $1.43 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 35,000
shares of common stock (now Class C common stock) for $1.43 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
1,613,487 shares of Class C common stock upon consummation of this
offering.
(12) From April 1998 to September 1998, we issued 142,555 shares of
common stock (now Class C 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 4,131,925 shares of Class C 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 21,933,333 shares of Class C common stock upon the
consummation of this offering.
(15) On April 8, 1999, we issued 11,666,667 shares of Series E
Convertible Preferred Stock and 5,637,295 warrants to The Goldman Sachs
Group, L.P. for $2.14 per share. Goldman Sachs has the right to receive up
to an additional 153,247 similar warrants in certain circumstances after
September 25, 1999. The shares of preferred stock will be converted into
11,666,667 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
purchased 875,000 shares of common stock (now Class C common stock) subject
to incremental vesting. The shares will vest as follows: 54,688 shares will
vest on June 30, 1999, 54,688 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 $2.14 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.
(17) On October 15, 1998, we issued warrants to purchase 87,500 shares of
common stock (now Class C common stock) at $1.43 per share to a former
employee in exchange for 87,500 options to purchase common stock previously
granted to the employee.
II-2
<PAGE>
(18) From April 1996 to March 1999, we issued 786,660 warrants to
purchase common stock (now Class C common stock) to nine investors for
prices between $1.43-$3.57 per share for providing consulting services.
(19) From January 1, 1999 to April 30, 1999, we issued a total of 285,184
shares of common stock (now Class C common stock) to accredited investors,
including one of our directors, for $2.14 per share.
(20) From January 1, 1999 to April 30, 1999, we issued a total of 573,999
shares of common stock (now Class C common stock) to 46 of our employees
for exercise of their stock options for $1.43 and $2.14 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
910,000 shares of common stock (now Class C common stock) at $2.14 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 $2.14 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 2,974,488 shares of common
stock (now Class C common stock) to four of our executive officers and five
of our key employees for exercise of their stock options for $1.43 and
$2.14 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 253,750
shares of common stock (now Class C common stock) to four investors for
exercise of their warrants to purchase common stock for $1.43 to $3.57 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.
(24) In May 1999, we converted our outstanding common stock into Class C
common stock. This conversion is exempt from registration under the
Securities Act pursuant to Section 3(a)(9) of the Securities Act. All
outstanding options and warrants will be exercisable for Class C common
stock for 180 days following the completion of this offering. Warrants
exercisable for Class B common stock will remain exercisable for such Class
B common stock.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Form of 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**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
(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 18th 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 and Director
- --------------------------------- May 18th,
1999
Robert H. Lessin
/s/ Ronald Readmond Co-Chief Executive Officer and Director
- --------------------------------- May 18th,
1999
Ronald Readmond
Director
/s/ Andrew D. Klein* May 18, 1999
- --------------------------------- [/R]
Andrew D. Klein
Director
/s/ John Fisher* May 18, 1999
- --------------------------------- [/R]
John Fisher
Director
/s/ Edward H. Fleischman* May 18, 1999
- --------------------------------- [/R]
Edward H. Fleischman
Director
/s/ Steven M. Gluckstern* May 18, 1999
- --------------------------------- [/R]
Steven M. Gluckstern
Director
/s/ Joseph R. Hardiman* May 18, 1999
- --------------------------------- [/R]
Joseph R. Hardiman
Director
May 18, 1999
- --------------------------------- [/R]
Gilbert C. Maurer
Director
/s/ Adam Mizel* May 18, 1999
- --------------------------------- [/R]
Adam Mizel
Chief Financial Officer
/s/ M. Bernard Siegel* May 18, 1999
- --------------------------------- [/R]
M. Bernard Siegel
- --------
* By:
/s/ Ronald Readmond
----------------------------
Ronald Readmond
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 --Form of 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>
[Draft--05/14/99]
EXHIBIT 1.1
7,600,000 Shares of Common Stock
Wit Capital Group, Inc.
UNDERWRITING AGREEMENT
----------------------
May ., 1999
BEAR, STEARNS & CO. INC.
Wit Capital Corporation, as e-Manager
Thomas Weisel Partners LLC
as Representatives of the
several Underwriters named in
Schedule I attached hereto
- ----------
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, NY 10167
Dear Sirs:
Wit Capital Group, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
----------
7,600,000 shares (the "Firm Shares") of its common stock, par value $.01 per
share (the "Common Stock") and, for the sole purpose of covering over-allotments
in connection with the sale of the Firm Shares, at the option of the
Underwriters, up to an additional 1,140,000 shares (the "Additional Shares") of
Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "Shares". The Shares are more fully
described in the Registration Statement referred to below.
<PAGE>
2
1. Representations and Warranties of the Company. The Company
----------------------------------------------
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-74619), and may
have filed an amendment or amendments thereto, for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as amended
at the time of effectiveness of the registration statement, including any
information deemed to be a part thereof as of the time of effectiveness pursuant
to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the
Commission under the Act (the "Regulations"), is herein called the "Registration
Statement", and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is
required, is herein called the "Prospectus". The term "preliminary prospectus"
as used herein means a preliminary prospectus as described in Rule 430 of the
Regulations.
(b) At the time of the effectiveness of the Registration Statement or
the effectiveness of any post-effective amendment to the Registration Statement,
when the Prospectus is first filed with the Commission pursuant to Rule 424(b)
or Rule 434 of the Regulations, when any supplement to or amendment of the
Prospectus is filed with the Commission and at the Closing Date and the
Additional Closing Date, if any (as hereinafter respectively defined), the
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and did not or will not
contain an untrue statement of a material fact and did not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the circumstances
under which they were made, not misleading. When the preliminary prospectus
dated May ., 1999 relating to the Shares was first filed with the Commission
(whether filed as part of the registration statement for the registration of the
Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations)
and when any amendment thereof or supplement thereto was first filed with the
Commission, such preliminary prospectus and any amendments thereof and
supplements thereto complied in all material respects with
<PAGE>
3
the applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein in light of the circumstances under which they were made not misleading.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection with
the preparation thereof. If Rule 434 is used, the Company will comply with the
requirements of Rule 434.
(c) Arthur Andersen LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants with respect to the Company as required by the Act and the
Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as disclosed in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other) or results of operations of the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the ordinary course of
business (a "Material Adverse Effect"), and since the date of the latest balance
sheet presented in the Registration Statement and the Prospectus, neither the
Company nor any of its subsidiaries has incurred or undertaken any liabilities
or obligations, direct or contingent, which are material to the Company and its
subsidiaries taken as a whole, except for liabilities or obligations which are
reflected in the Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement and
the consummation of the transactions
<PAGE>
4
contemplated hereby do not and will not (i) conflict with or result in a breach
of any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default) under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries pursuant to,
any agreement, instrument, franchise, license or permit to which the Company or
any of its subsidiaries is a party or by which any of such corporations or their
respective properties or assets may be bound or (ii) violate or conflict with
any provision of the certificate of incorporation or by-laws of the Company or
any of its subsidiaries or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this Agreement
or the consummation of the transactions contemplated hereby, including the
issuance, sale and delivery of the Shares to be issued, sold and delivered by
the Company hereunder, except the registration under the Act of the Shares and
such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws and the rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution of
the Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights, except such
rights as have been waived. The Shares, when issued, delivered and sold in
accordance with this Agreement, will be duly and validly issued and outstanding,
fully paid and nonassessable, and will not have been issued in violation of or
be subject to any preemptive rights, except such rights as have been waived.
