<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999
REGISTRATION NO. 333-80593
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WEBSTAKES.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7311 13-3898912
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
11 WEST 19TH STREET, 10TH FLOOR
NEW YORK, NEW YORK 10011
(212) 242-8800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN H. KREIN
WEBSTAKES.COM, INC.
11 WEST 19TH STREET, 10TH FLOOR
NEW YORK, NEW YORK 10011
(212) 242-8800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
MICHAEL B. POLLACK, ESQ. JULIE M. ALLEN, ESQ.
BARI S. KREIN, ESQ. PROSKAUER ROSE LLP
REED SMITH SHAW & MCCLAY LLP 1585 BROADWAY
2500 ONE LIBERTY PLACE NEW YORK, NEW YORK 10036-8299
PHILADELPHIA, PENNSYLVANIA 19103-7301 (212) 969-3000
(215) 851-8100
</TABLE>
------------------------
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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective Securities
Act registration statement for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
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 SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 23, 1999
PROSPECTUS
SHARES
WEBSTAKES.COM, INC.
COMMON STOCK
------------------------
This is an initial public offering of our common stock. We are selling all of
the shares offered under this prospectus. We anticipate that the
initial public offering price will be between $ and $ per share.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "IWIN."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY 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............................. $ $
Proceeds, before expenses, to us................................... $ $
</TABLE>
------------------------
The underwriters may purchase up to an additional shares from us
at the initial public offering price less the underwriting discount to cover
over-allotments.
------------------------
BEAR, STEARNS & CO. INC.
ING BARINGS
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE>
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER WEBSTAKES.COM, INC. NOR ANY UNDERWRITER HAS AUTHORIZED
ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER
TO BUY THE SECURITIES IN ANY JURISDICTION WHERE SUCH 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................... 1
Risk Factors..................................... 5
Use of Proceeds.................................. 12
Dividend Policy.................................. 12
Capitalization................................... 13
Dilution......................................... 14
Selected Financial Data.......................... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 16
<CAPTION>
PAGE
----
<S> <C>
Business......................................... 22
Management....................................... 34
Principal Stockholders........................... 40
Description of Capital Stock..................... 42
Shares Eligible for Future Sale.................. 44
Underwriting..................................... 46
Legal Matters.................................... 48
Experts.......................................... 48
Where You Can Get More Information............... 48
Index to Financial Statements.................... F-1
</TABLE>
------------------------
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors," before investing
in our common stock.
OUR BUSINESS
Webstakes.com, Inc. is a leading online sweepstakes promotion company. We
integrate sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary membership database of more than 1.4 million
consumers. We make our promotions available without charge to consumers through
our web site, webstakes.com, our clients' web sites and consumers' personal home
pages. We generate revenues through the sale of promotion services that allow
our clients to cost-effectively identify and communicate with potential
customers, increase sales and foster brand awareness. We are building on our
sweepstakes expertise to provide an integrated, comprehensive online promotion
solution. We have recently entered into agreements with NBC and Excite, which we
believe will increase awareness of the Webstakes.com brand and attract
additional visitors to webstakes.com. Some of our recent clients include CBS
Sportsline, Citibank, CDW, Disney, iMall, MapQuest.com, PC World and
ShopNow.com.
We believe that our promotions are informative and entertaining, creating
an engaging online experience for consumers. Our sweepstakes run continuously,
providing consumers with the opportunity to enter each day to win more than 100
prizes with retail values typically between $150 and $400. Since 1996, consumers
have entered our sweepstakes more than 49 million times and we have awarded over
6,000 prizes with a total retail value of more than $1,000,000. Once consumers
enter any of our sweepstakes by providing required demographic information, they
become lifetime Webstakes.com members and can enter additional sweepstakes
without having to resubmit this information. We believe that eliminating
requests for redundant information increases the likelihood that consumers will
participate more often in our promotions. We currently have approximately
1.4 million members and, over the last three months, we have added new members
at the rate of over 1,600 per day.
Our technology enables us to present tailored direct marketing offers to
our members based upon their demographic profiles each time they enter one of
our promotions. We respect the privacy rights of our members. Our privacy policy
precludes the sale of any individual member information collected from
promotions hosted on webstakes.com without the consent of our members. Members
may choose to receive our weekly electronic newsletter, the Webstakes Update.
Our members control whether and how often they receive email from our clients or
us.
We believe that the Internet is a compelling medium for direct marketing
promotions. The Internet enables marketers to collect extensive demographic
information and feedback from consumers and to use this information to tailor
and quickly adjust campaigns. According to Forrester Research, Inc., online
promotions generate three to five times the response rates of traditional
promotions. Forrester also reports that 88% of retailers and marketers surveyed
found that online promotional efforts have met or exceeded their expectations
and 80% of those surveyed planned to increase their online promotional spending
in the next year. Based on this survey, Forrester estimates that 50% to 70% of
total Internet marketing budgets will be spent on promotions over the next five
years, compared to less than 15% of Internet marketing budgets currently being
spent on promotions.
To date, substantially all of our revenues have been derived from the sale
of promotion services. We have incurred substantial costs and expenses to
create, launch and enhance webstakes.com and to grow our business. We expect
losses from operations and negative cash flow from operating activities to
continue for the forseeable future.
OUR STRATEGY
Our objective is to be the leading full-service online promotion company
and to make webstakes.com the leading Internet promotion destination. Key
elements of our strategy include:
o building on our sweepstakes expertise to provide an integrated,
comprehensive online promotion solution, including points and
loyalty programs, coupons, samples, premium incentives and instant
win games;
1
<PAGE>
o growing our membership base;
o building strong brand awareness through online and traditional
marketing campaigns;
o enhancing our database of information about our members; and
o expanding internationally.
RECENT DEVELOPMENTS
In March 1999, we entered into an agreement with NBC Multimedia, Inc. Under
this agreement, we have served as the exclusive third-party provider of online
sweepstakes and contests for the NBC.com and NBC Interactive Neighborhood web
sites and have the right to continue to serve in that capacity for the term of
the agreement. During the term of the agreement, a link to Webstakes-managed
promotions will be displayed on the NBC.com home page and the NBC Interactive
Neighborhood menu. We also entered into an agreement with NBC to advertise on
national television.
In June 1999, we entered into an agreement with Excite, Inc., a wholly
owned subsidiary of At Home Corporation, allowing us to market our promotions on
Excite.com. Given the similarity between the topical channels of Excite and
webstakes.com, we believe this relationship will enhance our visibility and
membership base.
In connection with the Excite agreement, we also entered into a services
agreement with its subsidiary, MatchLogic. Under this agreement, MatchLogic will
provide services to us which will enable us to more effectively conduct our
promotions and analyze information regarding webstakes.com visitors and members.
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of class B mandatorily redeemable convertible
preferred stock to a group of investors, including, among others, At Home
Corporation, XL Ventures, a subsidiary of Big Flower Holdings and Travelers
Insurance Company, for an aggregate purchase price of $40.0 million. At the same
time as the closing of this offering, the outstanding class B mandatorily
convertible redeemable preferred stock will automatically convert into
6,666,667 shares of common stock. The class A mandatorily redeemable convertible
preferred stock and the class B mandatorily redeemable convertible preferred
stock will be unavailable for reissue.
CORPORATE INFORMATION
We were incorporated in New York on January 8, 1996 as Webstakes, Inc. We
reincorporated in Delaware as Netstakes, Inc. on June 5, 1996 and we continued
doing business under the name Webstakes. We changed our name to Webstakes.com,
Inc. on June 11, 1999. Our principal executive offices are at 11 West 19th
Street, 10th Floor, New York, New York 10011. Our telephone number at that
location is (212) 242-8800. INFORMATION CONTAINED ON OUR WEB SITE DOES NOT
CONSTITUTE PART OF THIS PROSPECTUS.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................... shares
Common stock outstanding after this offering............ shares
Use of proceeds......................................... We intend to use a portion of the net proceeds to make
aggregate payments of $15.5 million to Excite and
MatchLogic, and the balance of the net proceeds for
working capital and general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol.................. IWIN
</TABLE>
You should be aware that we may issue additional shares of our common stock
after this offering upon the exercise of options. If and when we issue these
shares or any other shares, the percentage of common stock that you own will be
diluted. The following is a summary of the additional shares of common stock
that we may issue:
o 1,107,100 shares issuable upon the exercise of options outstanding
at a weighted average exercise price of $6.21;
o 64,000 shares issuable upon the exercise of options to be granted to
our non-employee directors at the closing of this offering at an
exercise price equal to the initial public offering price;
o 1,278,900 additional shares available for issuance under our equity
compensation plans; and
o 221,683 shares issuable upon the exercise of warrants outstanding at
an exercise price of $6.00.
Unless otherwise indicated, all pro forma information in this prospectus
gives effect to the issuance upon the closing of this offering of options to
purchase 64,000 shares of common stock at an exercise price equal to the initial
public offering price to non-employee directors and the conversion of 6,666,667
shares of class B mandatorily redeemable convertible preferred stock into common
stock at the same time as the closing of this offering.
In addition, unless otherwise indicated, all information in this prospectus
assumes that the underwriters do not exercise their option to purchase
additional shares from us after the closing of this offering.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth our summary financial data. This table does
not present all of our financial information. You should read this information
together with our financial statements and the notes to those statements
beginning on page F-1 of this prospectus and the information under "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ 80 $ 1,618 $ 4,799 $ 2,263 $ 3,054
Loss from operations................. (213) (190) (1,338) (223) (4,445)
Net loss............................. (221) (227) (1,414) (248) (4,393)
Basic and diluted net loss per
share............................. $ (0.06) $ (0.05) $ (0.27) $ (0.05) $ (1.10)
Weighted average shares of common
stock used in computing basic and
diluted net loss per share........ 3,999,576 4,278,916 5,181,356 4,999,176 3,999,576
Pro forma basic and diluted net loss
per share......................... -- -- $ (0.12) -- $ (0.41)
Shares of common stock used in
computing pro forma basic and
diluted net loss per share........ -- -- 11,848,023 -- 10,666,243
</TABLE>
The following table is a summary of our balance sheet at June 30, 1999. The
as adjusted column gives effect to the sale of the shares of
common stock in this offering after deducting underwriting discounts and
commissions and estimated offering expenses, assuming an initial public offering
price of $ per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................................. $ 12,973
Working capital....................................................................... 15,445
Total assets.......................................................................... 18,311
Notes payable (excluding current portion)............................................. 33
Class B mandatorily redeemable convertible preferred stock............................ 40,000
Total stockholders' equity (deficit).................................................. (23,349)
</TABLE>
------------------------
This prospectus contains forward-looking statements that are not based on
historical facts. The outcome of the events described in these forward-looking
statements is subject to risks and uncertainties. There are important factors
that could cause actual results to differ materially from those expressed or
implied by these forward-looking statements, including those discussed under
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
------------------------
Webstakes, iDialog and our logo are our trademarks. Each other trademark,
trade name or service mark appearing in this prospectus belongs to its holder.
4
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide to
purchase our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
this case, the market price of our common stock could decline, and you may lose
all or part of the money you paid to purchase our common stock.
RISKS RELATED TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We were incorporated, and launched our first promotion, in January 1996.
Accordingly, we have a limited operating history upon which to evaluate our
operations and future prospects. In addition, our revenue model is evolving and
relies substantially upon the growth of promotion spending on the Internet and
our ability to become a full-service Internet promotion company. As an early
stage company in a new and rapidly evolving market, we face risks and
uncertainties relating to our ability to successfully implement our business
plan, which are described in more detail below. We may not successfully address
these risks.
WE HAVE NOT BEEN PROFITABLE, WE MAY NOT BECOME PROFITABLE AND OUR BUSINESS AND
STOCK PRICE MAY BE ADVERSELY AFFECTED.
To date, we have not been profitable. We may never be profitable, or, if we
become profitable, we may be unable to sustain profitability. We expect to
continue to incur losses for the foreseeable future because we expect to
continue to spend significant resources to expand our business. Although we have
experienced revenue growth in recent periods, these growth rates may not be
sustainable or indicative of future growth. We reported a loss of $4,393,000 for
the six months ended June 30, 1999. As of June 30, 1999, our accumulated deficit
was approximately $6.3 million. For us to make a profit, our revenues will need
to increase sufficiently to cover our costs and expenses.
A SIGNIFICANT PORTION OF OUR REVENUES HAVE BEEN DERIVED FROM BARTER
TRANSACTIONS, AND WE MAY NOT BE SUCCESSFUL IN GENERATING SUFFICIENT CASH
REVENUES TO COVER OUR COSTS AND EXPENSES IN THE FUTURE.
For the year ended December 31, 1998, approximately 42% of our revenues
were derived from the trading of promotion services for advertising, prizes and
visitors to webstakes.com. For the six months ended June 30, 1999, approximately
29% of our revenues were derived from these barter agreements. We do not receive
cash for sales involving barter agreements and we may not generate sufficient
cash to pay our cash expenses. We expect that barter agreements will continue to
account for a significant portion of our revenues in the future.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH MAY CAUSE THE PRICE OF OUR
COMMON STOCK TO DECREASE.
We expect our operating results to vary significantly from quarter to
quarter due to many factors discussed in this Risk Factors section, some of
which are beyond our control. It is possible that in future periods our results
of operations will be below the expectations of public market analysts and
investors. In this event, the price of our common stock would likely decrease.
You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance.
The rapidly evolving market in which we operate and the possible seasonal
fluctuations in promotional spending and Internet use make it difficult to
forecast our revenues accurately. Our operating expenses are based on our
expectations of future revenues and are relatively fixed in the short term.
Accordingly, we may not be able to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. If we have a shortfall in
revenues in relation to our expenses, or if our expenses precede expected
revenues, then our results of operations and financial condition would be
materially adversely affected.
5
<PAGE>
IF THE DEMAND FOR INTERNET PROMOTION SERVICES DOES NOT INCREASE, OUR BUSINESS
WILL BE HARMED.
Our success depends in part on the increased acceptance of online promotion
services. The market for Internet promotion services has only recently begun to
develop and is evolving rapidly. Most businesses have little or no experience
using the Internet for promotion purposes. As a result, many businesses have
allocated only a limited portion of their marketing budgets to Internet
promotion spending. An increase in the demand for these services is dependent in
part on the effectiveness of the promotions and the recognition of this
effectiveness by clients and potential clients. The market for Internet
promotion services may not grow and any growth may not be sustained.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT VISITORS TO WEBSTAKES.COM AND THE
WEB SITES OF OUR CLIENTS.
Our future success depends upon our ability to continue to attract and
retain visitors with demographic characteristics desired by our clients to
webstakes.com and the web sites of our clients. If we are unable to attract
these visitors, the effectiveness of our promotions would be reduced, and our
business, results of operations and financial condition would be materially
adversely affected. In addition, we guarantee our clients that visitors will
view their pages and/or link to their web sites a minimum number of times. If we
are unable to meet these minimum guarantees, we will be required to defer
recognition of the related revenues until the guaranteed minimum is achieved. In
addition, we will be required to provide services to the client for free until
we are able to meet our guaranteed minimum, which may reduce our promotion
inventory in future periods.
IF WE ARE UNSUCCESSFUL IN BROADENING OUR PRODUCT OFFERINGS, OUR REVENUE GROWTH
WILL BE LIMITED.
To date, substantially all of our revenue has been derived from conducting
sweepstakes on the Internet. Our growth is largely dependent upon our ability to
leverage our sweepstakes expertise to become a full-service Internet promotion
company. In the event that we are unable to successfully implement our growth
strategy, our business, results of operations and financial condition would be
materially adversely affected.
WE FACE SIGNIFICANT COMPETITION, AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The market for Internet promotion services is intensely competitive. We
expect competition in our market to continue to intensify as a result of
increasing market size, greater visibility of the market opportunity for
Internet promotion services and minimal barriers to entry. Industry
consolidation may also increase competition. We compete with many types of
companies, including both online and offline promotion companies, large Internet
publishers, search engine and other Internet portal companies, a variety of
Internet-based advertising networks and other companies that facilitate the
marketing of products and services on the Internet. Many of our existing
competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition, larger client bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to compete more effectively and be more responsive to
industry and technological change than us. We may not be able to compete
successfully and competitive pressures may reduce our revenues and result in
increased losses or reduced profits.
Our ability to compete depends on many factors both within and beyond our
control. These factors include:
o the success of the sales and marketing efforts of us and our
competitors;
o the ease of use, performance, price and reliability of promotions
offered by us and our competitors; and
o the timing and market acceptance of new promotion services developed
by us and our competitors.
6
<PAGE>
OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN CLIENTS.
Our agreements with clients generally have terms ranging from one to
12 months. In addition, substantially all of our agreements permit our clients
to terminate their relationships with us on relatively short notice. Our clients
may not remain clients for the full term of their agreements or renew such
agreements when they expire. If clients do not renew their agreements or
terminate them prior to their scheduled expiration, our revenues will be
reduced.
OUR BRAND MAY NOT ACHIEVE THE RECOGNITION NECESSARY TO INCREASE OUR MEMBERSHIP
BASE AND ATTRACT CLIENTS.
To be successful, we must continue to build our corporate brand identity.
We believe that the importance of brand recognition will increase as more
companies enter our market. We may not be successful in our marketing efforts or
in increasing our brand awareness.
SWEEPSTAKES REGULATIONS MAY LIMIT OUR ABILITY TO CONDUCT SWEEPSTAKES OR LIMIT
PARTICIPATION IN OUR SWEEPSTAKES.