The Company had, at March 31, 1999, an authorized and outstanding capitalization
as set forth in the Registration Statement and the Prospectus under the caption
"Capitalization" (under the "Actual" column in the table set forth under such
caption). The Common Stock, the
<PAGE>
5
Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its subsidiaries is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not,
individually or in the aggregate, have a Material Adverse Effect. Each of the
Company and its subsidiaries has all requisite power and authority, and all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties and
conduct its business as now being conducted and as described in the Registration
Statement and the Prospectus, and no such consent, approval, authorization,
order, registration, qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the Registration Statement
and the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation
or default of (i) any provision of its certificate of incorporation or by-laws
(or other organizational documents), (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which it is a party
or bound or to which its property is subject or (iii) any statute, law, rule,
regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or such subsidiary or any of its properties, as
applicable, except, with respect to clauses (ii) and (iii) only, for violations
or defaults that would not, individually or in the aggregate, have a Material
Adverse Effect.
(j) Except as described in the Prospectus, there is no litigation or
governmental proceeding to which the Company or any of its subsidiaries is
a party or to which any property of the Company or any of its subsidiaries is
<PAGE>
6
subject or which is pending or, to the knowledge of the Company, contemplated
against the Company or any of its subsidiaries which might reasonably be
expected to result in a Material Adverse Effect or which is required to be
disclosed in the Registration Statement and the Prospectus.
(k) There is no statute, regulation, contract or other document of a
character required to be described in the Registration Statement or the
Prospectus, or, in the case of a contract or other document, to be filed as an
exhibit to the Registration Statement, that is not described or filed, as the
case may be, as required.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of shares of Common Stock to facilitate the sale or
resale of the Shares.
(m) The financial statements, including the notes thereto, and the
supporting schedule included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and the consolidated results of their
operations and cash flows for the periods specified; except as otherwise stated
in the Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedule included in the Registration Statement
presents fairly the information required to be stated therein; and the other
financial and statistical information and data included in the Registration
Statement and the Prospectus is, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements and the books
and records of the Company.
(n) Except such rights as have been waived or as described in the
Prospectus, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(o) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to
<PAGE>
7
registration as an "investment company" under the Investment Company Act of
1940.
(p) The Common Stock of the Company, including the Shares, has been
approved for quotation on the Nasdaq National Market, subject only to official
notice of issuance.
(q) No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing, threatened or imminent labor dispute or
disturbance by the employees of any of its principal customers, suppliers,
contractors or providers of outsourced services that might have a Material
Adverse Effect.
(r) The Company and its subsidiaries own, possess, license or have
rights to use all patents, patent applications, trade and service marks, trade
and service mark registrations, trade names, copyrights, licenses, inventions,
technology, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures) and
other intellectual property (collectively, the "Intellectual Property")
necessary for the conduct of the Company's business as now conducted or as
proposed in the Prospectus to be conducted. Except as described in the
Prospectus, (i) to the Company's knowledge, there is no material infringement by
third parties of any such Intellectual Property, (ii) there is no pending or, to
the Company's knowledge, threatened action, suit, proceeding or claim by others
challenging the Company's rights in or to any such Intellectual Property, and
the Company is unaware of any facts which would form a reasonable basis for any
such claim, (iii) there is no pending or, to the Company's knowledge, threatened
action, suit, proceeding or claim by others challenging the validity or scope of
any such Intellectual Property, and the Company is unaware of any facts which
would form a reasonable basis for any such claim, (iv) there is no pending or,
to the Company's knowledge, threatened action, suit, proceeding or claim by
others that the Company infringes or otherwise violates any patent, trademark,
copyright, trade secret or other proprietary rights of others, and the Company
is unaware of any other fact which would form a reasonable basis for any such
claim, (v) to the Company's knowledge, there is no U.S. patent or published U.S.
patent application which contains
<PAGE>
8
claims that dominate or may dominate any Intellectual Property described in the
Prospectus as being owned by or licensed to the Company or that interferes with
the issued or pending claims of any such Intellectual Property and (vi) there is
no prior art of which the Company is aware that may render any U.S. patent held
by the Company invalid or any U.S. patent application held by the Company
unpatentable which has not been disclosed to the U.S. Patent and Trademark
Office. True and correct copies of all material licenses and other material
agreements between the Company, its subsidiaries and any third parties relating
to the Intellectual Property, and all amendments and supplements thereto, have
been provided to the Underwriters or their counsel.
(s) The Company and its subsidiaries (i) are in compliance in all
material respects with any and all applicable foreign, Federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all material permits,
licenses or other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (iii) are in compliance with all
terms and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, individually or in
the aggregate, have a Material Adverse Effect.
(t) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for cleanup, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would,
individually or in the aggregate, have a Material Adverse Effect.
(u) The Company and its subsidiaries own no real property and have
good and marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not materially
<PAGE>
9
affect the value of such property and do not materially interfere with the use
made of such property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as are
not material and do not materially interfere with the use made and proposed to
be made of such property and buildings by the Company and its subsidiaries, in
each case except as described in or contemplated by the Prospectus.
(v) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as (i) the Company believes are prudent and customary in the businesses
in which it is engaged and (ii) are consistent with insurance coverage
maintained by similar companies in similar businesses; neither the Company nor
any such subsidiary has been refused any insurance coverage sought or applied
for, and neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not result in a
Material Adverse Effect.
(w) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers, suppliers or providers of outsourced services of the
Company or any of its subsidiaries on the other hand, which is required by the
Act to be described in the Registration Statement and the Prospectus which is
not so described.
<PAGE>
10
(y) The Company and its subsidiaries have implemented a comprehensive
program to analyze and address the risk that their internal information
technology and non-information technology systems may be unable to recognize and
properly execute date-sensitive functions involving certain dates prior to and
any dates after December 31, 1999 (the "Year 2000 Problem"), and the Company
believes, based on such assessment, that its and its subsidiaries' computer
hardware and software systems are and will be able to process date information
prior to and after December 31, 1999 without any errors, aborts, delays or other
interruptions in operations associated with the Year 2000 Problem; and the
Company has contacted those of its vendors with whom it has important financial
or operational relationships and believes (i) based on information received from
such vendors, that each such vendor has remedied or will remedy on a timely
basis the Year 2000 Problem and (ii) that it could find a suitable replacement
vendor without significant delay or expense in the event that any such vendor
fails to remedy on a timely basis the Year 2000 Problem.
(z) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery of
this Agreement or the issuance by the Company or sale by the Company of the
Securities.
(aa) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus.