The sweepstakes industry is subject to extensive regulation on the local,
state and national levels, regardless of whether promotions are conducted online
or offline. Congress and many state attorneys general and legislatures recently
have announced regulatory initiatives aimed at the sweepstakes industry. The
publicity generated by these initiatives may adversely affect demand for our
services. Although we believe that additional laws and regulations are likely to
be enacted, we cannot predict what they will be. Any new sweepstakes regulations
may have a material adverse affect on our business, results of operations and
financial condition. Additionally, the Internet is a new medium for sweepstakes,
and it is difficult to predict how existing laws and regulations will be
interpreted. See "Business--Government Regulation and Legal Uncertainties."
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR
BUSINESS.
In order to successfully implement our business plan, we must grow
significantly. Our anticipated future growth will likely place a significant
strain on our management resources and systems. To manage our growth
effectively, we will need to continue to improve our operational, financial and
managerial controls and reporting systems and procedures, and we will need to
continue to expand, train and manage our workforce. If we do not manage our
growth effectively, our business, results of operations and financial condition
would be materially adversely affected.
WE MAY BE UNABLE TO INCREASE OUR SALES FORCE, WHICH WOULD HAVE A MATERIAL
ADVERSE EFFECT ON THE GROWTH OF OUR BUSINESS.
We need to substantially expand our sales force to increase market
awareness and sales of our promotion services. Competition for qualified sales
personnel is intense, and we might not be able to hire the quality and number of
sales personnel we require. New hires require extensive training and typically
take several months to achieve productivity. If we fail to effectively increase
our sales force, our business, results of operations and financial condition
would be materially adversely affected.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our future success is substantially dependent upon the continued service of
our founders, Steven H. Krein, Chief Executive Officer, and Daniel J. Feldman,
President, and other senior officers. The loss of the services of any of our
executive officers could have a material adverse affect on our business. Many of
our executive officers, including our Chief Financial Officer, have only been
employed by us for a short time. We do not currently have "key person" life
insurance policies on any of our employees. We have employment agreements only
with Messrs. Krein and Feldman. Competition for senior management is intense,
and we may not be successful in attracting and retaining personnel.
7
<PAGE>
THE INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, AND ANY INFRINGEMENT
ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, COULD ADVERSELY AFFECT OUR
BUSINESS.
Third parties may infringe or misappropriate our patents, trademarks or
other intellectual property rights, which could have a material adverse effect
on our business, results of operations or financial condition. The actions we
take to protect our trademarks and other proprietary rights may not be adequate.
In addition, the validity, enforceability and scope of protection of proprietary
rights in Internet-related industries is uncertain and still evolving.
Third parties may assert infringement claims against us. Any claims and any
resulting litigation, should they occur, could subject us to significant
liability for damages. In addition, even if we prevail, litigation could be
time-consuming and expensive to defend, and could result in the diversion of our
time and attention. Any claims from third parties may also result in limitations
on our ability to use the intellectual property subject to these claims unless
we are able to enter into contractual arrangements with the third parties making
these claims, which arrangements may not be available on commercially reasonable
terms.
ANY ACQUISITIONS THAT WE MAKE MAY NOT BE SUCCESSFUL.
We have no experience in making acquisitions or investments. If we make an
acquisition, we could have difficulty in assimilating the acquired company's
personnel and operations. In addition, the key personnel of the acquired
business may not continue to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses
and adversely affect our results of operations. In addition, effecting
acquisitions could require use of a significant portion of our available cash.
Alternatively, we may have to issue equity or equity-linked securities to pay
for future acquisitions and any of these issuances could be dilutive to existing
and future stockholders. Any debt used for acquisitions may cause us to limit
certain aspects of our operations.
INTERNATIONAL EXPANSION INVOLVES CERTAIN RISKS.
Our growth strategy depends, in part, on international expansion. We may
not be successful in expanding our operations internationally. We currently have
no experience in developing localized versions of webstakes.com or in marketing
or selling our promotion services internationally. International operations are
subject to risks that may materially adversely affect our business, results of
operations and financial condition. In particular, privacy regulations in some
other countries, including the European Union, are more stringent than in the
United States. These regulations may prohibit the collection of demographic data
on visitors to our promotions, which would have a material adverse affect on our
business. Other risks of international operations are:
o regulatory requirements;
o reduced protection for intellectual property rights in some
countries;
o difficulties and costs of staffing and managing foreign operations;
o political and economic instability; and
o fluctuations in currency exchange rates.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH THE YEAR 2000 PROBLEM, ANY OF
WHICH MAY HARM OUR BUSINESS.
The failure of our internal systems, or any material third-party systems,
to be Year 2000 compliant would have a material adverse effect on our business,
results of operations and financial condition. Although Frontier GlobalCenter,
Inc., our production server provider, has represented to us that its internal
systems are Year 2000 compliant, their failure to be compliant would adversely
affect our ability to deliver our service. We have not yet devised a Year 2000
contingency plan. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000."
8
<PAGE>
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS FOR PRODUCTS GIVEN AS PRIZES IN
OUR PROMOTIONS AND FOR PRODUCTS SOLD BY OUR CLIENTS OVER THE INTERNET.
Consumers may sue us if any of the products we give as prizes are
defective, fail to perform properly or injure the user. We may also be sued by
consumers who purchase products that are offered or marketed through
webstakes.com. Although our agreements with our clients typically contain
provisions intended to limit our exposure to these product liability claims,
these limitations may not completely eliminate our liability. Liability claims
could require us to spend significant time and money in litigation or pay
significant damages. We do not carry product liability insurance. As a result,
any of these claims, whether or not successful, could have a material adverse
effect on our business, results of operations and financial condition.
RISKS RELATED TO THE INTERNET
PRIVACY AND SECURITY CONCERNS MAY CAUSE CONSUMERS NOT TO PARTICIPATE IN OUR
PROMOTIONS, WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
An important feature of the service we provide our clients is our ability
to develop and maintain demographic and other information about consumers
participating in our promotions. Privacy and other security concerns may cause
consumers to resist providing us with personal data, which would reduce the
value of our service. Moreover, privacy and security concerns may inhibit
consumer acceptance of the Internet as a means of commerce. If privacy and other
security concerns of consumers are not adequately addressed, our business would
be materially adversely affected.
OUR GROWTH WILL DEPEND ON THE GROWTH OF INTERNET USAGE.
We depend on continued growth in the use of the Internet by businesses and
consumers. If electronic commerce does not grow or grows more slowly than
expected, the use of the Internet by businesses may decline or grow more slowly
than anticipated. In addition, the acceptance and growth in the use of the
Internet by consumers could be negatively affected by consumer concerns about
the security of electronic commerce transactions and privacy. Even if Internet
usage grows, the Internet infrastructure may not be able to support the demands
placed on it and its performance or reliability may decline.
WE MAY BE UNABLE TO RESPOND TO TECHNOLOGICAL CHANGE EFFECTIVELY.
Our industry is characterized by rapid technological change, frequent new
service introductions, changing consumer demands and evolving industry standards
and practices. Our inability to anticipate and effectively respond to these
changes on a timely basis would materially adversely affect our business,
results of operations and financial condition. Our future success will depend,
in part, on our ability to cost-effectively adapt to rapidly changing
technologies, to enhance existing services and to develop and introduce a
variety of new services to address changing demands of consumers and our clients
on a timely basis.
THE FAILURE OF OUR COMPUTER OR COMMUNICATIONS SYSTEM MAY ADVERSELY AFFECT OUR
BUSINESS.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Any system failure, including network,
software or hardware failure, that causes an interruption in our service or
decreases the responsiveness of webstakes.com or the web sites of our clients
could materially adversely affect our business. webstakes.com could also be
affected by computer viruses, electronic break-ins or other similar disruptions.
Our insurance policies have coverage limits of $775,000 per occurrence and
therefore our insurance may not adequately compensate us for any losses that may
occur due to any interruptions in our service.
Frontier GlobalCenter, Inc. maintains all of our production servers at
their Manhattan Data Center. Our operations depend on Frontier's ability to
protect its own systems and our systems against damage from fire, power loss,
water, telecommunications failures, vandalism and other malicious acts, and
similar unexpected adverse events. Any disruption in the Internet access
provided by Frontier could have a material adverse effect on our business,
results of operations and financial condition.
9
<PAGE>
WE DEPEND ON THE CONTINUED VIABILITY OF THE INTERNET INFRASTRUCTURE.
Our success depends upon the development and maintenance of a viable
Internet infrastructure. The current Internet infrastructure may be unable to
support an increased number of users. The timely development of products such as
high-speed modems and communications equipment will be necessary to continue
reliable Internet access. Furthermore, the Internet has experienced outages and
delays as a result of damage to portions of its infrastructure. Such outages and
delays, including those relating to Year 2000 problems, could adversely affect
webstakes.com and the level of traffic on our customers' web sites. The
effectiveness of the Internet may decline due to delays in the development or
adoption of new standards and protocols designed to support increased levels of
activity. If such new infrastructure, standards or protocols are developed, we
may be required to incur substantial expenditures to adapt our services to the
new technologies.
LAWS AND REGULATIONS PERTAINING TO THE INTERNET MAY ADVERSELY AFFECT OUR
BUSINESS.
There are an increasing number of laws and regulations pertaining to the
Internet. These laws and/or regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. Moreover, the
applicability to the Internet of existing laws governing intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment, personal privacy and other issues is uncertain and
developing. Any new law or regulation pertaining to the Internet, or the
application or interpretation of existing laws, could decrease the demand for
our promotion services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition. Please see "Business--Government Regulation and Legal Uncertainties."
RISKS RELATED TO THIS OFFERING
THIS OFFERING WILL BENEFIT OUR CURRENT STOCKHOLDERS.
Our current stockholders, including members of management, will benefit
from this offering. This offering will result in the creation of a public market
for our common stock, which will enable existing stockholders to liquidate their
investments. Upon the closing of this offering, the unrealized appreciation in
the value of the common stock held by existing stockholders will be $ ,
assuming an initial public offering price of $ per share.
AFTER THIS OFFERING, OUR OFFICERS AND DIRECTORS MAY STILL CONTROL US.
Our executive officers and directors will, in the aggregate, beneficially
own approximately % of the common stock following this offering. These
stockholders may be able to effectively exercise control over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of us,
which could have a material adverse effect on our stock price.
WE MAY REQUIRE ADDITIONAL FINANCING TO EXPAND OUR BUSINESS, AND WE MAY NOT BE
ABLE TO OBTAIN ADDITIONAL FINANCING.
We may need to raise additional funds in the future in order to fund more
aggressive brand promotion or more rapid expansion, to develop new or enhanced
services, to respond to competitive pressures or to make acquisitions.
Additional financing may not be available on terms favorable to us, and may not
be available at all. If adequate funds are not available on acceptable terms, we
may be unable to fund our expansion, successfully promote our brand, take
advantage of acquisition opportunities, develop or enhance services or respond
to competitive pressures, any of which could have a material adverse effect on
our business, results of operations and financial condition. If additional funds
are raised by our issuing equity securities, stockholders may experience
dilution of their ownership interest and the newly issued securities may have
rights superior to those of the common stock. If additional funds are raised by
our issuing debt, we may be subject to limitations on our operations, including
limitations on the payment of dividends. Please see
10
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
The market price of our common stock could decline as a result of sales of
shares of common stock by our existing stockholders after this offering, or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. Please see "Shares Eligible for Future Sale."
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE, AND INVESTORS MAY NOT BE
ABLE TO SELL THEIR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest will lead to the development of a trading
market or how liquid that market might become. The initial public offering price
of the shares will be determined by negotiations between us and the
representatives of the underwriters and may not be indicative of prices that
will prevail in the trading market. The stock market has experienced significant
price and volume fluctuations and the market prices of securities of technology
companies, particularly Internet-related companies, have been highly volatile.
Investors may not be able to resell their shares at or above the initial public
offering price. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against the company issuing the securities. This type of litigation
could result in substantial costs and a diversion of our management's attention
and resources.
11
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately
$ million, or $ million if the underwriters exercise their over-allotment
option in full, assuming an initial public offering price of $ per share and
after deducting underwriting discounts and commissions and estimated expenses of
this offering.
We will use approximately $15.5 million of the net proceeds from this
offering to make payments due to Excite and MatchLogic. Payments to Excite are
for banner advertising on the Excite network and payments to MatchLogic are for
ad serving and targeting and data processing, analysis and enhancement services.
Excite and MatchLogic are subsidiaries of At Home Corporation, one of our
principal shareholders. Please see "Management's Discussion and
Analysis--Liquidity and Capital Resources" and "Certain Transactions." We expect
to use the balance of the net proceeds for working capital and general corporate
purposes, including advertising and marketing our brand and expanding our sales
and marketing capabilities. A portion of the net proceeds may be used to acquire
or invest in complementary businesses, technologies, products or services or to
invest in geographic expansion. Although we are not contemplating any specific
acquisitions at this time and no portion of the net proceeds has been allocated
for any acquisition, we evaluate acquisition opportunities on an ongoing basis.
Our management will have broad discretion in the application of the net
proceeds. Pending use, we intend to invest the net proceeds in interest-bearing,
investment-grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that the board of directors deems relevant.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
o on an actual basis; and
o on an as adjusted basis to reflect the sale of shares of
common stock in this offering, after deducting underwriting
discounts and commissions and estimated offering expenses, assuming
an initial public offering price of $ per share.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable (excluding current portion)....................................... $ 33 $
Class B mandatorily redeemable convertible preferred stock, par value $.01,
6,700,000 shares authorized; and 6,666,667 shares issued and outstanding
(actual), 0 shares authorized or issued (as adjusted)......................... 40,000 --
Stockholders' equity (deficit):
Preferred stock, no par value, 1,000,000 shares authorized (actual and as
adjusted); 0 shares issued (actual and as adjusted)........................
Common stock, par value $.01, 50,000,000 shares authorized (actual and as
adjusted); 3,999,576 shares issued and outstanding (actual);
shares issued and outstanding (as adjusted)................................ 40
Additional paid-in capital.................................................... (16,977)
Accumulated deficit........................................................... (6,255)
Deferred compensation......................................................... (157)
------- -------
Total stockholders' equity (deficit)....................................... (23,349)
------- -------
Total capitalization..................................................... $16,684 $
------- -------
------- -------
</TABLE>
We expect there to be shares of common stock outstanding after
this offering. In addition to the shares of common stock to be outstanding after
this offering, we may issue additional shares of common stock. See "Prospectus
Summary--The Offering."
13
<PAGE>
DILUTION
As of June 30, 1999, our net tangible book value was $16.7 million, or
$2.71 per share of common stock. "Net tangible book value" per share equals our
total tangible assets minus our total liabilities, divided by the number of
shares of common stock outstanding. As of June 30, 1999, our pro forma net
tangible book value, as adjusted for the sale of the shares in this
offering, assuming an initial public offering price of $ per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses, would have been approximately $ , or $ per share. This
represents an immediate increase of $ per share to existing stockholders and
an immediate dilution of $ per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......................... $
Net tangible book value per share as of
June 30, 1999...................................................... $ 2.71
Increase per share attributable to new investors......................
-------
Net tangible book value per share after this offering...................
-------
Dilution per share to new investors..................................... $
-------
-------
</TABLE>
The following table summarizes, as of June 30, 1999, the differences
between the total consideration paid and the average price per share paid by
existing stockholders (excluding purchasers of the class B mandatorily
redeemable convertible preferred stock), purchasers of the class B mandatorily
redeemable convertible preferred stock as converted into common stock upon the
completion of this offering and new investors purchasing shares in this offering
with respect to the number of shares of common stock purchased from us, assuming
an initial public offering price of $ per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------------------ ------------------------------------------
NUMBER PERCENT AMOUNT PERCENT
---------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Existing stockholders (excluding
class B purchasers).............. 3,999,576 % $ 30,029 %
Purchasers of class B mandatorily
redeemable convertible preferred
stock............................ 6,666,667 40,000,000
New investors......................
---------- ---- ----------- ---
Total............................ 100% $ 100%
---------- ---- ----------- ---
---------- ---- ----------- ---
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
<S> <C>
Existing stockholders (excluding
class B purchasers).............. $0.01
Purchasers of class B mandatorily
redeemable convertible preferred
stock............................ $6.00
New investors...................... $
Total............................
</TABLE>
None of the foregoing tables or calculations assume that any options or
warrants outstanding as of June 30, 1999 will be exercised. New investors in
this offering will suffer further dilution to the extent that these options or
warrants are exercised. If all outstanding options and warrants were exercised
on the date of the closing of this offering, new investors purchasing shares in
this offering would suffer total dilution of $ per share.