(bb) Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
regulations thereunder with respect to each "plan" (as defined in Section 3(3)
of ERISA and such regulations) in which employees of the Company and its
subsidiaries are eligible to participate and each such plan is in compliance in
all material respects with the presently applicable
<PAGE>
11
provisions of ERISA and such regulations. The Company and its subsidiaries have
not incurred any unpaid liability to the Pension Benefit Guaranty Corporation
(other than for the payment of premiums in the ordinary course) or to any such
plan under Title IV of ERISA.
2. Purchase, Sale and Delivery of the Shares.
------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $., the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
----------
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the offices of Cravath, Swaine & Moore,
Worldwide Plaza, 825 Eighth Avenue, New York, New York 10019, or at such other
place as shall be agreed upon by you and the Company, at 10:00 A.M. on the third
or fourth business day (as permitted under Rule 15c6-1 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) (unless postponed in
accordance with the provisions of Section 10 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has elected to
rely upon Rule 430A of the Regulations, the third or fourth business day (as
permitted under Rule 15c6-1 under the Exchange Act) after the determination of
the initial public offering price of the Shares), or such other time not later
than 10 business days after such date as shall be agreed upon by you and the
Company (such time and date of payment and delivery being herein called the
"Closing Date"). Payment shall be made to the Company by wire transfer of
immediately available funds to an account designated by the Company, against
delivery to you for the respective accounts of the Underwriters of certificates
for the Firm Shares to be purchased by them. Certificates for the Firm Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full business days prior to the
Closing Date. The Company will permit you to examine and package such
certificates for delivery at least one full business day prior to the Closing
<PAGE>
12
Date. If you so elect, delivery of the Firm Shares purchased from the Company
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by you.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 1,140,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at
any time, in whole or in part, on or before the thirtieth day following the date
of the Prospectus, by written notice by you to the Company. Such notice shall
set forth the aggregate number of Additional Shares as to which the option is
being exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
-------- -------
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full business day after the date on which the option shall have
been exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 10 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date. If you so elect, delivery of the
Additional Shares purchased from the Company may be made by credit through full
fast transfer to the accounts at The Depository Trust Company designated by you.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
----------
in Section 10 hereof) bears to 7,600,000, subject, however, to such adjustments
to eliminate any fractional shares as you in your sole discretion shall make.
<PAGE>
13
Payment for the Additional Shares shall be made by wire transfer of
immediately available funds to an account designated by the Company, and the
closing shall take place at the offices of Cravath, Swaine & Moore, Worldwide
Plaza, 825 Eighth Avenue, New York, New York 10019, or such other location as
may be mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. Offering. Upon your authorization of the release of the Firm
---------
Shares, the Underwriters propose to offer the Shares for sale to the public upon
the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
-------------------------
the Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the Commission,
and (vi) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Shares for sale in any jurisdiction or
the initiation or
<PAGE>
14
threatening of any proceeding for that purpose. If the Commission shall propose
or enter a stop order at any time, the Company will make every reasonable effort
to prevent the issuance of any such stop order and, if issued, to obtain the
lifting of such order as soon as possible. The Company will not file any
amendment to the Registration Statement or any amendment of or supplement to the
Prospectus (including the prospectus required to be filed pursuant to Rule
424(b) or Rule 434) that differs from the prospectus on file at the time of the
effectiveness of the Registration Statement before or after the effective date
of the Registration Statement to which you shall reasonably object in writing
after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary, in the
judgment of the Underwriters or the Company, at any time to amend or supplement
the Prospectus or Registration Statement to comply with the Act or the
Regulations, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form and substance
satisfactory to you) which will correct such statement or omission and will use
its best efforts to have any amendment to the Registration Statement declared
effective as soon as possible.
(c) The Company will promptly deliver to you one signed copy of the
Registration Statement, including exhibits and all amendments thereto, and will
maintain in the Company's files manually signed copies of such documents for at
least five years from the date of filing. The Company will promptly deliver to
each of the Underwriters such number of copies of any preliminary prospectus,
the Prospectus, the Registration Statement, and all amendments of and
supplements to such documents, if any, as you may reasonably request.
(d) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the effective date of this Agreement, to
Bear, Stearns & Co.
<PAGE>
15
Inc., Wit Capital Corporation and Thomas Weisel Partners LLC an "electronic
Prospectus" to be used by the Underwriters in connection with the offering and
sale of the Shares. As used herein, the term "electronic Prospectus" means a
form of Prospectus, and any amendment or supplement thereto, that meets each of
the following conditions: (i) it shall be encoded in an electronic format,
satisfactory to Bear, Stearns & Co. Inc., that may be transmitted electronically
by Bear, Stearns & Co. Inc. and the other Underwriters to offerees and
purchasers of the Shares for at least during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act ("the Prospectus
Delivery Period"); (ii) it shall disclose the same information as the paper
Prospectus and Prospectus filed with the Commission through its "EDGAR" system
(as such term is defined in Regulation S-T promulgated by the Commission),
except to the extent that graphic and image material cannot be disseminated
electronically, in which case such graphic and image material shall be replaced
in the electronic Prospectus with a fair and accurate narrative description or
tabular representation of such material, as appropriate and (iii) it shall be in
or convertible into a paper format or an electronic format, reasonably
satisfactory to Bear, Stearns & Co. Inc., that will allow investors to store and
have continuously ready access to the Prospectus at any future time, without
charge to investors (other than any fee charged for subscription to the system
as a whole and for on-line time). Such electronic Prospectus may consist of a
Rule 434 preliminary prospectus, together with the applicable term sheet,
provided that it otherwise satisfies the format and conditions described in the
immediately preceding sentence.
(e) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof, but in no event for longer than one year; except that in
no event shall the Company be obligated in connection therewith to qualify as a
foreign corporation or to execute a general consent to service of process.
(f) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
<PAGE>
16
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement.
(g) The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Common Stock.
(h) During the period of 180 days from the date of the Prospectus,
the Company will not, without the prior written consent of Bear, Stearns & Co.
Inc., issue, offer, sell, contract to sell, pledge or otherwise dispose of (or
enter into any transaction which is designed to, or could be expected to, result
in the disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any affiliate
of the Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, including the filing (or participation in the
filing) of a registration statement with the Commission in respect of, or
establish or increase a "put equivalent position" or liquidate or decrease a
"call equivalent position" within the meaning of the rules promulgated under
Section 16 of the Exchange Act with respect to, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock,
or publicly announce an intention to effect any such transaction, and the
Company will obtain the undertaking of each of its officers and directors and
such of its shareholders as have been heretofore designated by you and listed on
Schedule II attached hereto not to engage in any of the aforementioned
- -----------
transactions on their own behalf; provided, however, that the Company may (i)
-------- -------
sell the Shares hereunder, (ii) issue and sell Common Stock pursuant to any
employee stock option plan, stock ownership plan, retirement plan or dividend
reinvestment plan of the Company in effect on the date of this Agreement, (iii)
issue Common Stock issuable upon the conversion of securities or the exercise of
warrants outstanding on the date of this Agreement and (iv) issue and sell
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or grant or issue any options, rights or warrants
to purchase shares of Common Stock and issue shares of Common Stock upon
conversion, exercise of exchange thereof (all such shares of Common Stock
referred to in this clause (iv) are
<PAGE>
17
collectively referred to as "Supplemental Shares") in connection with raising
additional capital or making acquisitions so long as each person who acquires
any Supplemental Shares enters into an agreement with the Company that contains
provisions to the effect that such person may not sell, offer to sell, solicit
an offer to buy, contract to sell, pledge, grant any option to purchase, or
otherwise transfer or dispose of, any such Supplemental Shares, without the
prior written consent of Bear, Stearns & Co. Inc. at any time during the period
of 180 days from the date of the Prospectus (which agreement shall provide that
such provisions may not be amended, nor may the performance of any obligations
under such provisions be waived, without the prior written consent of Bear,
Stearns & Co. Inc.), and the certificates evidencing such Supplemental Shares
bear a legend that sets forth such restrictions on transfer or disposition.
(i) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its shareholders and (ii) all reports, financial statements and proxy
or information statements filed by the Company with the Commission or any
national securities exchange.
(j) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(k) The Company will use its best efforts to cause the Shares to be
qualified for inclusion in the Nasdaq National Market.
(l) During a period of 180 days from the date of the Prospectus, the
Company shall not propose, or agree to any proposal, to amend any provision of
the Company's certificate of incorporation that relates to the terms of the
Company's Class C Common Stock without the prior written consent of Bear,
Stearns & Co. Inc.
5. Payment of Expenses. Whether or not the transactions contemplated
--------------------
in this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits
<PAGE>
18
thereto), any preliminary prospectus, the Prospectus and any amendments or
supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents and all other
documents related to the public offering of the Shares (including those supplied
to the Underwriters in reasonable quantities as hereinabove stated), (ii) the
issuance, transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the qualification of the Shares
under state or foreign securities or Blue Sky laws, including the costs of
printing and mailing a preliminary and final "Blue Sky Survey" and the fees of
counsel for the Underwriters and such counsel's disbursements in relation
thereto, (iv) quotation of the Shares on the Nasdaq National Market, (v) filing
fees of the Commission and the NASD, (vi) the cost of printing certificates
representing the Shares and (vii) the cost and charges of any transfer agent or
registrar.
<PAGE>
19
6. Conditions of Underwriters' Obligations. The obligations of the
----------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Cravath, Swaine & Moore
("Under writers' Counsel") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than (i) if pricing pursuant to Rule 430A, 5:30 P.M., New York time, on the date
of this Agreement or (ii) if pricing pursuant to a pricing amendment, 12:00
P.M., New York time, on the date an amendment to the Registration Statement
containing the public offering price has been filed with the Commission, or at
such later time and date as shall have been consented to in writing by you; if
the Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of
Morgan, Lewis & Bockius LLP, counsel for the Company, dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and its wholly owned subsidiary, Wit Capital
Corporation, a New York corporation (the "Subsidiary"), has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the Company
and the Subsidiary is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character
<PAGE>
20
or location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the Company and the Subsidiary
taken as a whole. Each of the Company and the Subsidiary has all requisite
corporate authority to own, lease and license its respective properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus. All the issued and outstanding
capital stock of the Subsidiary has been duly and validly issued and is
fully paid and nonassessable and, to such counsel's knowledge, was not
issued in violation of preemptive rights, except such rights as have been
waived, and is owned directly or indirectly by the Company, free and clear
of any lien, encumbrance, claim, security interest, restriction on
transfer, shareholders' agreement, voting trust or other defect of title
whatsoever.
(ii) The Company has authorized capital stock as set forth in the
Registration Statement and the Prospectus. All of the outstanding shares
of Common Stock are duly and validly authorized and issued, are fully paid
and nonassessable and, to such counsel's knowledge, were not issued in
violation of or subject to any preemptive rights, except such rights as
have been waived. The Shares to be delivered on the Closing Date have been
duly and validly authorized and, when issued, sold and delivered by the
Company in accordance with this Agreement, will be duly and validly issued,
fully paid and nonassessable and, to such counsel's knowledge, will not
have been issued in violation of or subject to any preemptive rights,
except such rights as have been waived. The Common Stock, the Firm Shares
and the Additional Shares conform to the descriptions thereof contained in
the Registration Statement and the Prospectus.
(iii) The Shares to be sold under this Agreement to the Underwriters
have been duly registered pursuant to Section 12 of the Exchange Act.
(iv) This Agreement has been duly and validly authorized, executed
and delivered by the Company.
<PAGE>
21
(v) There is no litigation or governmental or other action, suit,
proceeding or investigation before any court or before or by any public,
regulatory or governmental agency or body pending or to the best of such
counsel's knowledge, threatened against, or involving the properties or
business of, the Company or the Subsidiary, which is of a character
required to be disclosed in the Registration Statement and the Prospectus
which has not been properly disclosed therein.
(vi) There is no statute, regulation, contract or other document known
to such counsel of a character required to be described in the Registration
Statement or the Prospectus, or, in the case of a contract or other
document, to be filed as an exhibit to the Registration Statement, that is
not described or filed, as the case may be, as required.
(vii) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the Company do
not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or the Subsidiary pursuant to,
any agreement, instrument, franchise, license or permit known to such
counsel to which the Company or the Subsidiary is a party or by which
either of such corporations or their respective properties or assets may be
bound or (B) violate or conflict with any provision of the certificate of
incorporation or by-laws of the Company or the Subsidiary, or, to the
knowledge of such counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or
body having jurisdiction over the Company or the Subsidiary or any of their
respective properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with
any court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or the Subsidiary or any of their respective
properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of
<PAGE>
22
the transactions contemplated hereby, except for (1) such as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters (as to which
such counsel need express no opinion) and (2) such as have been made or
obtained under the Act and the rules of the NASD.
(viii) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(ix) The Registration Statement and the Prospectus and any amendments
thereof or supplements thereto (other than the financial statements and the
supporting schedule and other financial data included therein, as to which
no opinion need be rendered) comply as to form in all material respects
with the requirements of the Act and the Regulations.
(x) The Registration Statement is effective under the Act, and, to
the best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereof has been issued and no proceedings therefor have been initiated or
threatened by the Commission; and all filings required by Rule 424(b) of
the Regulations have been made.
(xi) To such counsel's knowledge, no holder of any security of the
Company has any right, not effectively satisfied or waived, to require
inclusion of shares of Common Stock or any other security of the Company in
the Registration Statement.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if
<PAGE>
23
applicable), or any amendment thereof made prior to the Closing Date as of the
date of such amendment, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as of its date
(or any amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing Date
contained or contains an untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief or opinion with respect to the financial statements and schedules and
other financial data included therein).
The opinion of such counsel shall be limited to the laws of the United
States, the General Corporation Law of the State of Delaware and the laws of the
State of New York and, in rendering such opinion, such counsel may rely (A) as
to matters involving the application of laws other than the laws of the United
States, the General Corporation Law of the State of Delaware and the laws of the
State of New York, to the extent such counsel deems proper and to the extent
specified in such opinion, if at all, upon an opinion or opinions (in form and
substance reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the applicable
laws; (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and certificates or other written
statements of officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the Company and
the Subsidiary, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel. The opinion of such counsel for
the Company shall state that the opinion of any such other counsel is in form
satisfactory to such counsel and, in their opinion, you and they are justified
in relying thereon.