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read together with the
financial statements and the notes to those statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus. The statement of operations data for the period
from January 8, 1996 (inception) through December 31, 1996 and for the years
ended December 31, 1997 and 1998, and the balance sheet data as of December 31,
1997 and 1998, are derived from our audited financial statements included in
this prospectus. The balance sheet data as of December 31, 1996 has been derived
from our audited financial statements not included in this prospectus. Our
historical financial statements for the six months ended June 30, 1998 and 1999
are unaudited, and in our opinion include all adjustments, consisting of normal
and recurring adjustments, necessary for a fair presentation of the results for
the unaudited period. You should not rely on interim results as being indicative
of results we may expect for the full year. Historical results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------ ------------------------
DECEMBER 31, 1996 1997 1998 1998 1999
----------------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 80 $ 1,618 $ 4,799 $ 2,263 $ 3,054
Operating expenses:
Product development.............. 59 181 549 222 236
Sales and marketing.............. 125 1,091 3,619 1,491 4,194
General and administrative....... 109 536 1,969 773 2,273
Non-cash financial advisory
services....................... -- -- -- -- 796
----------- ---------- ---------- ---------- ----------
Total operating expenses.... 293 1,808 6,137 2,486 7,499
----------- ---------- ---------- ---------- ----------
Loss from operations................ (213) (190) (1,338) (223) (4,445)
Other income (expense).............. (8) (37) (76) (25) 52
----------- ---------- ---------- ---------- ----------
Net loss............................ $ (221) $ (227) $ (1,414) $ (248) $ (4,393)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Basic and diluted net loss per
share............................ $ (0.06) $ (0.05) $ (0.27) $ (0.05) $ (1.10)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Weighted average shares of common
stock used in computing basic and
diluted net loss per share....... 3,999,576 4,278,916 5,181,356 4,999,176 3,999,576
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Pro forma basic and diluted net loss
per share........................ -- -- $ (0.12) -- $ (0.41)
---------- ----------
---------- ----------
Shares of common stock used in
computing pro forma basic and
diluted net loss per share....... -- -- 11,848,023 -- 10,666,243
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------- JUNE 30,
1996 1997 1998 1999
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................................. $ 24 $ 85 $ 18 $ 12,973
Working capital...................................................... (249) (149) (1,124) 15,445
Total assets......................................................... 134 476 1,196 18,311
Notes payable (excluding current portion)............................ -- -- 67 33
Class B mandatorily redeemable convertible preferred stock........... -- -- -- 40,000
Stockholders' equity (deficit)....................................... (191) 125 (753) (23,349)
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements included
in this prospectus. This discussion includes forward-looking statements that
involve risks and uncertainties. Please see "Risk Factors."
OVERVIEW
To date, substantially all of our revenues have been derived from the sale
of promotion services. We expect to derive substantially all of our revenues
from the sale of promotion services for the foreseeable future.
We recognize revenues from promotion services ratably over the period
during which we provide promotion services, provided that no significant
obligations remain and collection of the resulting receivable is reasonably
assured. Payments received from clients prior to providing promotion services
are recorded as deferred revenue and are recognized as revenue ratably as the
services are provided. We generally guarantee a minimum number of impressions,
or times that the client's name, logo or other identifier appears in pages
viewed by visitors to webstakes.com, and/or times that our visitors are
delivered to our client's web site. To the extent that these minimum guarantees
are not met, we defer recognition of the corresponding revenues until the
guaranteed levels are achieved.
Revenues include revenues from barter transactions in which we exchange
promotion services for advertising and prizes. Revenues from these barter
transactions are recorded as promotion revenues at the lower of the estimated
fair value of the goods or services received or delivered and are recognized
when we deliver the promotion services. Advertising expenses related to barter
are recognized when our advertisements are run on the reciprocal web site, which
is typically in the same period as the corresponding barter revenues are
recognized. Prize expenses related to barter are recognized when prizes are
awarded. In 1998, barter revenues were 42% of our total revenues, and for the
six months ended June 30, 1999, 29% of total revenues. We expect that, as our
cash revenue base grows, barter as a percentage of our revenues will decrease.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenues. Revenues primarily result from the sale of promotion services.
Revenues increased from approximately $2.3 million for the six months ended
June 30, 1998 to $3.1 million for the six months ended June 30, 1999. We
recorded $945,000 and $877,000 of barter revenues during these same periods,
representing approximately 42% and 29% of total revenues during those periods.
The period-to-period growth in revenues was primarily attributable to an
increase in promotion services sold.
Product Development Expenses. Product development expenses include the
personnel costs associated with the design and development of webstakes.com, our
promotions infrastructure and technology, as well as software licensing costs.
Product development costs were $222,000 for the six months ended June 30, 1998,
or 9.8% of total revenues as compared to approximately $236,000 for the six
months ended June 30, 1999, or 7.7% of total revenues. Historically, we expensed
our product development costs as incurred. However, in the first quarter of
1999, we began to capitalize the labor costs of improvements and betterments to
our software under Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Such improvements and
betterments include improving the functionality and navigability of
webstakes.com. Therefore, we have capitalized $196,000 of product development
expenses for the six months ended June 30, 1999 and are amortizing these costs
over three years. We believe that timely deployment of new and enhanced
promotional tools and technology is critical to attaining our strategic
objectives. Accordingly, we intend to continue recruiting and hiring experienced
product development personnel and to make additional investments in product
development.
16
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of online advertising costs, salaries and commissions of sales and
marketing personnel, public relations costs and other marketing expenses. Sales
and marketing expenses were approximately $1.5 million for the six months ended
June 30, 1998, or 65.9% of total revenues, and approximately $4.2 million for
the six months ended June 30, 1999, or 137.3% of total revenues. The
period-to-period increase in sales and marketing expenses was primarily
attributable to the initiation of online advertising and other promotional
expenditures, as well as an increase in the number of sales and marketing
personnel and related expenses. We expect that sales and marketing expenses will
continue to increase in absolute dollars for the foreseeable future as we
increase expenditures for sales, marketing and brand promotion, and we hire
additional sales and marketing personnel. We expect that sales and marketing
expenses will follow the pattern for a growth company, increasing initially and
then, once a certain revenue base is achieved, decreasing, as a percentage of
revenue.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance, accounting and facilities, and fees for professional
services. General and administrative expenses were approximately $773,000 for
the six months ended June 30, 1998, or 34.2% of total revenues, and
$2.3 million for the six months ended June 30, 1999, or 74.4% of total revenues.
The increase in general and administrative expenses was primarily attributable
to increased salaries and related expenses associated with hiring additional
personnel in the finance and operations departments, and increased professional
fees and facility expenses to support the growth of our operations. We expect to
incur additional general and administrative expenses as we hire additional
personnel and to incur additional costs related to the growth of our business
and operation as a public company. We expect these expenses to include
facilities expansion, directors' and officers' liability insurance, investor
relations programs and professional service fees. Accordingly, we anticipate
that general and administrative expenses will continue to increase in absolute
dollars. We expect that general and administrative expenses will follow the
pattern for a growth company, increasing initially and then, once a certain
revenue base is achieved, decreasing, as a percentage of revenue.
Non-Cash Financial Advisory Services Expenses. Non-cash financial advisory
services expenses relate to stock options and warrants granted to third parties
for consulting and financial advisory services in the six months ended June 30,
1999. These stock options and warrants were fully vested at the date of
issuance. The expenses were calculated using the Black Scholes method.
Interest, Net. Interest income, net of expense, consists primarily of
interest earned on cash balances and the interest expense on our outstanding
debt. We incurred net interest expense of $25,000 for the six months ended
June 30, 1998 and net interest income of $52,000 for the six months ended
June 30, 1999.
INCEPTION PERIOD AND YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Revenues. Revenues were approximately $80,000 for the period from January
8, 1996 to December 31, 1996 (the "Inception Period"), $1.6 million for 1997 and
$4.8 million for 1998. We recorded no barter revenues during the Inception
Period and approximately $485,000 and $2.0 million of barter revenues during
1997 and 1998, representing approximately 30% and 42% of total revenues during
those periods. The period-to-period growth in revenues was primarily
attributable to an increase in promotion services sold.
Product Development Expenses. Product development expenses were
approximately $59,000 for the Inception Period, or 74.2% of total revenues,
$181,000 for 1997, or 11.2% of total revenues, and $549,000 for 1998, or 11.4%
of total revenues. The increase in these expenses was primarily attributable to
increased staffing levels required to support the development and enhancement of
webstakes.com and related back-office systems.
Sales and Marketing Expenses. Sales and marketing expenses were
approximately $125,000 for the Inception Period, or 156.8% of total revenues,
$1.1 million for 1997, or 67.4% of total revenues, and $3.6 million for 1998, or
75.4% of total revenues. The period-to-period increases in sales and marketing
expenses were primarily attributable to the increase in barter expense, the
initiation of online advertising and other promotional expenditures, as well as
an increase in the number of sales and marketing personnel and related expenses.
17
<PAGE>
General and Administrative Expenses. General and administrative expenses
were approximately $109,000 for the Inception Period, or 136.5% of total
revenues, $536,000 for 1997, or 33.1% of total revenues, and $2.0 million for
1998, or 41.0% of total revenues. The increases in general and administrative
expenses were primarily attributable to increased salaries and related expenses
associated with hiring additional personnel, and increased professional fees and
facility expenses to support the growth of our operations.
Interest Expense, Net. We incurred net interest expense of approximately
$8,000 for the Inception Period, $37,000 for 1997 and $76,000 for 1998. The
increase was primarily attributable to the increase in the principal amount of
outstanding debt obligations incurred to fund our expanding operations.
Income Taxes. No income tax benefit is reflected in the financial
statements as a valuation allowance was provided for deferred tax assets
relating to net operating losses. As of December 31, 1998, we had approximately
$1.6 million of federal net operating loss carryforwards for tax reporting
purposes to offset future taxable income. Our federal net operating loss
carryforwards expire in the years 2011 through 2018.
QUARTERLY RESULTS OF OPERATIONS DATA
The following table sets forth certain unaudited quarterly statement of
operations data for each of the ten quarters preceding June 30, 1999. In our
opinion, this data has been prepared on the same basis as the audited financial
statements appearing in this prospectus, and reflect all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of this data. The results of operations for any quarter are not
necessarily indicative of the results of operations for a full year or any
future period. We expect our quarterly operating results to vary significantly
in the future. See "Risk Factors--Our quarterly operating results may fluctuate,
which may cause the price of our common stock to decrease."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998 1998 1998 1999 1999
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 130 $314 $ 281 $893 $ 1,067 $1,196 $ 1,250 $1,286 $ 1,319 $ 1,735
Operating expenses:
Product development... 46 12 24 99 102 120 166 161 13 223
Sales and marketing... 130 217 266 478 691 800 1,094 1,034 1,371 2,823
General and
administrative..... 58 41 187 250 326 447 529 667 833 1,440
Non-cash financial
advisory services.. -- -- -- -- -- -- -- -- -- 796
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Total operating
expenses.............. 234 270 477 827 1,119 1,367 1,789 1,862 2,217 5,282
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Income (loss) from
operations............ (104) 44 (196) 66 (52) (171) (539) (576) (898) (3,547)
Other income (expense),
net................... (18) (15) (12) 8 (10) (15) (25) (26) 14 38
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
Net income (loss)....... $(122) $ 29 $(208) $ 74 $ (62) $ (186) $ (564) $ (602) $ (884) $ (3,509)
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
----- ---- ----- ---- ------- ------ ------- ------ ------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the
private placement of equity securities and the incurrence of indebtedness. As of
June 30, 1999, we had $13 million in cash and cash equivalents.
Net cash used in investing activities was approximately $203,000 for 1997,
$301,000 for 1998 and $352,000 for the six months ended June 30, 1999. As of
June 30, 1999, our principal capital commitments consisted of obligations
outstanding under operating and capital leases. All net cash used in investing
18
<PAGE>
activities was used for capital expenditures, primarily the acquisition of
equipment. We have spent approximately $1,079,000 on capital expenditures since
inception through June 30, 1999. We estimate that our capital expenditures will
be approximately $7.0 million for 1999. We currently expect that our principal
capital expenditures through 1999 will relate to improvements to our technical
infrastructure and expansion of our headquarters.
Net cash provided by financing activities was approximately $1.7 million
for 1998 and $19.6 million for the six months ended June 30, 1999. Net cash
provided by financing activities in 1998 was primarily attributable to
incurrence of indebtedness and, to a lesser extent, borrowings under a secured
credit facility related to equipment financing. We borrowed $200,000 available
under a credit facility in December 1997 to purchase equipment. The loan bears
interest at an annual rate equal to the prime rate plus 3%. Payments of
principal and any accrued interest are due and payable in 36 monthly
installments beginning January 1, 1998. To date, we have made all payments due
under this equipment loan.
In March 1999, we entered into a financing agreement with a leasing company
for the leasing of equipment in an amount up to $1.0 million in operating and/or
capital leases, secured by certain accounts receivable and the equipment
purchased pursuant to the agreement. To date, we have leased approximately
$812,000 of equipment under the agreement. We expect the leases to have terms of
up to three years and the interest rates under the leases to range from 8 1/2%
to 13%. We are required to make monthly payments of interest and principal under
the leases.
In June 1999, we entered into a two-year sponsorship agreement with Excite
under which Excite agreed to promote webstakes.com through ad banner placements
and links to webstakes.com and its promotions on Excite.com, WebCrawler.com and
Classified2000.com and through the use of a webstakes.com personalized front
page made available by Excite. As part of this agreement, we received a
guarantee of a total number of impressions per year. The fee to be paid to
Excite under this agreement is $5.6 million, $685,000 of which has been paid,
and the balance of which is due 10 days following the completion of this
offering. At Home Corporation, the parent company of Excite, is one of our
stockholders.
In June 1999, we entered into a services agreement with MatchLogic, Inc., a
wholly owned subsidiary of Excite pursuant to which MatchLogic will provide ad
serving and targeting, data processing, analysis and enhancement services to
Webstakes.com. The term of the agreement is two years. The fee to be paid to
MatchLogic under this agreement is $13.1 million, $2.5 million of which has been
paid and the balance of which is due 10 days following completion of this
offering. See "Use of Proceeds."
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of new class B mandatorily redeemable
convertible preferred stock to a group of investors, including among others, At
Home Corporation, XL Ventures, a subsidiary of Big Flower Holdings, and
Travelers, for an aggregate purchase price of $40.0 million. Upon completion of
this offering, the class B mandatorily redeemable convertible preferred stock
will automatically convert into 6,666,667 shares of common stock. The class A
mandatorily redeemable convertible preferred stock and class B mandatorily
redeemable convertible preferred stock will not be available for reissue.
Our ability to generate significant revenues is uncertain. We have incurred
substantial costs and expenses to create, launch and enhance webstakes.com and
to grow our business. We incurred net losses of approximately $221,000 for the
Inception Period, $227,000 for 1997, $1.4 million for 1998 and $4,393,000 for
the six months ended June 30, 1999. At June 30, 1999, we had an accumulated
deficit of approximately $6.3 million. We expect losses from operations and
negative cash flow from operating activities to continue for the foreseeable
future. As a result of our expansion plans, we expect our operating expenses to
increase significantly in the next several years. Although we have experienced
revenue growth in recent periods, our revenues may not remain at their current
level or increase in the future. If our revenues do not increase and if our
spending levels are not adjusted accordingly, we may not generate sufficient
revenues to achieve profitability or otherwise obtain additional equity, debt or
lease financing. Even if we achieve profitability, we may not sustain or
increase profitability on a quarterly or annual basis in the future.
19
<PAGE>
We engage in barter transactions to manage liquidity. We expect to enter
into fewer barter transactions as we have greater cash resources.
We believe that the net proceeds of this offering, together with available
funds, will be sufficient to meet our anticipated needs for at least the next
12 months. Thereafter, we may need to raise additional funds in the future in
order to fund more aggressive brand promotion or more rapid expansion, to
develop new or enhanced promotional services, to respond to competitive
pressures or to make acquisitions. There can be no assurance that any required
additional financing will be available on terms favorable to us, or will be
available at all. If additional funds are raised through the issuance of our
equity securities, stockholders may experience dilution of their ownership
interest and the new securities may have rights superior to those of the holders
of the common stock. If additional funds are raised by the issuance of debt, we
may be subject to certain limitations on our operations and our ability to pay
dividends. If adequate funds are not available or not available on acceptable
terms, we may be unable to fund our expansion, successfully promote our brand
name, develop or enhance our services, respond to competitive pressures or take
advantage of acquisition opportunities. Any of these events could have a
material adverse effect on our business, results of operations or financial
condition.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software may need to be upgraded to
comply with the Year 2000 requirements or risk system failure or miscalculations
causing disruptions of normal business activities.
State of Readiness. We have recently completed upgrading our technology
infrastructure. We consider all of our mission critical systems to be Y2K
compliant. The mission critical systems are defined as those systems that impact
the delivery of services to our customers, members and internal business units.
Many of these systems rely on the readiness and Y2K compliance of strategic
telecommunications partners, Frontier and Intermedia Communications. We have
received Y2K readiness disclosure statements from our telecommunications
partners and we are comfortable with the progress they have made toward
compliance. However, in the event there is a failure of service from our primary
facility located at Frontier, we are prepared to move our primary operations to
our internal hosting facility. This facility is located at our offices with
telecommunications services provided by Intermedia.
We are in the process of building an additional data center located on the
west coast with telecommunications provided by a different vendor. This process
is scheduled to be completed by the beginning of the fourth quarter of 1999.
This will add an additional layer of redundancy. We have requested Y2K readiness
disclosure from NBC and Excite and we are awaiting a response.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the operating costs associated with
time spent by employees in the evaluation process and Year 2000 compliance
matters generally. At this time, we do not possess the information necessary to
estimate the potential costs of revisions to our software should these revisions
be required or the replacement of third-party software, hardware or services
that are determined not to be Year 2000 compliant. Although we do not anticipate
that these expenses will be material, such expenses, if higher than anticipated,
could have a material adverse effect on our business, results of operations or
financial condition.