(c) At the Closing Date you shall have received the opinion of
Potter, Anderson & Corroon LLP, special Delaware counsel to the Company, dated
the Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that [(i) the
reclassification of the Company's outstanding
<PAGE>
24
Common Stock into Class C Common Stock, which was effected pursuant to an
amendment to the Company's certificate of incorporation filed with the Secretary
of State of the State of Delaware on May ., 1999 (the "Amendment"), is legal and
valid under the General Corporation Law of the State of Delaware and (ii) the
restrictions on transfer relating to the Company's Class C Common Stock set
forth in the Amendment are legal and valid under the General Corporation Law of
the State of Delaware].
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(e) At the Closing Date you shall have received a certificate of a
Co-Chief Executive Officer and the Chief Financial Officer of the Company, dated
the Closing Date to the effect that (i) the condition set forth in subsection
(a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of
the Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material adverse
change, in the business prospects, properties, operations, condition (financial
or otherwise), or results of operations of the Company and its subsidiaries
taken as a whole, except in each case as described in or contemplated by the
Prospectus.
<PAGE>
25
(f) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Arthur Andersen LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company and its subsidiaries, a reading of the
minutes of meetings and consents of the shareholders and boards of directors of
the Company and its subsidiaries and the committees of such boards subsequent to
March 31, 1999, inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting matters of the
Company and its subsidiaries with respect to transactions and events subsequent
to March 31, 1999 and other specified procedures and inquiries to a date not
more than five days prior to the date of such letter, nothing has come to their
attention that would cause them to believe that: (A) the unaudited consolidated
financial statements and schedules of the Company presented in the Registration
Statement and the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the applicable
published rules and regulations of the Commission thereunder or that such
unaudited consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated financial
statements of the Company and its subsidiaries included in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent to March
31, 1999 there were, as of the date of the most recent available monthly
consolidated financial statements of the Company and its subsidiaries, if any,
and as of a specified date not more than five days prior to the date of such
letter, any changes in the capital stock or long-term indebtedness of the
<PAGE>
26
Company or any decrease in the net current assets or stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet presented in the Registration Statement and the Prospectus, except
for changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter; or
(C) that during the period from April 1, 1999 to the date of the most recent
available monthly consolidated financial statements of the Company and its
subsidiaries, if any, and to a specified date not more than five days prior to
the date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues, or any
increase, as compared with the corresponding period in the prior fiscal year, in
operating loss or total or per share net loss, except for decreases or
increases, as the case may be, which the Registration Statement and the
Prospectus disclose have occurred or may occur or which are set forth in such
letter; and (iv) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, and other financial
information pertaining to the Company and its subsidiaries set forth in the
Registration Statement and the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such amounts, numbers,
percentages, and information may be derived from the general accounting and
financial records of the Company and its subsidiaries or from schedules
furnished by the Company, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the application
of specified readings, inquiries, and other appropriate procedures specified by
you set forth in such letter, and found them to be in agreement.
(g) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(h) You shall have received from each person who is a director or
officer of the Company and such shareholders as have been heretofore designated
by you and listed on Schedule II hereto an agreement to the effect that such
-----------
person will not, directly or indirectly, without the prior written consent of
Bear, Stearns & Co. Inc., offer, sell, contract to sell, pledge or otherwise
dispose of (or enter into any transaction which is designed to, or could be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash
<PAGE>
27
settlement or otherwise) by such person or by the Company or any affiliate of
the Company or any person in privity with the Company or any affiliate of the
Company) directly or indirectly, including the filing (or participation in the
filing) of a registration statement with the Commission in respect of, or
establish or increase a "put equivalent position" or liquidate or decrease a
"call equivalent position" within the meaning of the rules promulgated under
Section 16 of the Exchange Act with respect to, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock,
or publicly announce an intention to effect any such transaction, for a period
of 180 days after the date of the Prospectus; provided, however, that no such
-------- -------
agreement shall in any way limit the rights of the Company to
issue and sell Common Stock as provided in Section 4(h) of this Agreement.
(i) At the Closing Date, the Shares shall
have been approved for quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancelation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
----------------
<PAGE>
28
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, 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;
provided, however, that the Company will not be liable in any such case to the
- -------- -------
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein. This indemnity
agreement will be in addition to any liability which the Company may otherwise
have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), jointly or several, to which they or any of them
may become subject
<PAGE>
29
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, 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, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
--------
however, that in no case shall any Underwriter be liable or responsible for any
- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page and in the eighth, eleventh and fourteenth
paragraphs and the first sentence of the sixth paragraph under the caption
"Underwriting" in the Prospectus constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for use in the registration
statement relating to the Shares as originally filed or in any amendment
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice
<PAGE>
30
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was
-------- -------
not unreasonably withheld.
8. Contribution. In order to provide for contribution in
-------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, officers of the Company who signed the Registration Statement and
directors of the Company) as incurred to which the Company
<PAGE>
31
and one or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering(net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth on the cover page of the Prospectus. The relative fault of the
Company and of the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission; provided, however, that no intent or knowledge of, or
-------- -------
opportunity to correct or prevent any such statement or omission by, Wit Capital
Corporation shall be attributed to any other Underwriter. The Company and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 8 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8 and the preceding sentence, no Underwriter
shall be required to contribute any amount in
<PAGE>
32
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of the second preceding sentence. Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties, notify each party or
parties from whom contribution may be sought, but the omission to so notify such
party or parties shall not relieve the party or parties from whom contribution
may be sought from any obligation it or they may have under this Section 8 or
otherwise. No party shall be liable for contribution with respect to any action
or claim settled without its consent; provided, however, that such consent was
-------- -------
not unreasonably withheld.
9. Qualified Independent Underwriter.
----------------------------------
(a) The Company hereby confirms its engagement of the services of
Bear, Stearns & Co. Inc. as, and Bear, Stearns & Co. Inc. hereby confirms its
agreement with the Company to render services without compensation as, a
"qualified independent underwriter" (in such capacity, the "a=") within the
meaning of Rule 2720(b)(15) of the Conduct Rules of the NASD with respect to the
offering and sale of the Shares.