Risks. We are not currently aware of any Year 2000 compliance problems
relating to our systems that would have a material adverse effect on our
business, results of operations and financial condition. However, we may
discover Year 2000 compliance problems in our systems that require substantial
revision. In addition, third-party software, hardware or services incorporated
into our material systems may need to be revised or replaced, all of which could
be time-consuming and expensive. Our failure to fix or replace our internally
developed proprietary software or third-party software, hardware or services on
a timely basis could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions, any of which could have a
material adverse effect on our business, results of operations and financial
condition. Moreover,
20
<PAGE>
the failure to adequately address Year 2000 compliance issues in our internally
developed proprietary software could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
We are heavily dependent on a significant number of third-party vendors to
provide both network services and equipment. A significant Year 2000-related
disruption of the network, services or equipment that third-party vendors
provide to us could cause visitors to webstakes.com and our clients to consider
seeking alternate providers or cause an unmanageable burden on our technical
support, which in turn could materially adversely affect our business, financial
condition and results of operations.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside of our control may
not be Year 2000 compliant. The failure by these entities to be Year 2000
compliant could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our clients and visitors, decrease
the use of the Internet or prevent users from accessing our web site, which
could have a material adverse effect on our business, results of operations and
financial condition.
Contingency Plan. We have not yet fully developed a contingency plan to
address situations that may result if our systems fail. In the event there are
multiple failures among all of our telecommunications partners, our web site and
services will be unavailable to our members and clients until one of our three
telecommunications vendors resolve their Y2K problems.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. Since we have
historically expensed these costs as incurred, the adoption of this standard is
not expected to have a significant impact on our results of operations or
financial position.
In February 1998, FASB issued SFAS No. 132, "Employer's Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 132 has not had an impact on our results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. Statement of Financial Accounting
Standards No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. We do not expect the adoption of this statement to have a
significant impact on our results of operations or financial position.
21
<PAGE>
BUSINESS
OVERVIEW
Webstakes.com, Inc. is a leading online sweepstakes promotion company. We
integrate sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary membership database of more than 1.4 million
consumers. We make our promotions available without charge to consumers through
our web site, webstakes.com, our clients' web sites and consumers' personal home
pages. We generate revenues through the sale of promotion services that allow
our clients to cost-effectively identify and communicate with potential
customers, increase sales and foster brand awareness. We are building on our
sweepstakes expertise to provide an integrated, comprehensive online promotion
solution. We have recently entered into agreements with NBC and Excite, which we
believe will increase awareness of the Webstakes.com brand and attract
additional visitors to webstakes.com. Some of our recent clients include CBS
Sportsline, Citibank, CDW, Disney, iMall, MapQuest.com, PC World and
ShopNow.com.
INDUSTRY BACKGROUND
Promotions and Direct Marketing
Promotions and direct marketing are used to stimulate consumer spending.
Historically, most marketing communications dollars were spent on mass
advertising, but in recent years marketers have shifted their spending toward
direct marketing activities.
Promotions are designed to stimulate an immediate action which could
include a product sale, a request for further information or a visit to a place
of business for the purchase of a specific product or service. American
businesses spent $85.4 billion on promotion marketing in 1998, a 7.6% increase
over 1997, according to Promo Magazine. Promotions include:
o sweepstakes
o premium incentives
o product samples
o coupons
o points and loyalty programs
o rebates (cash incentives paid upon a purchase)
o games
o contests
Direct marketing is the delivery of a customized message to a defined
audience. Unlike mass advertising (such as television, print and radio), direct
marketing enables the measurement of the response to a message. Companies can
measure the response to specific direct marketing programs or promotions and
analyze the financial return on marketing expenditures. Direct marketing
programs can then be improved and tailored with a degree of precision that is
generally not possible with mass marketing.
According to the Direct Marketing Association, direct marketing
expenditures in the United States reached approximately $163 billion in 1998 and
are estimated to increase at a compound annual rate of over 6% from 1998 to
2003. Forrester Research, Inc. projects that by 2000 direct marketing
expenditures will be three times larger than expenditures for brand advertising.
Promotions and Direct Marketing on the Internet
The Internet has emerged as an important medium for collecting and
exchanging information, communicating and conducting business worldwide.
International Data Corporation estimates that the number of Internet users will
grow from approximately 142 million worldwide in 1998 to approximately 399
million worldwide by the end of 2002, and that the value of transactions on the
Internet will increase from approximately $50 billion in 1998 to approximately
$1.3 trillion in 2003.
We believe that the Internet is a compelling medium for direct marketing
promotions. The Internet has introduced tools for collecting consumer data,
measuring results, interacting with customers and marketing on
22
<PAGE>
a personalized basis that are not available in traditional media. Direct
marketing traditionally has been conducted through telemarketing or printed
mail, which require significant investments in paper, printing, postage and/or
personnel. Use of the Internet reduces these costs. The Internet also allows
marketers to track consumers' demographic characteristics, purchasing histories
and product preferences in order to tailor their product offerings to consumers
more likely to respond to these offerings. We believe that marketers can achieve
higher consumer response rates online than through traditional media. The
Internet enables marketers to change promotional messages rapidly and
cost-effectively. For example, online marketers can measure the response rate of
a promotion by sending out several sample test promotions with variable prices,
graphics and text to small groups of consumers. Based on the responses to a
sample, an online promotion can be modified quickly for much less than the cost
to modify a printed promotion.
Forrester Research, Inc. estimates that online promotions generate three to
five times the consumer response rates of traditional promotions. Forrester also
reports that 88% of retailers and marketers surveyed found that online
promotional efforts have met or exceeded their expectations and 80% of those
surveyed planned to increase their online promotional spending in the next year.
Based on this survey, Forrester estimates that 50% to 70% of total Internet
marketing budgets will be spent on promotions over the next five years, compared
to less than 15% of Internet marketing budgets currently being spent on
promotions.
WEBSTAKES SERVICES FOR CONSUMERS
We offer consumers the opportunity to win free merchandise and receive
discounts and special offers from our clients. Consumers can access these
opportunities from webstakes.com where a variety of weekly sweepstakes and
contests are available 24 hours a day, seven days a week. Consumers can also
access our promotions on the web sites of many of our clients. Additionally, our
Affiliate Program gives consumers the opportunity to offer visitors to their
personal home pages the chance to enter a special monthly sweepstakes.
Our Web Site
webstakes.com is our web site where consumers interact with our clients.
Through our promotions, consumers have an opportunity to explore products and
special offers presented by our clients and to enter sweepstakes to win product
and cash prizes, free travel, coupons and gift certificates. At their request,
consumers may also receive additional offers and information about clients'
products through our weekly electronic newsletter, the Webstakes Update, and
individual emails. Approximately 600,000 of our members have opted to receive
our newsletter. Our proprietary technology, which we have branded "iDialog,"
allows us to tailor emails based on the demographic profiles and interests of
the members to whom they are sent.
Our Prize Club page on webstakes.com offers a variety of prizes in
different interest categories. Each category is designed to appeal to consumers
with a specific interest and includes sweepstakes for prizes related to the
theme of the interest category. Presently, there are 13 Prize Club interest
categories:
o Auto
o Books & Music
o Business & Finance
o Campus
o Computing Products
o Family & Kids
o Games & Casino
o Gifts, Flowers & Food
o House & Home
o Mind Your Business
o Sports & Health
o Travel & Outdoors
o TV, Movies & Video
In addition, several special promotions run at different times throughout the
year on webstakes.com. These include promotions designed around holidays such as
Mother's Day and Christmas and events such as the Super Bowl, movie premiers and
the Academy Awards.
23
<PAGE>
Visitors to webstakes.com enter a sweepstakes either by selecting a prize,
by selecting a special promotion or by selecting an interest category and then
selecting a sponsor within that category. At any given time, there are typically
sweepstakes for over 100 prizes available on webstakes.com. The following is a
representative list of prizes in each category:
AUTO
F1 Racing Simulation Video Game
Nascar Collectible Diecast
Sony Car Stereo
Immobilizer Car Alarm
Pair Of Revo Shades
Infant/Toddler Car Seat
BOOKS & MUSIC
H.G. Wells Reading Lamp
$150 Barnes & Noble Gift Certificate
Yamaha Keyboard
$150 Music Boulevard Gift Certificate
Panasonic CD Player
JVC 200-Disc Changer
BUSINESS & FINANCE
Canon Personal Copier
$150 Dayton's Gift Certificate
Panasonic Fax Machine
Palm Pilot Professional
Panasonic Cordless Phone
Iomega Zip Drive
Epson Stylus Color Printer
$150 Staples Gift Certificate
CAMPUS
$150 Eddie Bauer Gift Certificate
Minolta Digital Camera
$150 Sam Goody Gift Certificate
Sanyo Refrigerator
Aiwa Stereo System
COMPUTING PRODUCTS
$150 CDW Gift Certificate
Minolta Digital Camera
Creative PC-DVD Player
Microtek Scanner
FAMILY & KIDS
$150 Bed Bath & Beyond Gift Certificate
$150 KB Toys Gift Certificate
$150 Warner Bros. Gift Certificate
$150 Sears Gift Certificate
$150 Marshall Field's Gift Certificate
GAMES & CASINO
Polaroid Instant Camera
Sony Playstation
Samsung Television
$150 Spiegel Gift Certificate
$160 Universal Amusement Gift Certificate
GIFTS, FLOWERS & FOOD
Kitchen Aid Mixer
Godiva Chocolates
Omaha Steaks
Digital Espresso Machine
Harry & David Fruits
HOUSE & HOME
$150 Home Depot Gift Certificate
Panasonic Microwave
Cuisinart Coffee Pot
$150 Crabtree & Evelyn Gift Certificate
$150 Lillian Vernon Gift Certificate
$150 Sharper Image Gift Certificate
MIND YOUR BUSINESS
Epson Printer
Panasonic Cordless Phone
Canon Copier
USB Zip Drive
SPORTS & HEALTH
$250 Universal Golf Gift Certificate
$150 Spa Finders Gift Certificate
Sony Portable CD Stereo
$150 REI Gift Certificate
27" Samsung TV
AIWA CD Player
$150 Foot Locker Gift Certificate
Circuit3 Watch
TV, MOVIES & VIDEO
Panasonic Television/VCR
Samsung Camcorder
Audible Mobileplayer
$150 Sony Theatres Gift Certificate
TRAVEL & OUTDOORS
$100 Planet Hollywood Gift Certificate
Olympus Binoculars
Kodak Digital Video Camera
Sony Stereo
The Savings Club is a section of webstakes.com that provides consumers with
savings opportunities in different interest categories. Recently, the Savings
Club has been expanded to integrate Prize Club promotions with special savings
on products related to a particular theme, such as an event or holiday. For
example, when visitors entered a recent Mother's Day prize promotion, they were
taken to a collection of special offers for Mother's Day products from a number
of clients.
Membership Registration and Prize Entry
Visitors to webstakes.com must register as members to participate in our
promotions. Visitors become members by completing our one-time registration form
that requires them to provide certain demographic information. Once this
information is provided, a visitor becomes a lifetime member and never has to
provide the registration information again, other than to update any changed
information.
To enter a promotion, members click on an interest category, a prize or a
special promotion, and they are presented with a page that displays the logos
and text messages of our clients that are sponsoring the particular interest
category, prize or promotion. After selecting one of these logos, members are
offered the opportunity to enter a sweepstakes for any of the products in the
category. At this point in the entry process, members may be asked if they want
to receive offers for products or services from the client whose logo they
selected when entering the sweepstakes or another question related to the chosen
prize or client. Responses to these questions are stored in our database.
Members may enter the sweepstakes by answering
24
<PAGE>
the question and clicking on the prize entry button. This final mouse click
takes members to the web site of the chosen sponsoring client.
The Webstakes Update Newsletter, Email Offers and Tell-a-Friend
During registration, new members are asked if they want to receive the
weekly Webstakes Update newsletter, emails from our clients that relate to their
interests or occasional special offers. This information will be provided only
if it is requested by the member. During the process of entering sweepstakes,
members that meet certain demographic criteria may be asked if they want to
receive offers for products or services. When a member gives us permission, he
or she is sent an individual email message often containing a special product
offer. In addition, our Tell-a-Friend Program enables recipients of our email
and Webstakes Update, as well as visitors to webstakes.com, to forward any
promotion to friends and family via email, and provides incentives to members
who tell others about webstakes.com.
Affiliate Program
Our Affiliate Program allows a member to put a free link to the
webstakes.com Affiliate Program sweepstakes on their personal home page. Members
with their own personal web site can request the information necessary to
install a webstakes.com banner on their web page. We have received more than
10,000 requests for this information. A visitor to a member's personal home page
can click on the webstakes.com banner, register as a webstakes.com member and
enter a monthly $1,000 sweepstakes run exclusively for the Affiliate Program.
After entering the special sweepstakes, the visitor is taken to the
webstakes.com home page and can then enter other webstakes.com promotions. Every
affiliate is automatically entered into a special monthly $500 sweepstakes we
conduct to encourage participation in the Affiliate Program. This program can
make personal home pages more fun while at the same time increase the exposure
of webstakes.com.
Privacy
We believe that it is important to build and maintain the trust of our
members. We are committed to maintaining the privacy of our members and their
personally-identifiable information. We are a member of TRUSTe, an independent,
non-profit initiative whose mission is to build users' trust and confidence in
the Internet by promoting the principles of disclosure and informed consent. As
a member of TRUSTe, we disclose our information practices on webstakes.com and
in our promotions and we comply with specified information disclosure practices.
As a general policy, we do not sell individual member information collected from
promotions on webstakes.com. During the registration process and thereafter,
webstakes.com visitors must grant us permission to send them the Webstakes
Update and email offers from us or our clients. If users do not specifically
authorize us to send them information, they will not receive email from us. We
seek to ensure that our privacy policy satisfies consumer expectations and
evolving Internet practices. If a member grants us permission, we may share
specific information with our clients or service providers, but we strictly
prohibit the sale of this information.
WEBSTAKES.COM SERVICES FOR BUSINESSES
We provide clients with the ability to build relationships with consumers
through webstakes.com, direct emails, the Webstakes Update and the use of their
products as prizes for our sweepstakes. We can direct a client's product offer
based on either the demographic profile of a visitor or the visitor's responses
to personalized questions generated by our proprietary technology. We provide
promotional research and client service expertise before, during and after a
promotion to help clients effectively use these tools to meet their goals. We
use our membership database to help clients identify potential customers more
effectively and to enable them to use the results of their promotions in other
sales and marketing efforts.
25
<PAGE>
We provide the technological, business and creative infrastructure
necessary to effectively produce and conduct online promotions, including
sweepstakes, on a cost-effective basis. These capabilities include the
following:
Creative Services
o Theme, naming and concept development of promotions--create
appropriate prize interest categories; create theme-based and
private label promotions
o Promotion design and production--create and produce visually
attractive, easy-to-use promotions
Automation of Process
o Collection and maintenance of demographic information--manage data
provided by member registration, prize selection and other member
activity
o Promotion research--measure effectiveness of promotions; suggest
alternatives to better satisfy client goals
o Winner selection, notification and affidavit collection--select
winners in compliance with sweepstakes law; collect affidavits;
verify accuracy of information provided by winner
o Customer service--respond to email questions
o Promotion support services--handle postal entries; provide lists of
winners
o Legal compliance services--distribute IRS Form 1099's as required;
create and provide official rules
Fulfillment
o Prize selection and acquisition--select appropriate prizes; acquire
prizes from suppliers
o Prize fulfillment--arrange for shipment of prizes
The Internet and our technology allow us to deliver promotions at a lower
cost than traditional offline promotions. Unlike traditional direct marketing
promotion campaigns, which typically use paper-based materials delivered by
mail, our promotions do not require postage or printing because they are all
delivered electronically. It is also unnecessary for us to manually enter online
response information because participants enter their own information when they
register as a member or participate in a promotion. Lastly, all of the online
winner selection, notification and processing functions are automated. This high
degree of automation will allow us to increase our promotion volume without the
need to add a significant number of employees to handle these functions.
We provide our services to businesses through webstakes.com and directly on
client web sites through syndicated versions of our promotions or through
private label promotions. webstakes.com is our largest distribution channel. We
use webstakes.com to host promotions, to gather demographic information and to
serve as a gateway for access to our clients' web sites. Syndicated versions of
our promotions are designed to run on our clients' web sites at the same time as
they are running on webstakes.com. Private label promotions run exclusively on
our clients' web sites. These promotions have a customized appearance and
client-specific prizes or offers but use our technology and infrastructure.
Promotions on webstakes.com
We currently offer a variety of promotional services built around our
sweepstakes. Our services are most typically sold in sponsorship packages, each
of which includes a combination of Webstakes.com services tailored to satisfy a
client's objectives. The choice and level of the services included in a
sponsorship package is determined by the level of sponsorship selected by the
client. Our sponsorship packages vary by:
o the number of interest categories in which a client's logo appears;
26
<PAGE>
o the size of the client's logo, and whether a text message
accompanies the logo;
o the number of guaranteed impressions or visitors delivered to a
client's logo, advertisement or web site;
o the number of times a client's offer appears in the Webstakes Update
newsletter; and
o the number of email campaigns.
Anchor sponsors receive the most prominent placement in the interest categories
of their choice. Anchor sponsors have included CDW, Golden Palace, iMALL,
Internet Shopping Network, Speedyclick and Spree.com. Tenant and Affiliate
sponsors pay a lower fee than Anchor sponsors and receive fewer and less
prominent logo placements and other services. Tenant and Affiliate sponsors have
included FortuneCity, Net Market, PC World and Value America.
The promotional tools we use to help clients meet their marketing
objectives include:
Exposure on webstakes.com. Clients receive exposure in the
webstakes.com interest categories they select. We feature client logos,
advertisements and text messages on the selected web pages. Each interest
category provides clients with the opportunity to direct their marketing
efforts to consumers most likely to be interested in their products.
Interest categories may be added as clients request additional exposure on
webstakes.com or the ability to direct offers to consumers with other
specific interests. We generally guarantee the minimum number of visitors
who will view a client's advertisement and/or be delivered to the client's
web site during the term of its sponsorship.
Lead Generation. Clients may extend special email offers to
webstakes.com members based on information gained using our technology.
These offers can be directed to members who meet pre-determined demographic
profiles. Members who request information about a client or client's offer
later receive an email describing a special offer that is sent
automatically using our iDialog technology. Each email includes a link to
the client's web site that allows the recipient to take advantage of the
offer. Finally, our iDialog technology allows us to measure the response
rates to these emails.
The Webstakes Update Newsletter. The Webstakes Update is an
electronic newsletter that is sent to more than 600,000 registered members
each week. The Webstakes Update features products, services and special
promotions from our clients. Each offer featured in The Webstakes Update
includes a link to the web site of the client making the offer, enabling
newsletter recipients to access the offer directly from the Webstakes
Update.
Loyalty Program. Our clients have the opportunity to place a banner
on their web site linking it directly to webstakes.com. A webstakes.com
banner on a client's web site provides the client with sweepstakes content
to build traffic and loyalty to the web site and provide value to its
visitors.
Management Reports. We make detailed daily reports available to our
clients. These reports include aggregated demographic information and
consumer preferences regarding our members that select a client's logo and
responses to each client's promotions on webstakes.com. A client can use
this information to tailor its promotions to reach its desired audience.
Special Promotions. Clients also may participate in special
promotions we run that relate to seasonal and special events, like the
Super Bowl or movie premiers, or major holidays, like Christmas or Mother's
Day. These special promotions provide a further opportunity for our clients
to make special merchandise offers relating to the featured event or
holiday.
Promotions on Client Web Sites
We provide a comprehensive outsourcing solution for clients who want to
host a promotion on their own web site to increase traffic. These promotions
range from a special promotion run only on the client's web site to a modified
version of a sweepstakes running concurrently on webstakes.com. We offer all of
the other services available in our sponsorship package to our private label and
syndication promotion clients at an additional cost.
27
<PAGE>
We conceive, design and produce private label promotions for a variety of
clients. A private label promotion gives a client the opportunity to run a
promotion on its own web site that has an appearance that is unique and
consistent with its own web site design, while using our infrastructure and
technology to avoid the cost of developing the promotion in-house. A client can
choose a complete promotion package or any one or a combination of the specific
services we offer. We guide private label clients through the promotion-
creation process and allow clients to choose those features appropriate for
their promotion. We will generally work with the client to design the appearance
of the promotion on its web site. Clients generally select their own prizes or
offers for the promotion and we tailor the other aspects of the promotion to
help clients meet their goals. Private label promotions generally include lead
generation through email campaigns and management reports.
Web site visitors entering private label promotions register for prizes
through our proprietary technology and registration process. This enables our
private label promotion clients to use our technology to offer our one-time
lifetime registration, which makes it easier for their visitors to enter our
sweepstakes. Private label clients have included Hyundai, NBC Multimedia,
Netscape, Panasonic, Toshiba and Universal Studios.
We provide syndicated versions of our webstakes.com promotions which may be
run on our clients' web sites at the same time as they are running on
webstakes.com. These promotions serve the same purpose as a private label
promotion but require less customization. Syndicated promotions have an initial
appearance consistent with the host client's web site. We display the client's
logo and/or color scheme on the various pages of the promotion. While the
appearance of the promotion is customized, the process for entering the
promotion is the same as the visitor would experience on our web site had he or
she selected the logo of the syndicated promotion client on webstakes.com. The
prizes offered in a syndicated promotion are the same as those being offered on
webstakes.com. Syndicated promotions may include promotions in all interest
categories, as well as seasonal, special event and major holiday promotional
programs. Syndicated promotion clients have included Internet Broadcast System
and JOBTRAK.
OUR STRATEGY
Our objective is to be the leading full-service online promotion company
and to make webstakes.com a leading Internet promotion destination. Key elements
of our strategy include:
Build on our Sweepstakes Expertise to Provide an Integrated, Comprehensive
Online Promotions Solution
We intend to build on our expertise, technology, membership base, web site
and client relationships to expand our offerings to include a broad range of
promotion services including instant win and other games, premium incentive
tools, points and loyalty programs, coupons, promotion fulfillment and product
sampling. Our goal is to provide clients with a one-stop promotion outsourcing
solution that provides a full range of promotions and promotion support services
that can be integrated to maximize effectiveness.
Grow our Membership Base
A larger membership base provides more potential customers with whom we can
test the effectiveness of our clients' promotions. We plan to increase our
membership base and membership usage by:
o increasing awareness of webstakes.com among Internet users;
o increasing the number of promotions available to members;
o increasing the number of destinations at which Internet users can
enter our promotions; and
o improving the attractiveness of webstakes.com by adding new
promotional opportunities such as games and points and loyalty
programs.
28
<PAGE>
Build Strong Brand Awareness through Online and Traditional Marketing
Campaigns
Brand recognition will help increase our membership base and help improve
visibility with potential clients. We plan to establish and expand the
recognition of our brand identity and service offerings through our web site,
other web sites, direct mail, promotional activities, trade show participation
and other media events. We have entered into an agreement with Excite to market
our promotions on Excite.com and with NBC to advertise on national television
and on the Internet.
Enhance Our Database of Information About Our Members
We believe we can enhance the effectiveness of our promotions by learning
more about our membership base. As more members enter our promotions, and with
each additional contact with our members, the extent and precision of our
information continues to grow. We intend to use our growing database and our
knowledge and experience to assist clients to tailor offers and encourage future
participation in our promotions.
Expand Internationally
We believe that our products and technology can both help U.S.-based
businesses to reach international consumers and help international businesses to
reach U.S. and international consumers. We intend to open sales offices in
selected foreign countries and to employ non-exclusive sales agents to expand
international sales. We also intend to create foreign language web sites to
increase foreign sales.
SALES AND MARKETING
We believe that a strong sales and marketing organization is essential to
effectively sell our Internet promotion services and to promote webstakes.com.
We sell our promotion services through a sales and marketing team that has
grown over the past three years to include 35 employees as of June 30, 1999.
These employees are located at our offices in New York and San Francisco. The
sales organization is dedicated to developing and maintaining close
relationships with our clients. We intend to increase our sales force and open
additional sales offices in the United States. We also intend to expand our
sales effort internationally.
Customer service is an important part of our sales effort. Once a sale is
made, our strategy group develops a plan to execute the promotions to help
assure that the client's objectives are met. We are committed to providing a
high level of client satisfaction. Sometimes a client will first use a private
label or syndicated promotion as an introduction to our promotion services. Once
we can demonstrate the effectiveness of our promotions, these clients may
purchase full sponsorship packages.
Our marketing of webstakes.com to consumers initially was primarily through
word-of-mouth and by promotions by clients. In March 1999, we entered into an
agreement with NBC under which we advertise on the NBC television network. In
June 1999, we began an on-line promotion campaign through Excite. Ads promoting
webstakes.com and our clients will appear on many of Excite's topical channels
including the Money and Investing channel, the Home & Real Estate channel, the
Games channel and many others. We are also advertising our web site and the
promotions run by our clients in The Net's Best, a Sunday newspaper insert. We
also use our Affiliate Program and our Tell-a-Friend Program to expand our
consumer reach at little or no cost.
CLIENTS
During 1998, we served approximately 125 clients. During the first six
months of 1999, we served approximately 75 clients. In 1998, our five largest
clients, iVillage.com, Jam TV, PC World, SonicNet and Virtual Vegas, accounted
for approximately 24% of our revenues. For the first six months of 1999, our
five largest clients, NBC, Speedyclick, iMall, Internet Shopping Network and
MapQuest.com, accounted for approximately 24% of our revenues.
29
<PAGE>
OPERATING INFRASTRUCTURE
Our operating infrastructure is designed to support the creation and
delivery of millions of page views each day. This infrastructure currently uses
30 web servers, application servers and database servers to provide timely and
efficient delivery of our services to clients and members. Our servers run on
Sun Solaris and Microsoft NT operating systems and our database systems are
standardized in Oracle products.
We have developed a broad array of information systems to perform site
management, user interaction, tracking, search, transaction processing and
fulfillment functions. When available, our systems use third-party licensed
technologies to augment internally-developed software. We focus our development
efforts on improving and enhancing our specialized proprietary tools with the
goal of automating as many processes as possible to increase member and client
satisfaction.
Our iDialog technology consists of three integrated systems; a publishing
system, an online promotion engine and a data processing system, all of which
are supported by relational databases.
Publishing System
The publishing system contains the relevant information about our
promotions, including prizes, interest categories and clients. Once a client's
offer or advertisement has been designed, each component, such as color, text
and graphics, is published as datasets in our Oracle relational database
management systems. Various combinations of these datasets are accessed and
published to webstakes.com.
Online Promotion Engine
When a member visits our web site, the online promotion engine creates a
web page of various datasets by accessing the online Oracle databases. The
components of each web page are dynamically generated based on the demographic
characteristics and preferences of the member user. The online promotion engine
also deploys email campaigns to members based on the same information stored in
the Oracle databases. The online promotion engine uses a combination of Sun
MicroSystems' NetDynamics Application Servers, Standard Java servlets and
Netscape and Apache Webservers as the front-end development tools to connect
with the Oracle databases. This software handles all transactional events and
queries, updates the Oracle databases and manages webstakes.com, which is
designed to give members a convenient and safe environment to register for
offers.
Data Processing System
Our data processing system retrieves member demographic data from the
Oracle databases through the online promotion engine, processes the data,
creates and issues offers to members and manages all winner selections. The
system was designed to give employees and clients instant online access to
information related to specific promotions. Our salespeople can access member
profiles to search and analyze demographics and usage patterns to suggest
promotions and offers to clients. Generally, only aggregate data, and not
individual member profiles, is available to our clients.
The structure of our hardware and software is designed to allow for rapid
expansion while maintaining our desired user performance standards. In the
rapidly changing Internet environment, we believe that the ability to update an
application to stay current with new technologies is important. Our system
design allows for the addition, modification or replacement of applications in a
cost-efficient and expeditious manner. We continually evaluate emerging
technologies and new developments in web technologies with the objective of
optimizing our member and client interfaces, web site features and operational
systems.
We use high-capacity telephone communication lines to connect with the
Internet. These communication lines are currently one-third to one-half
utilized. As we grow, communications lines with increased capacity and higher
capacity routers will need to be added. We maintain redundant communication
lines with the Internet to protect against the loss of connectivity and we
safeguard our information using large storage devices. We have back-up copies of
all of our programs and data in an off-site location.
30
<PAGE>
Our Internet connectivity is provided by Frontier GlobalCenter. We have
entered into an Internet-hosting agreement with Frontier to maintain all of our
production servers at Frontier's Manhattan data center. Frontier provides
comprehensive facilities management services, including human and technical
monitoring of all production servers 24 hours per day, seven days per week.
Frontier provides the means of connectivity from webstakes.com servers to
end-users via the Internet. The facility has two independent uninterruptible
power supplies, as well as two independent diesel generators designed to provide
power to the systems within seconds of a power outage.
COMPETITION
Competition in the Internet promotion services market is intense. We expect
competition in our market to continue to intensify as a result of increasing
market size, greater visibility of the market opportunity for Internet promotion
services and minimal barriers to entry. Competition may also increase as a
result of industry consolidation, particularly among narrowly-focused promotion
companies. We believe that our ability to compete depends on many factors both
within and beyond our control, including the following:
o the success of the sales and marketing efforts of us and our
competitors;
o the ease of use, performance, price and reliability of promotions
developed by us and our competitors; and
o the timing and market acceptance of new services developed by us and
our competitors.
The online promotion services market is highly fragmented, with many
companies focusing generally on only one aspect of the promotions market. We
also compete with offline promotion companies, large Internet publishers, search
engine and other portal companies, a variety of Internet advertising networks
and other companies that facilitate the marketing of products and services on
the Internet.
Please see "Risk Factors--We face significant competition, and may not be
able to compete successfully" for a more detailed description of the risks of
our competition.
PROPRIETARY RIGHTS
We protect our technology and proprietary rights through a combination of
patent, copyright, trade secret and trademark law. We have filed one patent
application in the United States relating to the presentation of questions to
webstates.com visitors. In addition, we have a pending registration for the
Webstakes trademark in the United States. Our patent applications and trademark
registration may not be approved.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technologies, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights from
unauthorized use or disclosure, parties may attempt to disclose, obtain or use
our proprietary rights. We cannot be certain that the steps we have taken will
prevent misappropriation of our proprietary rights, particularly in foreign
countries where the laws or law enforcement may not protect our proprietary
rights as fully as in the United States.
Our technology collects and utilizes data derived from user activity on
webstakes.com. This data is used primarily for promotion targeting and measuring
the effectiveness of different promotions. Although we believe that we have the
right to compile and use this data, there can be no assurance that any trade
secret, copyright or other protection will be available for this information. In
addition, others may claim rights to this information or to the technology that
we use to collect this information, tailor advertisements and measure
promotional performance.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
Regulation of Sweepstakes
The sweepstakes industry is subject to extensive regulation on the local,
state and national levels, regardless of whether the promotions take place over
the Internet, through the mail or otherwise. Thus, the same regulations that
apply to traditional sweepstakes promotions apply to each of our online
sweepstakes
31
<PAGE>
promotions. Regulations governing the conduct of sweepstakes promotions vary
from state to state and from country to country. Although the state and national
sweepstakes laws and regulations generally are similar in nature, they and their
application vary. We use various methods to achieve compliance with these laws.
We seek to protect ourself by placing restrictions on who may enter our
sweepstakes. We generally prohibit minors from entering our sweepstakes.
Further, our sweepstakes generally are limited to United States residents, and
residents of Florida typically are prohibited from entering certain of our
sweepstakes to comply with local laws, regulations or administrative rulings.
However, because it is sometimes difficult to verify entries over the Internet,
it is possible that minors or residents of these restricted states are entering
our sweepstakes promotions using misinformation.
Deceptive practices in direct mail sweepstakes promotions have recently
been the subject of hearings in the United States Senate and certain states.
While these hearings did not focus on online sweepstakes, it is unclear whether
any new laws or regulations will result from these hearings and whether or not
these laws or regulations will affect online sweepstakes. Similar attention is
expected from state legislatures and regulators. See "Risk Factors--Sweepstakes
regulations may limit our ability to conduct sweepstakes or limit participation
in our sweepstakes."
Regulation Concerning Privacy
Congress has passed the Children's Online Privacy Protection Act, and the
Federal Trade Commission has issued a Notice of Proposed Rulemaking regarding
the adoption of regulations regarding the collection and use of personal
identifying information obtained from individuals when accessing web sites, with
particular emphasis on access by minors. These regulations may include
requirements that companies establish certain procedures to, among other things:
o give adequate notice to consumers regarding information collection
and disclosure practices;
o provide consumers with the ability to have personal identifying
information deleted from a company's database;
o provide consumers with access to their personal information and with
the ability to rectify inaccurate information; and
o obtain express parental consent prior to collecting and using
personal identifying information obtained from children under
13 years of age.
These regulations may also include enforcement and redress provisions. While we
have a privacy policy designed to enhance the protection of the privacy of our
users, there can be no assurance that these programs will conform with any
regulations adopted by the FTC. Moreover, even in the absence of those
regulations, the FTC has begun investigations into the privacy practices of
companies that collect information on the Internet. One investigation resulted
in a consent decree pursuant to which an Internet company agreed to establish
programs to implement the principles noted above. We may become subject to a
similar investigation, or the FTC's regulatory and enforcement efforts may
adversely affect our ability to collect demographic and personal information
from users, which could have an adverse effect on our ability to provide
effective promotions. Any of these developments would have a material adverse
effect on our business, results of operations and financial condition.
It is also possible that cookies, or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, possibly without the user's knowledge, which are used to track
demographic information and to target advertising, may become subject to laws
limiting or prohibiting their use. A number of Internet commentators, advocates
and governmental bodies in the United States and other countries have urged the
passage of laws limiting or abolishing the use of cookies. Limitations on or
elimination of our use of cookies could limit the effectiveness of our
promotions, which could have a material adverse effect on our business, results
of operations and financial condition.
The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the directive, EU citizens are
guaranteed rights to access their data, rights to know where the data
originated, rights to have inaccurate data rectified, rights to recourse in the
event of unlawful
32
<PAGE>
processing and rights to withhold permission to use their data for direct
marketing. The directive could, among other things, affect U.S. companies that
collect information over the Internet from individuals in EU member countries,
and may impose restrictions that are more stringent than current Internet
privacy standard in the United States. In particular, companies with offices
located in EU countries will not be allowed to send personal information to
countries that do not maintain adequate standards of privacy. The directive does
not, however, define what standards of privacy are adequate. As a result, the
directive may adversely affect the activities of entities such as Webstakes.com
that engage in data collection from users in EU member countries.
We are taking steps to prepare for the institution of any safeguards to
privacy and procedures that could limit access, storage, use and transport of
individual data elements. These steps include:
o carefully identifying the source, timing and classification of each
data element collected;
o segregating data elements with matching identifiers in our data
warehouse to allow for separate processes, regulations and
treatments by type of data; and
o making the maintenance of members' elections with respect to the
receipt of information a priority in the handling and conveyance of
information from and to members.