(b) The QIU hereby represents and warrants to, and agrees with, the
Company and the other Underwriters that, with respect to the offering and sale
of the Shares as described in the Prospectus:
(i) the QIU qualifies as, and constitutes, a "qualified independent
underwriter" within
<PAGE>
33
the meaning of Rule 2720(b)(15) of the Conduct Rules of the
NASD;
(ii) the QIU has participated in the preparation of the
Registration Statement and the Prospectus and has exercised
the usual standards of "due diligence" in respect thereto;
(iii) the QIU has agreed in acting as a "qualified independent
underwriter" within the meaning of Rule 2720(b)(15) of the
Conduct Rules of the NASD to undertake the legal
responsibilities and liabilities of an underwriter under the
Act, specifically including those inherent in Section 11
thereof;
(iv) based upon, among other factors, the information set forth in
the Prospectus and its review of such other documents and the
taking of such other actions as the QIU, in its sole
discretion, has deemed necessary or appropriate for the
purposes of delivering its recommendation hereunder, the QIU
recommends, as of the date of the execution and delivery of
this Agreement, that the price at which the Shares are to be
distributed to the public shall not be higher than that set
forth on the cover page of the Prospectus, which price should
in no way be considered or relied upon as an indication of
the value of the Shares; and
(v) the QIU will furnish to the other Representatives on the
Closing Date a letter, dated the date thereof, in form and
substance satisfactory to the other Representatives, to the
effect of clauses (i) through (iv) above.
(c) The Company, the QIU and the other Underwriters agree to comply
in all material respects with all of the requirements of Rule 2720 of the
Conduct Rules of the NASD applicable to them in connection with the offering and
sale of the Shares. The Company agrees to cooperate with the Underwriters,
including the QIU, to enable the
<PAGE>
34
Underwriters to comply with Rule 2720 of the Conduct Rules of the NASD and to
enable the QIU to perform the services contemplated by this Agreement.
(d) The Company agrees promptly to reimburse the QIU for all out-of-
pocket expenses, including fees and disbursements of counsel, reasonably
incurred in connection with the services to be rendered as QIU hereunder.
(e) The QIU hereby consents to the references to it in its capacity
as "qualified independent underwriter" as set forth under the caption
"Underwriting" in the Prospectus.
(f) The Company will indemnify and hold harmless the QIU against any
losses, claims, damages or liabilities, joint or several, to which the QIU may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon the QIU's acting (or alleged failing to act) as a "qualified independent
underwriter" within the meaning of Rule 2720(b)(15) of the Conduct Rules of the
NASD with respect to the offering and sale of the Shares and will reimburse the
QIU for any legal or other expenses reasonably incurred by the QIU in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred.
10. Default by an Underwriter.
--------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, the Firm Shares or Additional Shares to which the default
relates shall be purchased by the non-defaulting Underwriters in proportion to
the respective proportions which the numbers of Firm Shares set forth opposite
their respective names in Schedule I hereto bear to the aggregate number of Firm
----------
Shares set forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for
<PAGE>
35
yourself or for another party or parties (including any non-defaulting
Underwriter or Underwriters who so agree) to purchase such Firm Shares or
Additional Shares, as the case may be, to which such default relates on the
terms contained herein. In the event that within 5 calendar days after such a
default you do not arrange for the purchase of the Firm Shares or Additional
Shares, as the case may be, to which such default relates as provided in this
Section 10, this Agreement or, in the case of a default with respect to the
Additional Shares, the obligations of the Underwriters to purchase and of the
Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 10 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.
11. Survival of Representations and Agreements. All representations
-------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any
<PAGE>
36
controlling person thereof, and shall survive delivery of and payment for the
Shares to and by the Underwriters. The representations contained in Section 1
and the agreements contained in Sections 5, 7, 8 and 12(d) hereof shall survive
the termination of this Agreement, including termination pursuant to Section 10
or 12 hereof.
12. Effective Date of Agreement; Termination.
-----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you by
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 12 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in general; or
(B) if trading on the New York or American Stock Exchanges or on Nasdaq shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required, on
the New York or American Stock Exchanges or on Nasdaq by the New York or
American Stock Exchanges, the NASD or by order of the Commission or any other
governmental authority having jurisdiction; or (C) if a banking moratorium has
been declared by a state or Federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares or the
Additional Shares, as the case may be, shall have become effective; or (D) (i)
if, after the date hereof, the United States becomes engaged in hostilities or
there is an escalation of hostilities
<PAGE>
37
involving the United States or there is a declaration of a national emergency or
war by the United States or (ii) if there shall have been such change in
political, financial or economic conditions if the effect of any such event in
(i) or (ii) as in your judgment makes it impracticable or inadvisable to proceed
with the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 12 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 12(a) hereof or (ii) Section 10(b) or 12(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
13. Notices. All communications hereunder, except as may be
--------
otherwise specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, NY 10167, Attention of ; if sent to the Company, shall be
mailed, delivered, or telegraphed and confirmed in writing to the Company, 826
Broadway, Sixth Floor, New York, NY 10003, Attention of: Robert H. Lessin and
Ronald Readmond, Co-Chief Executive Officers.
14. Parties. This Agreement shall inure solely to the benefit of,
--------
and shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Sections 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and
<PAGE>
38
assigns" shall not include a purchaser, in its capacity as such, of Shares from
any of the Underwriters.
15. Governing Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
<PAGE>
39
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
WIT CAPITAL GROUP, INC.
by
-----------------------------------
Name:
Title:
Accepted as of the date
first above written:
BEAR, STEARNS & CO. INC.,
Wit Capital Corporation, as e-Manager
Thomas Weisel Partners LLC
On behalf of themselves and the other
Underwriters named in Schedule I
----------
hereto
BY: BEAR, STEARNS, & CO. INC.
by
------------------------
Name:
Title:
<PAGE>
40
SCHEDULE I
Name of Underwriter Number of Firm
Shares to be
Purchased
- --------------------------------------------
Bear, Stearns & Co. Inc.
- --------------------------------------------
Wit Capital Corporation
- --------------------------------------------
Thomas Weisel Partners LLC
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------
--------
- --------------------------------------------
Total........... ========
- --------------------------------------------
<PAGE>
41
SCHEDULE II
[Names of shareholders subject to the lock-up provision]
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WIT CAPITAL GROUP, INC.
----------------------------
The name of the Corporation is "Wit Capital Group, Inc."
The original Certificate of Incorporation was filed with the Secretary of
State of the State of Delaware on July 2, 1998.
The text of the Certificate of Incorporation is hereby amended and restated
to read in its entirety as follows:
FIRST: Name. The name of the Corporation is Wit Capital Group, Inc.
----
SECOND: Registered Agent. The address of its registered office in the
----------------
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporation Service
Company.
THIRD: Purpose. The purpose of the Corporation is to engage in any
-------
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: Section 1. Capital Stock. The total number of shares of capital
-------------
stock which the Corporation shall have authority to issue is 764,000,000 shares,
consisting of (i) 500,000,000 shares of Common Stock, par value $0.01 per share
(the "Common Stock"), (ii) 75,000,000 shares of non-voting Class B Common Stock,
------------
par value $0.01 per share (the "Class B Common Stock"), (iii) 159,000,000 voting
--------------------
Class C Common Stock (the "Class C Common Stock") and (iv) 30,000,000 shares of
--------------------
Preferred Stock, par value $0.001 per share (the "Preferred Stock"). Shares of
---------------
any class of capital stock of the Corporation may be issued for such
consideration and for such corporate purposes as the Board of Directors of the
Corporation may from time to time determine.
The following is a statement of the designations and the powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, in respect of the Preferred Stock which the Board of Directors is
herein authorized to fix and the designations and the powers, preferences and
rights, and the qualifications, limitations or restrictions thereof, in respect
of the Common Stock and the Class B Common Stock.