Regulation of the Internet
We are currently subject to federal and state laws and regulations that are
applicable to specific activities on the Internet. Although there are currently
few laws or regulations directly governing access to or commerce on the
Internet, due to the increasing popularity and use of the Internet, a number of
laws and regulations may be adopted regarding user privacy, pricing, acceptable
content, taxation and quality of products and services. In addition, the
government has been requested to regulate and impose fees on Internet service
providers and online service providers in a manner similar to long distance
telephone carriers. This regulation may place our activities under increased
regulation, increase our cost of doing business, decrease the growth in Internet
use or otherwise have a material adverse effect on our business. See "Risk
Factors--Laws and regulations pertaining to the Internet may adversely affect
our business.
EMPLOYEES
As of June 30, 1999, we employed 71 people including 35 in sales and
marketing, 21 in engineering and product development and 15 in accounting, human
resources, business operations and administration. We are not subject to any
collective bargaining agreements and believe that our relationship with our
employees is good.
FACILITIES
Our principal executive offices are currently located in two separate
facilities in New York, New York. These facilities consist of a total of
approximately 11,250 square feet and are under leases which expire in March 2000
and February 2002. We also lease approximately 3,400 square feet of space for
our sales and marketing efforts in San Francisco, California. We will need
additional space in the near future, and we believe that suitable additional
space will be available on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
33
<PAGE>
MANAGEMENT
The following table sets forth our directors and executive officers, their
ages and the positions held by them with us.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- -------------------------------------------------
<S> <C> <C>
Steven H. Krein..................... 29 Chairman of the Board of Directors and
Chief Executive Officer
Daniel J. Feldman................... 29 President and Director
Christopher F. Bragas............... 39 Vice President of Integrated Promotions
Thomas E. Brophy.................... 32 Vice President of Finance and Chief Financial
Officer
Steven K. Caputo.................... 43 Vice President of Partnership Services and
Promotions
Kenneth J. Grosso................... 31 Vice President of Partnership Development
Alfonzso Holmes..................... 34 Chief Technology Officer
Joseph Lamport...................... 42 Vice President of Product Development
Jane C. Weber....................... 45 Vice President of Direct Marketing
Lisa Z. Crane....................... 40 Director*
Arnold Greenberg.................... 66 Director
Dirk A. Hall........................ 28 Director*
Kristopher A. Wood.................. 27 Director*
</TABLE>
- ------------------
* Nominee--to be elected by the board immediately after completion of this
offering.
Steven H. Krein, a founder of Webstakes.com, has been our Chief Executive
Officer and Chairman of the Board of Directors since January 1999. From our
inception to January 1999, he served as President and director. Prior to
founding Webstakes.com, from October 1994 to May 1996, Mr. Krein was Assistant
Publisher of Law Journal EXTRA!, an online service for lawyers from American
Lawyer Media, Inc. In 1993, Mr. Krein co-founded LINK, an online service for
lawyers in Delaware. Mr. Krein received his J.D. degree from Widener University
School of Law and his B.A. degree from the University of Maryland.
Daniel J. Feldman, a founder of Webstakes.com, has been President since
January 1999 and a director since our inception. Mr. Feldman served as Vice
President of Webstakes.com from January 1998 until January 1999. He was our
Director of Operations from January 1996 to December 1996 and Director of Sales
and Marketing from January 1997 to December 1997. Prior to founding
Webstakes.com, from 1995 through 1996, Mr. Feldman was employed by Law Journal
EXTRA!, where he was Director of Product Development. Previously, Mr. Feldman
founded Closeout Network, Inc., a directory service for the closeout industry.
Mr. Feldman received his B.A. degree in International Business from George
Washington University.
Christopher F. Bragas has been Vice President of Integrated Promotions
since July 1999. From September 1998 to July 1999, Mr. Bragas was our Vice
President of Finance and Chief Financial Officer. Prior to joining
Webstakes.com, Mr. Bragas was the Senior Vice President of Finance at Don Jagoda
Associates, Inc., an international promotions agency. From July 1981 through
August 1989, Mr. Bragas was in public accounting, serving with
PricewaterhouseCoopers LLP from February 1983 to July 1988. Mr. Bragas is a CPA
and received his B.S. degree from State University of New York at Oneonta.
Thomas E. Brophy has been our Vice President of Finance and Chief Financial
Officer since July 1999. From April 1999 to July 1999, Mr. Brophy served as our
Controller. From November 1994 through March 1999, Mr. Brophy held the positions
of Chief Financial Officer and Vice President of Finance at Health Partners,
Inc., a healthcare company based in Connecticut. From January 1989 through
November 1994, Mr. Brophy held various auditing positions at Deloitte & Touche,
LLP, including Audit Manager from August 1993 through November 1994. Mr. Brophy
is a CPA and received his B.S. degree in accounting from the University of
Connecticut.
Steven K. Caputo has been Vice President of Partnership Services and
Promotions since June 1999. From February 1997 to June 1999, Mr. Caputo served
as Executive Vice President and General Manager of Promotion Development Group,
Inc., a New York promotion agency. From June 1990 to January 1997, Mr. Caputo
was Senior Vice President of Account Services at Don Jagoda Associates, Inc.
From May 1989 to
34
<PAGE>
May 1990, Mr. Caputo was Director of Account Services at Sims Freeman O'Brien
(Omnicom Group). Mr. Caputo received his B.A. degree from Adelphi University.
Kenneth J. Grosso joined Webstakes.com in August 1997 as Director of Sales.
Mr. Grosso has served as Vice President of Partnership Development, responsible
for sales, since May 1998. From 1992 to 1997, Mr. Grosso was employed with KPMG,
L.L.P., as an audit manager. Mr. Grosso founded Zonk Productions, a New York
promotions company, in 1994 and served as its president through 1996.
Mr. Grosso is a C.P.A. and received his B.A. degree in Accounting from Pace
University.
Alfonzso Holmes joined Webstakes.com in August 1997 as Director of Systems
Architecture and was Vice President of Technology from January 1998 until May
1998. In March 1999, Mr. Holmes returned to Webstakes.com as Chief Technology
Officer. From October 1998 to March 1999, Mr. Holmes was employed by Advanced
Solutions Inc. as Vice President of Technology Development. From 1995 to 1997,
Mr. Holmes was Director of Technology at Comedy Central, a subsidiary of Viacom
and Time Warner/HBO. Prior to that time, Mr. Holmes was employed by
Communications Workers of America in various positions, including application
developer, network administrator and director of operations. Mr. Holmes has over
14 years of technology experience. Mr. Holmes received his B.A. degree in
English from West Virginia University.
Joseph Lamport has been Vice President of Product Development since
September 1998. From 1992 to 1998, Mr. Lamport served as Publisher of Law
Journal EXTRA! for American Lawyer Media, Inc. During his tenure, Mr. Lamport
established and served as publisher of both Counsel Connect, an online
interactive service for lawyers, and Law Journal EXTRA! From 1987 to 1992,
Mr. Lamport was an attorney with the law firm Cleary, Gottlieb, Stern and
Hamilton. Mr. Lamport received his J.D. degree from Cardozo Law School and his
B.A. degree from Yale University. Mr. Lamport served as a director of
Webstakes.com from its inception in January 1996 until June 1999.
Jane C. Weber has been Vice President of Direct Marketing since June 1999.
Ms. Weber joined Webstakes.com in September 1997 as Direct Marketing Account
Manager, and was promoted to Director of Strategic Development in February 1998.
From 1994 to 1997, Ms. Weber served as Product Manager at The Reader's Digest
Association and, from 1990 to 1994, she held various direct marketing positions
at International Masters Publishers, Inc. Ms. Weber received her M.B.A. degree
from the University of Connecticut and her B.A. degree from Oral Roberts
University.
Lisa Z. Crane has agreed to serve as a director of Webstakes.com upon
completion of this offering. From January to July 1999, Ms. Crane served as Vice
President of NBC Interactive and general manager of NBC.com. Prior to joining
NBC Interactive, Ms. Crane served as Vice President of Sales and Marketing of
Universal Studios Online from May 1997 to December 1998, Vice President of
Marketing of the New Media Group from September 1996 to May 1997, and Vice
President of the Consumer Products Group from August 1995 to September 1996. She
was also director of Corporate Sales and Sponsorships for ECO Expo from 1992 to
1993 and was President of Zola Fine Art from 1986 to 1992. Ms. Crane received
her M.B.A. degree from Pepperdine University and her B.A. degree from the
University of California, Los Angeles.
Arnold Greenberg has served as a director of Webstakes.com since June 1999.
Mr. Greenberg co-founded Snapple Beverages in 1972, and he served as Chief
Operating Officer and Vice Chairman of the Board of Snapple until 1994. He is a
trustee of Mount Sinai-New York University Medical Center and Health Service and
a trustee of the New York University Medical School. Mr. Greenberg is also a
director of Volatile Media, a seller of custom compilation music compact discs,
and of the Lipper/Lumi High Income Bond Fund, Ltd.
Dirk A. Hall has agreed to serve as a director of Webstakes.com upon
completion of this offering. Since June 1997, Mr. Hall has served as Portfolio
Manager of Citigroup Investments Inc. where he is responsible for the management
of venture capital investments for various Travelers insurance companies. From
July 1993 to June 1996, Mr. Hall was a member of the Investment Banking Group at
Smith Barney Inc. Mr. Hall received his M.B.A. degree from Harvard Business
School and his B.S. degree in Finance and Information Systems from New York
University.
Kristopher A. Wood has agreed to serve as a director of Webstakes.com upon
completion of this offering. Since September 1997, Mr. Wood has served as
Managing Director of XL Ventures, Inc., the venture capital investment
subsidiary of Big Flower Holdings, Inc., an advertising, marketing and
information services company. Since September 1995, Mr. Wood has also served as
Managing Director--Mergers &
35
<PAGE>
Acquisitions of Big Flower Holdings, Inc. (and its predecessor, Big Flower Press
Holdings, Inc.). From July 1993 to May 1995, Mr. Wood was a member of the Global
Finance Group at BT Alex. Brown Incorporated. Mr. Wood also serves as a director
of About.com, Inc. and Andromedia, Inc. Mr. Wood received his B.S. degree in
economics from The Wharton School of the Univerisity of Pennsylvania.
RIGHT OF INVESTORS TO DESIGNATE BOARD MEMBERS
The terms of the purchase agreement executed in conjunction with our
June 1999 sale of class B mandatorily redeemable convertible preferred stock
permit the holders of a majority of these shares, or the majority of the shares
of common stock into which these shares are converted upon completion of this
offering, to designate two directors to serve on our board. We are required to
nominate these designees to the board and use our best efforts to have them
elected. This right to nominate directors expires three years after the closing
of this offering. Mr. Wood and Mr. Hall have been designated by these holders.
OBSERVATION RIGHTS OF INVESTORS
Under the terms of the stock purchase agreement executed in conjunction
with the sale of our class B mandatorily redeemable convertible preferred stock,
any purchaser who purchased $5.0 million or more of that stock is entitled to
have an agent present at all meetings of our board of directors, for a period of
three years from the closing of this offering, unless that purchaser has one or
more of its nominees placed on our board of directors as described above. These
observation rights will continue after the conversion of the preferred stock to
common stock upon completion of this offering.
CLASSES OF THE BOARD OF DIRECTORS
Our board of directors is divided into three classes that serve staggered
three-year terms as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION OF TERM MEMBERS
- ----------------------------------------------- ------------------ -------------------
<S> <C> <C>
Class I........................................ 2000 Daniel J. Feldman,
Arnold Greenberg
Class II....................................... 2001 Steven H. Krein,
Lisa Z. Crane*
Class III...................................... 2002 Kristopher A. Wood*
Dirk A. Hall*
</TABLE>
- ------------------
* Nominee--to be elected by the board immediately after completion of this
offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors recently established a compensation committee and an
audit committee. The compensation committee evaluates our compensation policies,
determines compensation for our executive officers and administers our stock
option plans. The members of the compensation committee are Messrs. Greenberg,
Hall and Wood. The audit committee reviews the scope of our audit, the
engagement of our independent auditors and their audit reports. The audit
committee also meets with the financial staff to review accounting procedures
and reports. The audit committee currently consists of Ms. Crane and Messrs.
Greenberg and Wood.
DIRECTOR COMPENSATION
We do not pay directors cash compensation. Directors are reimbursed for the
expenses they incur in attending meetings of the board or board committees.
Non-employee directors are eligible to receive options to purchase common stock
awarded under our 1999 Equity Compensation Plan.
Each non-employee director will be granted, upon the closing of this
offering, an option to purchase 16,000 shares that will have an exercise price
equal to the offering price in this offering. After this offering, each director
who is not an employee will receive an option to purchase 16,000 shares upon his
or her election to the board and will receive an option to purchase 5,000 shares
upon his or her reelection to the board. The exercise price of options granted
after this offering will be the fair market value of the stock on the date of
the grant.
36
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to our completion of this offering, our board of directors as a whole
made decisions relating to the compensation of our executive officers. During
this time, Messrs. Krein, Feldman and Lamport participated in all discussions
concerning the compensation of our executive officers, except that each was
excluded from discussions regarding their own compensation. None of our officers
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on our compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended
December 31, 1998 concerning compensation we paid to our Chief Executive
Officer. No other executive officer received more than $100,000 in compensation
for 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY
- ----------------------------------------------------------------------------------------- ----------- --------
<S> <C> <C>
Steven H. Krein
Chairman of the Board and Chief Executive Officer...................................... 1998 $131,250
</TABLE>
No stock options were granted to Mr. Krein in 1998 nor did he exercise any
options in 1999 or hold any unexercised stock options as of December 31, 1998.
In connection with employment agreements entered into in June 1999, Messrs.
Krein and Feldman will receive a base annual salary of $175,000 and $150,000 per
year, respectively, and a bonus of up to $100,000 each based on the attainment
of certain performance objectives. In addition, upon completion of this
offering, Messrs. Krein and Feldman will each be paid a bonus of $175,000. At
the time of execution of the employment agreement in June 1999, as an inducement
to Messrs. Krein and Feldman to enter into their respective agreements, they
were each granted 62,000 options to purchase common stock at $6.00 per share.
The options are exercisable for a period of ten years beginning on the date of
grant. One-half of the options vest immediately and one-half vest one year from
the date of grant.
STOCK OPTION PLANS
1999 Equity Compensation Plan
We adopted the 1999 Equity Compensation Plan on June 8, 1999. The plan
provides for grants of incentive stock options, nonqualified stock options and
restricted stock to designated employees, advisors and consultants, and to
non-employees directors. By encouraging stock ownership, we seek to motivate
these individuals to contribute to our success.
The plan authorizes up to 2,000,000 shares of common stock for issuance
under the plan. If options granted under the plan expire or are terminated for
any reason without being exercised, or shares of restricted stock are forfeited,
the underlying shares of common stock will again be available for issuance under
the plan.
The compensation committee of the board of directors administers and
interprets the plan. The compensation committee has the sole authority to
determine the type, size and terms of the grants, including the individuals to
whom grants shall be made.
Grants may be made to any of our employees or any employee of our
subsidiaries and to any non-employee member of our board of directors. Key
consultants and advisors who perform services for us or any of our subsidiaries
are eligible if they render bona fide services, other than as part of the offer
or sale of securities in a capital-raising transaction. No more than 500,000
shares and/or options in the aggregate may be granted or awarded to any
individual in any calendar year.
Incentive stock options may be granted only to employees. Non-qualified
stock options may be granted to employees, non-employee directors and key
consultants and advisors. The exercise price of an option is determined by the
compensation committee but in no event can the exercise price of an incentive
stock option be less than the fair market value of a share of common stock on
the date the incentive stock option is granted. The exercise price of an
incentive stock option granted to an employee who owns more than 10% of
37
<PAGE>
the common stock may not be less than 110% of the fair market value of a share
of common stock on the date of grant.
The compensation committee determines the term of each option, up to a
maximum of ten years from the date of grant, except that the term of an
incentive stock option granted to an employee who owns more than 10% of the
common stock may not exceed five years from the date of grant.
The compensation committee shall determine the number of shares of
restricted stock granted to a participant. Grants of restricted stock may be
conditioned on such performance requirements, vesting provisions, transfer
restrictions or other restrictions and conditions as the compensation committee
determines in its sole discretion.
The compensation committee may amend or terminate the plan at any time,
subject to stockholder approval if required. The plan will terminate in June
2009, unless the compensation committee terminates it earlier or extends it with
approval of the stockholders.
In the event of a change of control, whether by merger or asset sale or a
sale by the stockholders of more than 50% of the total voting power of
Webstakes.com, the compensation committee may determine that all outstanding
options shall immediately vest, and the restrictions on all outstanding
restricted stock shall immediately lapse.
Upon the occurrence of an event where we are not the surviving entity or
where we survive only as a subsidiary of another entity, unless the compensation
committee determines otherwise, all outstanding grants shall be assumed by or
replaced with comparable options or stock by the surviving corporation. In
addition, the compensation committee may require that grantees surrender their
outstanding options in exchange for payment by us, in cash or common stock, at
an amount equal to the amount by which the then fair market value of the shares
of common stock subject to the grantee's unexercised options exceeds the
exercise price of those options and/or after giving grantees an opportunity to
exercise their outstanding options, terminate any or all unexercised options.
Options to purchase 43,385 shares of common stock are outstanding under
this plan.
Stock Option Plan
Options to purchase 450,000 shares of common stock are outstanding under
the Stock Option Plan. Holders of these options were given the right to purchase
common stock at the market price on the date of grant as determined by the board
of directors. These options vest ratably on an annual basis over a four-year
period. The other terms of this predecessor plan are similar in all material
respects to the 1999 Equity Compensation Plan.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Krein and Feldman
pursuant to which Mr. Krein serves as Chief Executive Officer and Mr. Feldman
serves as President. In connection with these employment agreements, Messrs.
Krein and Feldman receive base annual salaries of $175,000 and $150,000 per
year, respectively, and a bonus of up to $100,000 each based on the attainment
of certain performance objectives. In addition, upon completion of this
offering, Messrs. Krein and Feldman will each be paid a bonus of $175,000. At
the time of execution of the employment agreements in June 1999, as an
inducement to Messrs. Krein and Feldman to enter into their respective
agreements, they were each granted 62,000 options to purchase common stock at
$6.00 per share. The options are exercisable for a period of ten years. One-half
of the options vest immediately and one-half vest after one year. If either of
Messrs. Krein or Feldman is terminated for any reason other than for cause, the
employment agreements provide that he is entitled to a severance payment equal
to one year of his base salary. The employment agreements contain provisions
restricting the rights of Messrs. Krein or Feldman to compete with us under
certain events of termination. They also contain standard confidentiality
provisions. Please see "Management--Executive Compensation."
CERTAIN TRANSACTIONS
In June 1999, we entered into a two-year sponsorship agreement with Excite
under which Excite agreed to promote webstakes.com through ad banner placements
and links to webstakes.com and its promotions on Excite.com, WebCrawler.com and
Classified 2000.com and through the use of a webstakes.com personalized
38
<PAGE>
front page made available by Excite. As part of this agreement, we received a
guarantee of a total number of impressions per year. The fee to be paid to
Excite under this agreement is $5.6 million, $685,000 of which has been paid,
and the balance of which is due 10 days following the completion of this
offering. At Home Corporation, the parent company of Excite, is one of our
stockholders.
In June 1999, we entered into a services agreement with MatchLogic, Inc., a
wholly owned subsidiary of Excite, pursuant to which MatchLogic will provide us
with ad serving and targeting, data processing, analysis and enhancement
services. The term of the agreement is two years. The fee to be paid to
MatchLogic under this agreement is $13.1 million, $2.5 million of which has been
paid and the balance of which is due 10 days following completion of this
offering. See "Use of Proceeds."
In June 1999, we redeemed all outstanding shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of common stock for
an aggregate amount of $24.0 million. To finance the redemption and to provide
working capital, we issued shares of new class B mandatorily redeemable
convertible preferred stock to a group of investors, including At Home
Corporation, XL Ventures, a subsidiary of Big Flower Holdings and Travelers, for
an aggregate purchase price of $40.0 million. Upon completion of this offering,
the class B mandatorily redeemable convertible preferred stock will
automatically convert into 6,666,667 shares of common stock.
39
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding the beneficial
ownership of our common stock as of June 30, 1999 and as adjusted to reflect the
sale of the shares of our common stock offered in this offering,
by:
o each person or entity who beneficially owns more than 5% of our
stock;
o each of our directors and director nominees;
o our named executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each person named in the table
below is Webstakes.com, Inc. 11 West 19th Street, New York, New York 10011. The
amounts and percentages of common stock beneficially owned are reported on the
basis of regulations of the Securities and Exchange Commission governing the
determination of beneficial ownership of securities. Under the rules of the
Commission, a person is deemed to be a "beneficial owner" of a security if that
person has or shares "voting power," which includes the power to vote or to
direct the voting of such security, or "investment power," which includes the
power to dispose of or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities of which that person has
a right to acquire beneficial ownership within 60 days. Under these rules, more
than one person may be deemed a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest. The information set forth in the following
table (1) assumes that the over-allotment option by the underwriters has not
been exercised, (2) excludes any shares purchased in this offering by the
respective beneficial owner, and (3) reflects the conversion of all shares of
class B mandatorily redeemable convertible preferred stock upon completion of
this offering.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Steven H. Krein(1)............................................ 1,501,000 14.0% %
Daniel J. Feldman(1).......................................... 1,501,000 14.0
At Home Corporation(2)........................................ 1,166,667 10.9
XL Ventures, LLC(3)........................................... 1,166,667 10.9
Kristopher Wood(4)*........................................... 1,166,667 10.9
The Travelers Insurance Company (5)(6)........................ 833,333 7.8
Dirk A. Hall(6)(7)*........................................... 833,333 7.8
Invesco Private Capital Inc.(8)(9)............................ 691,667 6.5
Joseph Lamport................................................ 588,000 5.5
Arnold Greenberg(10).......................................... 166,667 1.6
Lisa Z. Crane(11)*............................................ ** **
All executive officers and directors as a group
(13 persons)................................................ 5,788,656 53.8%
</TABLE>
- ------------------
* Nominee - to be elected to the board immediately after completion of this
offering.
** Less than 1% of total.
(1) Includes options to purchase 31,000 shares of common stock which are
exercisable within 60 days following the date of this prospectus.
(2) The address of At Home Corporation is 425 Broadway Street, Redwood, CA
94063.
(3) The address of XL Ventures, LLC is 1105 North Market Street, Suite 1300,
Wilmington, DE 19801.
(Footnotes continued on next page)
40
<PAGE>
(Footnotes continued from previous page)
(4) Represents 1,166,667 shares held by XL Ventures, LLC. Mr. Wood is managing
director of XL Ventures, Inc., an affiliate of XL Ventures, LLC. Mr. Wood
disclaims beneficial ownership of these shares. Does not include 16,000
shares issuable upon the exercise of stock options which will be granted to
Mr. Wood upon completion of this offering.
(5) The address of The Travelers Insurance Company is 388 Greenwich Street,
36th Floor, New York, NY 10013.
(6) Does not include 16,000 shares issuable upon the exercise of stock options
which will be granted to Mr. Hall upon completion of this offering. Upon
grant, such options will be transferred to The Travelers Insurance Group by
Mr. Hall.
(7) Represents 833,333 shares held by The Travelers Insurance Company. Mr. Hall
is Portfolio Manager of Citigroup Investments, the parent company of The
Travelers Insurance Company. Mr. Hall disclaims beneficial ownership of
these shares.
(8) The address of Invesco Private Capital, Inc. is 1166 Avenue of the Americas,
New York, NY 10036.
(9) Includes 691,667 shares of which Invesco Private Capital Inc. has
discretionary authority for five accounts, including dispositive and voting
control. Invesco Private Capital Inc. disclaims beneficial ownership of
these shares.
(10) These shares are owned by the Greenberg Family Fund LLC for which Mr.
Greenberg serves as manager. Does not include 16,000 shares issuable upon
the exercise of stock options which will be granted to Mr. Greenberg upon
completion of this offering.
(11) Does not include 16,000 shares is upon the exercise of stock options which
will be granted to Ms. Crane upon completion of this offering.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of our capital stock and provisions of our
certificate of incorporation and our bylaws are summaries thereof and are
qualified by reference to our certificate of incorporation and our bylaws,
copies of which have been filed with the Commission as exhibits to our
registration statement, of which this prospectus forms a part.
Upon the completion of this offering, our capital stock will consist of:
<TABLE>
<CAPTION>
PAR VALUE
TYPE OF CAPITAL STOCK AUTHORIZED PER SHARE
- -------------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Common.................................................................... 50,000,000 $ 0.01
Preferred Stock........................................................... 1,000,000 no par value
</TABLE>
COMMON STOCK
The holders of the common stock are entitled to receive dividends and other
distributions in cash, stock or property from our assets that are legally
available for distribution, subject to any dividend preferences that may be
attributable to preferred stock that may be outstanding. The form, amount and
timing of dividends will be determined by our board of directors.
Holders of the common stock may vote on all matters submitted for a vote of
our stockholders. Each share of common stock is entitled to one vote. Cumulative
voting is not authorized by our certificate of incorporation.
Voting may be done by written consent when one or more stockholders have
enough votes to approve a particular issue by themselves. There are no
preemptive, conversion, redemption or sinking fund provisions applicable to the
common stock. Each outstanding share of common stock is, and all shares of
common stock to be outstanding upon completion of this offering will be, duly
and validly issued, fully paid and non-assessable. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in the assets available for distribution after the claims of
all senior security holders and creditors are satisfied.
PREFERRED STOCK
Our board of directors, without further action by the stockholders, is
authorized to issue an aggregate of 1,000,000 shares of preferred stock in one
or more series. The issuance of preferred shares is subject to restrictions
under Delaware law. The board may fix the rights, preferences and privileges of
the preferred stock, along with any limitations or restrictions. The preferred
stock could have voting or conversion rights that could adversely affect the
voting power or other rights of common stock holders. The issuance of preferred
stock could also have the effect, under certain circumstances, of delaying,
deferring or preventing a change of control of Webstakes.com. We currently have
no plans to issue any shares of preferred stock.
COMMON STOCK WARRANTS
As of the date of this prospectus, we have issued and outstanding warrants
to purchase a total of 221,683 shares of common stock, at an exercise price of
$6.00 per share. The warrants contain anti-dilution provisions providing for
adjustments of the exercise price and the number of shares of common stock
underlying the warrants upon the occurrence of any recapitalization,
reclassification, stock dividend, stock split, stock combination or similar
transaction. The warrants expire on March 24, 2009.
DELAWARE ANTI-TAKEOVER LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations, under certain circumstances, from engaging in a "business
combination" with:
o a stockholder who owns 15% or more of our outstanding voting stock
(otherwise known as an "interested stockholder"),
42
<PAGE>
o an affiliate of an interested stockholder or
o an associate of an interested stockholder,
for three years following the date that the stockholder became an "interested
stockholder." A "business combination" includes a merger or sale of more than
10% of our assets.
However, the above provisions of Section 203 do not apply if:
o our board approves the transaction that made the stockholder an
"interested stockholder," prior to the date of that transaction;
o after the completion of the transaction that resulted in the
stockholder becoming an "interested stockholder," that stockholder
owned at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding shares owned by persons who are
both Webstakes.com officers and directors; or
o on or subsequent to the date of the transaction, the business
combination is approved by our board and authorized at a meeting of
our stockholders by an affirmative vote of at least two-thirds of
the outstanding voting stock not owned by the "interested
shareholder."
This statute could prohibit or delay mergers or other change in control
attempts, and thus may discourage attempts to acquire us.
CLASSIFIED BOARD OF DIRECTORS
Our bylaws divide our board of directors into three classes, with regular
three-year staggered terms and initial terms of three years for class III
directors, two years for class II directors and one year for class I directors.
This could prevent a party who acquires control of the majority of the
outstanding voting stock from immediately obtaining control of our board of
directors.
OUR BYLAWS
Our bylaws provide that special meetings of our stockholders may only be
called by our president, board or the holders of at least one-fifth of all the
shares of any class outstanding and entitled to vote. This may have the effect
of delaying or preventing a change in control.
Our bylaws provide that the vote of a majority of all our directors or a
vote of the majority of the outstanding stock entitled to vote is required to
amend or repeal our bylaws.
Our bylaws provide that any action that may be taken at a meeting of the
stockholders may be taken without a meeting if:
o the action is authorized by the unanimous written consent of all
stockholders entitled to vote at a meeting for these purposes; or
o the action is authorized by written consent of that number of
stockholders entitled to vote on the issue as would be required to
approve the action at a meeting of stockholders attended by all
stockholders entitled to vote upon the issue.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Certificate of Incorporation, as amended, includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to Webstakes.com or
its stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under the section 174 of the Delaware General Corporation Law
regarding unlawful dividends and stock purchases; or
o for any transaction from which the director derived an improper
personal benefit.
These provisions are permitted under Delaware law.
43
<PAGE>
Our bylaws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
o we may indemnify our other employees and agents to the same extent
that we indemnify our officers and directors, unless otherwise
required by law, our Amended and Restated Certificate of
Incorporation, our Bylaws or agreements; and
o we must advance expenses, as incurred, to our directors and
executive officers in connection with a legal proceeding to the
fullest extent permitted by Delaware Law, subject to very limited
exceptions.
We have obtained directors' and officers' insurance for our directors,
officers and some employees for specified liabilities.
The limitation of liability and indemnification provisions in our Amended
and Restated Certificate of Incorporation and Bylaws may discourage stockholders
from bringing a lawsuit against directors for breach of their fiduciary duty.
They may also have the effect of reducing the likelihood of derivative
litigation against directors and officers, even though an action of this kind,
if successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholder's investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions. However, we believe that these indemnification
provisions are necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market or
the perception that these sales could occur could adversely affect prevailing
market prices of our common stock. They could also adversely affect our ability
to raise capital at a time and on terms favorable to us.
Upon completion of this offering, we will have outstanding a total of
shares of our common stock. Of these shares, all of the shares sold
in this offering will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act. The
remaining shares of common stock held by existing stockholders are
"restricted securities," as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. These rules are summarized below.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares will be available for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ------------------------------------------ -----------------------------------------------------------
<S> <C>
3,999,576 After 180 days from the date of this prospectus (subject to
volume limitations)
6,666,667 After 180 days and upon the filing of a registration
statement to register for resale shares of common stock.
1,015,100 At various times after 180 days from the date of this
prospectus.
</TABLE>
44
<PAGE>
LOCK-UP AGREEMENTS
Our officers and directors, holders of 11,656,343 shares of our common
stock and holders of warrants to purchase 221,683 shares of our common stock,
have agreed not to sell or otherwise dispose of any shares of our common stock
for a period of 180 days after the date of this prospectus, without the prior
written consent of Bear, Stearns & Co. Inc. See "Underwriting."
RULE 144
In general, under Rule 144, a person who has beneficially owned shares of
our common stock for at least one year can sell within any three-month period a
number of shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding, which
will equal approximately shares immediately after this
offering; or
o the average weekly trading volume during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to the
sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, can sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, directors, consultants or
advisors who purchase shares from us in connection with a compensatory stock
option plan or other written agreement are eligible to resell these shares
90 days after the date of this offering in reliance on Rule 144, without
compliance with certain restrictions contained in Rule 144, including the
holding period.
REGISTRATION RIGHTS
After this offering, holders of 6,666,667 shares of common stock will be
entitled to require us to register their shares for public sale, pursuant to a
Registration Rights Agreement between us and the purchasers of the class B
mandatorily redeemable convertible preferred stock (who will become holders of
common stock after this offering). Holders of 25% of these shares (and any
people who purchase shares of common stock from these holders in a private
transaction) have the right to require us to file up to three registration
statements to allow for the public sale of their common stock. The number of our
shares subject to these registration rights which may be registered in a
non-underwritten offering is limited to 15% of the number of shares of our
common stock outstanding at the time of that registration. This 15% limit may be
exceeded if a nationally-recognized investment bank determines that a greater
number of shares may be registered without a material adverse effect on the
market for our securities. These registration statements must be maintained
effective for up to 180 days. In addition, these holders (and their transferees)
and the holder of warrants to purchase 221,683 shares of common stock have the
right to include their shares in any registered offering of our securities
(other than in connection with some corporate transactions and employee benefit
plans). We are required to pay most of the expenses related to these
registrations, excluding underwriters' commissions and discounts.
We intend to file registration statements to register shares of common
stock reserved for issuance under our Stock Option Plan and the 1999 Equity
Compensation Plan. These registration statements will permit the resale of
shares issued under these plans by non-affiliates in the public market without
restriction, subject to the lock-up agreements.
45
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., ING Barings LLC, Thomas Weisel Partners LLC and Wit Capital Corporation
are acting as representatives, have severally agreed with us, subject to the
terms and conditions of the underwriting agreement, to purchase from us the
aggregate number of shares of common stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Bear, Stearns & Co. Inc....................................................................
ING Barings LLC............................................................................
Thomas Weisel Partners LLC.................................................................
Wit Capital Corporation....................................................................
---------
Total.................................................................................
---------
---------
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. We have agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act, and
where such indemnification is unavailable, to contribute to payments that the
underwriters may be required to make in respect of such liabilities. 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.
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional shares
to cover such sales from us. The underwriters may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in the same proportion as set forth in the table
above.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to of the shares of common stock to be sold in
this offering for sale to our employees and directors and other persons
designated by us. The number of shares available for sale to the general public
will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered hereby.
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
We, all of our directors and officers and other stockholders holding an
aggregate of 10,641,243 shares of our common stock have agreed that, subject to
certain exceptions, for a period of 180 days from the date of this prospectus,
without the prior written consent of Bear, Stearns & Co. Inc., will not,
directly or indirectly, (i) issue, sell, offer or agree to sell, grant any
option for the sale of, pledge, make any short sale, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act
or otherwise dispose of any shares of our common stock (or securities
convertible into, exercisable for or exchangeable for our common stock) or
(ii) enter into any swap, derivative transaction or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of the transactions described in
clause (i) or (ii) above is to be settled by delivery of our common stock or
those other securities, in cash or otherwise. This restriction does not apply to
bona fide gifts or, in the case of stockholders who are corporations, limited
liability companies or partnerships, transfers to these stockholders'
affiliates, shareholders, members or partners, provided that in each case, the
recipients agree in writing to abide (and in the case of non-individuals certify
in writing that they have always abided since the original date of the
agreement) by these restrictions. In addition, this restriction does not apply
to shares of our common stock purchased in the public market after this
offering.
46
<PAGE>
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per Share.................................................................... $ $
Total........................................................................