<PAGE>
Section 2. Preferred Stock. The Board of Directors is expressly
---------------
authorized, by resolution or resolutions, to provide, out of the unissued shares
of the Preferred Stock, for series of the Preferred Stock. Before any shares of
any such series are issued, the Board of Directors shall fix, and is expressly
empowered to fix, by resolution or resolutions, the provisions of the shares
thereof, including, as appropriate:
(a) the designation of such series, the number of shares to
constitute such series and the stated value thereof if different from the
par value thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of
such voting rights (which may be special voting rights) and the
preference or relation which such voting rights shall bear to the voting
rights of any other class or any other series of this class;
(c) the rate of dividends (or method of determining such rate), if
any, payable on such series, the conditions and the date or dates (or
method of determining the date or dates) upon which such dividends shall
be payable, the preference or relation which such dividends shall bear to
the dividends payable on any other class or any other series of this
class;
(d) whether dividends on the shares of such series shall be
cumulative and, in the case of shares of a series having cumulative
dividend rights, the date or dates (or method of determining the date or
dates) from which dividends on the shares of such series shall be
cumulative;
(e) whether the shares of such series shall be subject to
redemption or purchase by the Corporation and, if so, whether such
redemption or purchase shall occur at the option of the Corporation or
the holder of such shares, upon the occurrence of any event or at a date
or dates (or method of determining the date or dates), the times and
prices (or method of determining the times and prices) of such redemption
or purchase, the form of payment of such prices (which may be cash,
property or rights, including securities of the Corporation or another
corporation or other entity) and any other terms and conditions of such
redemption or purchase;
(f) the amount or amounts payable upon shares of such series upon,
and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(g) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement or
other corporate purposes and the terms and provisions relative to the
operation thereof;
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<PAGE>
(h) whether the shares of such series shall be convertible into, or
exchangeable for, at the option of the holder or the Corporation or upon
the happening of a specified event, shares of stock of any other class or
of any other series of this class and, if so, the price or prices or the
rate or rates of conversion or exchange and the method, if any, of
adjusting the same;
(i) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends
or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, the Common Stock,
the Class B Common Stock, the Class C Common Stock, any other series of
the Preferred Stock or any other class of capital stock;
(j) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other series
of the Preferred Stock or of any other class of capital stock; and
(k) any other powers, preferences or rights, or any qualifications,
limitations or restrictions thereof.
Except as otherwise provided by such resolution or resolutions, all
shares of the Preferred Stock shall be of equal rank. All shares of any one
series of the Preferred Stock shall be identical in all respects with all other
shares of such series, except that shares of any one series issued at different
times may differ as to the dates from which dividends thereon shall be
cumulative.
Section 3. Common Stock and Class C Common Stock.
-------------------------------------
(a) Voting Rights. Except as otherwise provided herein or as
-------------
otherwise required by law, the entire voting power and all voting rights shall
be vested exclusively in the Common Stock and the Class C Common Stock, the
holders of which shall vote together on all matters to be voted on by the
stockholders of the Corporation. Each outstanding share of Common Stock and
each outstanding share of Class C Common Stock shall entitle the holder thereof
to one vote, in person or by proxy, on all matters submitted to a vote of the
stockholders of the Corporation. The Common Stock and Class C Common Stock
shall vote as a single class with the Preferred Stock
(b) Transfer Restrictions. Prior to the Transfer Restriction
---------------------
Termination Date (as hereinafter defined), no holder of Class C Common Stock may
transfer or dispose of any share of Class C Common Stock or any interest in any
such share. Any purported transfer or disposition of a share of Class C Common
Stock in violation of the aforesaid restriction shall be null and void and the
Corporation shall not be required to register the same or otherwise give effect
thereto. Certificates evidencing shares of Class C Common Stock shall bear a
legend evidencing the foregoing restriction. For purposes hereof, the term
"Transfer Restriction Termination Date" shall mean the earliest of (i) the date
which is 180 days following the closing
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by the Corporation of an initial public offering of shares of the Common Stock
registered under the Securities Act of 1933, as amended, in which (a) the
aggregate net proceeds to the Corporation are at least $5,000,000 and (b) the
per share price to the public is not less than $3.00 (appropriately adjusted for
any stock splits, combinations or stock dividends) and (ii) February 1, 2000.
(c) Conversion. Each share of Class C Common Stock shall be
----------
automatically and irrevocably converted into one share of Common Stock, without
further on the part of the holder thereof, upon the Transfer Restriction
Termination Date and thereafter all rights of the holders of shares of Class C
Common Stock, as holders of Class C Common Stock, shall cease and such holders
shall be treated for all purposes as having become the holders of shares of
Common Stock.
(d) Corporation to Reserve Shares of Common Stock for Conversion of
---------------------------------------------------------------
Class C 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 C
Common Stock, at least the number of shares of Common Stock that is equal to
the number of shares of Class C Common Stock then outstanding plus the number of
shares of Class C Common Stock issuable upon exercise of warrants, options and
rights to acquire shares of Class C Common Stock then outstanding or upon
conversion or exchange of other securities exercisable for or exchangeable into
shares of Class C Common Stock then outstanding.
(e) Class C Common Stock to Receive Equal Treatment. The Class C
-----------------------------------------------
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.
Section 4. Class B Common Stock.
--------------------
(a) Voting Rights. The Class B Common Stock shall have
-------------
no voting rights except (i) as may be required by law, (ii) such rights as may
be otherwise provided herein and (iii) the right, as a separate class, to
approve any amendment or repeal of any provision of this Amended and Restated
Certificate of Incorporation (including, without limitation, by way of a merger
or consolidation of the Corporation) that would adversely affect the voting
powers, designations, preferences and rights 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 prior to
the record date for such transaction, shall not be deemed to adversely affect
the voting powers, designations, preferences and rights of the holders of the
Class B Common Stock.
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(b) Dividends 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 of 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 of 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 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
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<PAGE>
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 at least such number of shares of Common Stock as is equal
to the number of shares of Class B Common Stock then outstanding plus the number
of shares of Class B Common Stock issuable upon exercise of warrants or options
exercisable for or exchangeable into shares of Class B Common Stock then
outstanding or upon conversion or exchange of other securities exercisable for
or exchangeable into shares of Class B Common Stock then outstanding.
(f) No Preemptive or Preferential Rights. No stockholder
------------------------------------
shall, by reason of the holding of shares of any class or series of capital
stock of the Corporation, have a preemptive or preferential right to acquire or
subscribe for any shares or securities of any class, whether now or hereafter
authorized, which may at any time be issued, sold or offered for sale by the
Corporation, unless specifically provided for in a resolution by the Board of
Directors with respect to a series of Preferred Stock.
(g) Cumulative Voting. Cumulative voting of shares of
-----------------
any class or series of capital stock having voting rights is prohibited unless
specifically provided for in a resolution by the Board of Directors with respect
to a series of Preferred Stock.
(h) Definitions. 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
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<PAGE>
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 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.
FIFTH: (a) Directors. The business and affairs of the Corporation
---------
shall be managed by or under the direction of the Board of Directors.
(b) Number, Election and Terms of Directors. The number of
---------------------------------------
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by a majority of the directors then in office, subject to an
increase in the number of directors by reason of any provisions contained in or
established pursuant to Article FOURTH, but in any event shall not be less than
one. The Board of Directors shall be classified, with respect to the time for
which the directors severally hold office, into three classes as nearly equal in
number as possible, with the term of those directors of the first class to
expire at the
7
<PAGE>
annual meeting of stockholders to be held in 2000, the term of those directors
of the second class to expire at the annual meeting of stockholders to be held
in 2001, and the term of those directors of the third class to expire at the
annual meeting of stockholders to be held in 2002, with each class to hold
office until its successor is duly elected and qualified. At each succeeding
annual meeting of stockholders, directors elected to succeed those directors
whose terms then expire shall be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor shall have been duly
elected and qualified. Any amendment or alteration to this Amended and Restated
Certificate of Incorporation relating to the classification of the Board of
Directors must be authorized by the affirmative vote of holders of at least two-
thirds of the voting power of all outstanding shares of capital stock of the
Corporation entitled to vote thereon. Each director shall serve until his
successor shall have been duly elected and qualified or until his earlier death,
resignation or removal. Election of directors need not be by written ballot
unless the By-Laws of the Corporation shall so provide. Advance notice of
nominations for the election of directors by stockholders and of the proposal of
business by stockholders shall be given in the manner provided in the By-Laws of
the Corporation.
(c) Removal of Directors. No director of the Corporation
--------------------
shall be removed from office as a director by vote or other action of the
stockholders or otherwise except for cause, and then only by the affirmative
vote of the holders of at least a majority of the voting power of all
outstanding shares of capital stock of the Corporation generally entitled to
vote in the election of directors, voting together as a single class. Except as
may otherwise be provided by law, cause for removal of a director shall be
deemed to exist only if: (i) the director whose removal is proposed has been
convicted, or the director is granted immunity to testify where another person
has been convicted, of a felony by a court of competent jurisdiction and such
conviction is no longer subject to direct appeal (for this purpose, the entry by
a director of a plea of nolo contendere shall be deemed to be a conviction not
subject to appeal); (ii) such director has been found by the affirmative vote of
a majority of the entire Board of Directors at any regular or special meeting of
the Board of Directors called for that purpose or by a court of competent
jurisdiction to have been grossly negligent or guilty of misconduct in the
performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability to function as a director of the
Corporation. Notwithstanding the foregoing, whenever holders of outstanding
shares of one or more series of Preferred Stock are entitled to elect members of
the Board of Directors pursuant to the provisions applicable in the case of
arrearages in the payment of dividends or other defaults contained in a
resolution by the Board of Directors providing for the establishment of any
series of Preferred Stock, any such director of the Corporation so elected may
be removed in accordance with the provision of such resolution by the Board of
Directors.
(d) Newly Created Directorships and Vacancies. Except as
-----------------------------------------
provided in this Article FIFTH, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from the death, resignation or removal of a director or from any other
cause shall be filled by the affirmative vote of a majority
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<PAGE>
of the remaining directors then in office, even though less than a quorum of the
Board of Directors, and not by the stockholders. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor is elected
and qualified. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
(e) Directors Elected by Preferred Stockholders.
-------------------------------------------
Notwithstanding the foregoing, in the event that the holders of any class or
series of Preferred Stock of the Corporation shall be entitled, voting
separately as a class, to elect any directors of the Corporation, then the
number of directors that may be elected by such holders voting separately as a
class shall be in addition to the number fixed pursuant to a resolution of the
Board of Directors of the Corporation. Except as otherwise provided in the terms
of such class or series, (i) the terms of the directors elected by such holders
voting separately as a class shall expire at the annual meeting of stockholders
next succeeding their election without regard to the classification of other
directors and (ii) any director or directors elected by such holders voting
separately as a class may be removed, with or without cause, by the holders of a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote separately as a class in an election of such
directors.
(f) Amendment, Repeal, etc. Notwithstanding anything
----------------------
contained herein to the contrary, the affirmative vote of the holders of at
least two-thirds of the voting power of all outstanding shares of capital stock
of the Corporation entitled to vote generally for the election of directors
shall be required to alter, amend, adopt any provision inconsistent with or
repeal this Article FIFTH.
SIXTH: Stockholder Action. From and after the first date as of which
------------------
the Corporation has a class or series of capital stock registered under the
Securities Exchange Act of 1934, any action required or permitted to be taken by
the stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Except as otherwise required by
law, or as may be prescribed in a resolution by the Board of Directors, special
meetings of stockholders of the Corporation may be called only by the chief
executive officer or by the Board of Directors pursuant to a resolution approved
by the affirmative vote of a majority of the entire Board of Directors. No
business shall be transacted and no corporate action shall be taken at any
special meeting of stockholders other than that stated in the notice of the
meeting or brought before the meeting by or at the direction of the Board of
Directors. Notwithstanding this Article SIXTH, the holders of any series of
Preferred Stock of the Corporation shall be entitled to take action by written
consent to such extent, if any, as may be provided in the terms of such series.
SEVENTH: By-Laws. In furtherance and not in limitation of the powers
-------
conferred by statute, the Board of Directors is expressly authorized to make,
amend, alter or repeal by-laws of the Corporation. If not otherwise authorized
by the Board of Directors, the stockholders of the
9
<PAGE>
Corporation may make, amend, alter or repeal by-laws of the Corporation by the
affirmative vote of holders of at least two-thirds of the voting power of all
outstanding shares of capital stock of the Corporation entitled to vote
generally for the election of directors.
EIGHTH: (a) Indemnification. The Corporation shall, to the fullest
---------------
extent permitted by law, indemnify any and all persons whom it shall have power
to indemnify from and against any and all of the expenses, liabilities and other
matters, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any statute, By-Law, agreement, vote of stockholders or of 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
person.
(b) Limited Liability of Directors. No director of the
------------------------------
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent that such exemption from liability or limitation thereof is not permitted
under the General Corporation Law of the State of Delaware as currently in
effect or as the same may hereafter be amended. 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, or performing
other services at the Corporation's request for, another corporation, limited
liability company, partnership, joint venture, trust, employee benefit plan or
other enterprise, and "personal liability to the Corporation or its
stockholders" shall include any liability to such other corporation, limited
liability company, partnership, joint venture, trust, employee benefit plan 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, limited liability company, partnership, joint
venture, trust, employee benefit plan or other enterprise.
(c) Insurance. The Corporation may maintain insurance, at
---------
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under applicable law.
10
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IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation which restates and integrates and further amends the provisions of
the Certificate of Incorporation of this Corporation, and which has been duly
adopted in accordance with Sections 242 and 245 of the General Corporation Law
of the State of Delaware, has been executed by its duly authorized officer this
______ day of May, 1999.
WIT CAPITAL GROUP, INC.
By:
-----------------------------------------
Name:
Title:
11
<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.
- -------------------------------
New York, New York
May , 1999