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to $ per share from the public offering price. Any such securities dealers may
resell any shares purchased from the underwriters to certain other brokers or
dealers at a discount of up to $ per share from the public offering price. If
all the shares are not sold at the offering price, the representative may change
the offering price and the other selling terms.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiations between us and the representatives of the
underwriters. Among the factors to be considered in those negotiations will be:
o Our results of operations in recent periods;
o Estimates of our prospects and the industry in which we compete;
o An assessment of our management;
o The general state of the securities markets at the time of this
offering; and
o The prices of similar securities of generally comparable companies.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol IWIN. However, there can be no assurance
that an active or orderly trading market will develop for the common stock or
that the common stock will trade in the public markets subsequent to this
offering at or above the initial offering price.
In connection with this offering, certain persons participating in this
offering may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
this offering. Stabilizing transactions consist of certain bids or purchases
made for the purpose of preventing or retarding a decline in the market price of
the common stock while this offering is in progress. The underwriters also may
impose a penalty bid. This occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the
representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
We estimate that the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $ .
A number of shares in this offering have been reserved for sale by Wit
Capital to its customers through the Internet. A prospectus in electronic format
is being made available on a special web site established by Wit Capital for
this offering.
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 LLC has been named as a lead or co-manager on 37
filed public offerings of equity securities, of which 17 have been completed,
and has acted as a syndicate member in an additional 10 public offerings of
equity securities.
47
<PAGE>
Thomas Weisel Partners LLC does not have any material relationship with us or
any of our officers, directors or controlling persons, except with respect to
its contractual relationship with us under the underwriting agreement entered
into in connection with this offering.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 105 public offerings. Except for its
participation as a representative in this offering, Wit Capital has no
relationship with us or any of our founders or significant stockholders.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Reed Smith Shaw & McClay LLP, Philadelphia, Pennsylvania and for
the underwriters by Proskauer Rose LLP, New York, New York.
EXPERTS
The financial statements of Webstakes.com as of December 31, 1998 and 1997
and for each of the two years in the period ended December 31, 1998 and the
period from January 8, 1996 (inception) to December 31, 1996 included in this
prospectus have been included in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. With respect to references made in this prospectus to any contract
or other document, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may review a copy of the registration statement
at the SEC's public reference room in Washington, D.C., and at the SEC's
regional offices in Chicago, Illinois and New York, New York. Please call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. Our SEC filings and the registration statement can also be
reviewed by accessing the SEC's Internet site at http://www.sec.gov. As a result
of this offering, we will become subject to the information and reporting
requirements of the Securities Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. Upon
approval of the common stock for the quotation on the Nasdaq National Market,
such reports, proxy and information statements and other information may also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
This prospectus includes statistical data regarding Internet usage and the
advertising industry which were obtained from industry publications, including
reports generated by International Data Corporation, the Direct Marketing
Association, Forrester Research, Inc. and Promo Magazine. These industry
publications generally indicate that they have obtained information from sources
believed to be reliable, but they do not guarantee the accuracy and completeness
of such information. While we believe those industry publications to be
reliable, we have not independently verified such data. We also have not sought
the consent of any of these organizations to refer to their reports in this
prospectus.
48
<PAGE>
WEBSTAKES.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................................................ F-2
Balance Sheets at December 31, 1997 and 1998 and the six months ended
June 30, 1999 (unaudited).............................................................................. F-3
Statements of Operations for the period from January 8, 1996 (inception) to December 31, 1996,
the years ended December 31, 1997 and 1998 and the six months ended June 30, 1998 (unaudited) and June
30, 1999 (unaudited)................................................................................... F-4
Statements of Stockholders' Equity (Deficit) for the period from January 8, 1996 (inception) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the six months ended June 30, 1999
(unaudited)............................................................................................ F-5
Statements of Cash Flows for the period from January 8, 1996 (inception) to December 31, 1996, the years
ended December 31, 1997 and 1998 and for the six months ended June 30, 1998 (unaudited) and June 30,
1999 (unaudited)....................................................................................... F-6
Notes to Financial Statements............................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Webstakes.com, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of Webstakes.com, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1998, and the period
from January 8, 1996, (inception) to December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
February 19, 1999
1301 Avenue of the Americas
New York, New York
F-2
<PAGE>
WEBSTAKES.COM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ JUNE 30,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 85,365 $ 17,573 $ 12,973,305
Accounts receivable, less allowance of $12,700, $125,000
and $314,714 (unaudited)............................................. 113,336 615,230 803,536
Prepaid expenses and other current assets.............................. 2,751 125,174 3,140,319
--------- ----------- -------------
Total current assets................................................. 201,452 757,977 16,917,160
--------- ----------- -------------
Fixed assets, net........................................................ 232,858 437,759 862,295
Other assets............................................................. 41,708 -- 531,104
--------- ----------- -------------
Total assets......................................................... $ 476,018 $ 1,195,736 $ 18,310,559
--------- ----------- -------------
--------- ----------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................................... $ 155,257 $ 221,745 $ 571,718
Accrued liabilities.................................................... 22,081 169,136 591,537
Deferred revenues...................................................... 23,333 117,297 161,720
Capital lease obligations.............................................. -- 31,764 80,965
Notes payable-related party, current portion........................... 150,000 1,342,222 66,667
--------- ----------- -------------
Total current liabilities............................................ 350,671 1,882,164 1,472,607
--------- ----------- -------------
Capital lease obligation, net of current portion....................... -- -- 133,005
Deferred gain on sale of assets........................................ -- -- 20,776
Notes payable--related party, net of current portion................... -- 66,667 33,333
--------- ----------- -------------
Total liabilities.................................................... 350,671 1,948,831 1,659,721
--------- ----------- -------------
Class B mandatorily redeemable convertible preferred stock--par value
$.01, no shares authorized issued and outstanding at December 31, 1997
and 1998, 6,700,000 authorized, 6,666,667 shares issued and outstanding
at June 30, 1999 (unaudited), respectively............................. -- -- 40,000,000
Stockholders' equity (deficit):
Common stock--par value $.01, 50,000,000 shares authorized, 4,999,176,
5,714,184 and 3,999,576 shares issued and outstanding at
December 31, 1997, 1998 and June 30, 1999 (unaudited),
respectively......................................................... 49,992 57,142 39,996
Additional paid-in capital............................................. 526,914 1,140,624 (16,977,147)
Accumulated deficit.................................................... (447,934) (1,861,977) (6,254,735)
Deferred compensation.................................................. (3,625) (88,884) (157,276)
--------- ----------- -------------
Total stockholders' equity (deficit)................................. 125,347 (753,095) (23,349,162)
--------- ----------- -------------
Total liabilities, redeemable preferred stock and stockholders'
equity (deficit)................................................ $ 476,018 $ 1,195,736 $ 18,310,559
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 8, 1996
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
--------------- -------------------------- --------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $ 79,584 $1,618,277 $ 4,798,893 $ 2,262,454 $ 3,054,463
Operating expenses:
Product development................. 59,073 181,260 548,818 221,508 235,634
Sales and marketing................. 124,754 1,090,721 3,618,557 1,490,946 4,193,595
General and administrative.......... 108,665 535,963 1,969,214 773,359 2,273,234
Non-cash financial advisory
services......................... -- -- -- -- 796,691
----------- ---------- ------------ ----------- -----------
Total operating expenses......... 292,492 1,807,944 6,136,589 2,485,813 7,499,154
----------- ---------- ------------ ----------- -----------
Loss from operations................ (212,908) (189,667) (1,337,696) (223,359) (4,444,691)
Interest income (expense), net........ (8,187) (37,172) (76,347) (24,845) 51,933
----------- ---------- ------------ ----------- -----------
Net loss.............................. $ (221,095) $ (226,839) $ (1,414,043) $ (248,204) $(4,392,758)
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Basic and diluted net loss per share.. $ (0.06) $ (0.05) $ (0.27) $ (0.05) $ (1.10)
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Weighted average shares of common
stock used in computing basic and
diluted net loss per share.......... 3,999,576 4,278,916 5,181,356 4,999,176 3,999,576
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Pro forma basic and diluted net loss
per share (see Note 2).............. -- -- $ (0.12) -- $ (0.41)
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Shares of common stock used in
computing pro forma basic and
diluted net loss per share (see Note
2).................................. -- -- 11,848,023 -- 10,666,243
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL DEFERRED ACCUMULATED
SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION DEFICIT TOTAL
---------- ------- --------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders at
January 8, 1996 (inception)................. 3,999,576 $39,996 $ (9,967) $ 30,029
Net and comprehensive loss................ $ (221,095) (221,095)
---------- ------- ------------- ----------- ------------
Balance December 31, 1996..................... 3,999,576 39,996 (9,967) (221,095) (191,066)
---------- ------- ------------- ----------- ------------
---------- ------- ------------- ----------- ------------
Debt to equity conversion at book value plus
interest.................................. 999,600 9,996 533,256 543,252
Stock options to non-employees.............. 3,625 $ (3,625) --
Net and comprehensive loss................ (226,839) (226,839)
---------- ------- ------------- ---------- ----------- ------------
Balance December 31, 1997..................... 4,999,176 49,992 526,914 (3,625) (447,934) 125,347
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
Debt to equity conversion at book value plus
interest.................................. 715,008 7,150 524,826 531,976
Amortization of deferred compensation....... 3,625 3,625
Stock options to non-employees.............. 88,884 (88,884) --
Net and comprehensive loss................ (1,414,043) (1,414,043)
---------- ------- ------------- ---------- ----------- ------------
Balance December 31, 1998..................... 5,714,184 57,142 1,140,624 (88,884) (1,861,977) (753,095)
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
Repurchase of common stock (unaudited)...... (1,714,608) (17,146) (18,982,854) (19,000,000)
Adjustment of deferred compensation to
non-employees to current fair value
(unaudited)............................... 177,293 (177,293) --
Stock options to non-employees (unaudited).. 687,790 (687,790) --
Amortization of deferred compensation
(unaudited)............................... 796,691 796,691
Net and comprehensive loss (unaudited).... (4,392,758) (4,392,758)
---------- ------- ------------- ---------- ----------- ------------
Balance June 30, 1999 (unaudited)............. 3,999,576 $39,996 $ (16,977,147) $ (157,276) $(6,254,735) $(23,349,162)
---------- ------- ------------- ---------- ----------- ------------
---------- ------- ------------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WEBSTAKES.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 8, 1996
(INCEPTION) TO SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, JUNE 30,
1996 ------------------------- ---------------------------
1997 1998 1998 1999
--------------- ---------- ------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $ (221,095) $ (226,839) $ (1,414,043) $ (248,204) $ (4,392,758)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 7,471 37,661 147,515 59,866 176,808
Bad debt expense.......................... 2,499 11,829 208,604 38,431 215,805
Non-cash financial advisory services
expense................................ -- -- 3,625 -- 796,691
Interest payable converted into
common stock........................... -- 33,256 24,826 -- 35,000
Changes in operating assets and liabilities:
Increase in accounts receivable........... (55,480) (72,184) (710,498) (277,035) (404,111)
(Increase) in prepaid expenses and other
current assets......................... -- (2,751) (122,423) (77,225) (3,015,145)
(Increase) decrease in other assets....... -- (41,708) 41,708 33,871 (531,104)
Increase in accounts payable.............. 48,161 107,096 66,488 10,891 349,973
Increase in accrued liabilities........... 16,934 5,147 147,055 17,279 422,401
Increase in deferred revenue.............. -- 23,333 93,964 93,595 44,423
----------- ---------- ------------ ----------- -------------
NET CASH USED IN OPERATING ACTIVITIES........... (201,510) (125,160) (1,513,179) (348,531) (6,302,017)
----------- ---------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets...................... (64,934) (203,060) (301,444) (166,092) (509,170)
Proceeds from sale of fixed assets............ -- -- -- -- 157,292
----------- ---------- ------------ ----------- -------------
NET CASH USED IN INVESTING ACTIVITY............. (64,934) (203,060) (301,444) (166,092) (351,878)
----------- ---------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable....... 260,000 390,000 1,820,000 466,667 120,000
Principal payments on notes payable-related
party....................................... -- -- (61,111) -- (38,889)
Proceeds from issuance of common stock........ 30,029 -- -- -- --
Principal payments on capital lease
obligations................................. -- -- (12,058) (58) (46,484)
Proceeds from issuance of class A mandatorily
redeemable convertible preferred stock...... -- -- -- -- 3,575,000
Proceeds from issuance of class B mandatorily
redeemable convertible preferred stock...... -- -- -- -- 40,000,000
Redemption of class A mandatorily redeemable
convertible preferred stock and repurchase
of common stock............................. -- -- -- -- (24,000,000)
----------- ---------- ------------ ----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 290,029 390,000 1,746,831 466,609 19,609,627
----------- ---------- ------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD.. 23,585 61,780 (67,792) (48,014) 12,955,732
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.. -- 23,585 85,365 85,365 17,573
----------- ---------- ------------ ----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $ 23,585 $ 85,365 $ 17,573 $ 37,351 $ 12,973,305
----------- ---------- ------------ ----------- -------------
----------- ---------- ------------ ----------- -------------
CASH PAID DURING THE PERIOD FOR INTEREST........ $ 18,530 $ 10,247 $ 11,157
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, 1998 and the six months ended June 30, 1999 (unaudited),
certain convertible notes and interest were converted into common stock
and preferred stock (see Note 8).
During 1998 and the six months ended June 30, 1999, the Company entered
into capital leases for computer equipment with a cost of $43,822 and
$228,692 (unaudited), respectively.
Barter revenue for the period January 8, 1996 to December 31, 1996, the
years ended December 31, 1997 and 1998 was $0, $484,844, and $2,039,144,
and for the six months ended June 30, 1998 and 1999 was $944,907
(unaudited), and $876,892 (unaudited), respectively.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Webstakes.com, Inc. (the "Company"), formerly Netstakes, Inc., was
incorporated and commenced operations in the State of New York on January 8,
1996 and was reincorporated in the State of Delaware on June 5, 1996. The period
from January 8, 1996 to December 31, 1996 is referred to as the Inception
Period. The Company is an online sweepstakes promotion company. The Company
integrates sweepstakes, contests and similar promotional events with direct
marketing tools and a proprietary database. The Company makes promotions
available without charge to consumers through its web site, webstakes.com,
clients' web sites and consumers' personal home pages. The Company generates
revenues through the sale of promotion sponsorships and services that allow
clients to cost-effectively identify and communicate with potential customers,
increase sales and foster brand awareness.
The Company has sustained net losses and negative cash flows from
operations since its inception. The Company's ability to meet its obligations in
the ordinary course of business is dependent upon its ability to establish
profitable operations or raise additional financing through public or private
equity financings, collaborative or other arrangements with corporate sources,
or other sources of financing to fund operations. During 1999, the Company has
raised additional financings through the issuance of class A mandatorily
redeemable convertible preferred stock (the "class A") and class B mandatorily
redeemable convertible preferred stock (the "class B"). Management believes that
its current funds will be sufficient to enable the Company to meet its planned
expenditures through at least June 2000. If anticipated operating results are
not achieved and additional financings are not available on terms acceptable to
the Company, management has the intent and believes it has the ability to delay
or reduce expenditures.
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by companies in
the new and rapidly evolving markets for Internet products and services. These
risks include the failure to develop and extend the Company's online service
brand, the rejection of the Company's services by web consumers, vendors and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its online service, as well as other risks and uncertainties. In the
event that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
2. SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1999 and 1998 are unaudited and do not include all disclosures required
by generally accepted accounting principles. In the opinion of management, this
unaudited information has been prepared substantially on the same basis as the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for any future period.
REVENUE RECOGNITION
Principally all of the Company's historical revenues have been derived from
promotion services. Promotion services revenues are derived principally from
contracts in which the Company typically guarantees a minimum number of
impressions, or times that the client's name, logo or other identifier appears
in pages viewed by visitors to webstakes.com, and/or times that visitors are
delivered to the client's web site, over a specified period of time for a fixed
fee. The contracts typically include cancellation clauses ranging from 30 to 60
days. Promotion services revenues are recognized ratably in the period in which
the promotion is run, provided that no significant Company obligations remain.
To the extent that minimum guarantees are not met, the Company defers
recognition of the corresponding revenues until the guaranteed minimums are
achieved. Promotion services revenues were approximately 100%, 95% and 98% of
total revenues for the Inception Period and the years ended December 31, 1997
and 1998, respectively. Promotion services revenues were approximately 96%
(unaudited) and 100% (unaudited) of total revenues for the six months ended
June 30, 1998 and 1999, respectively.
F-7
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Included in revenues are barter revenues from the exchange by the Company
with counterparties of promotion services for reciprocal advertising, or
applicable goods and services. Barter revenues are recorded as promotion service
revenues at the lower of the estimated fair value of goods and services received
or promotion services provided, and are recognized when the counterparty's
promotions are run by the Company. In cases where there is not objective
evidence of fair market value, no revenue is recognized. Barter revenues
represented 0%, 30% and 42% of total revenues for the Inception Period and the
years ended December 31, 1997 and 1998, respectively. Barter revenues
represented 42% (unaudited) and 29% (unaudited) of total revenues for the six
months ended June 30, 1998 and 1999, respectively. Barter expense is recognized
when the Company's promotions are run on the counterparty's web sites, which is
typically in the same period the related barter revenue is recognized.
CONCENTRATION OF CREDIT RISK
In 1998, no one customer accounted for greater than 10% of total revenues
or 10% of net accounts receivable. Two customers individually accounted for 12%
and 19% of total revenues in the Inception Period and one customer accounted for
35% of total revenues in 1997. In the Inception Period, 1997 and 1998, revenues
from the Company's five largest customers accounted for 56%, 53% and 24% of
total revenues, respectively. At December 31, 1996 and 1997, the receivable
balances from its two largest customers amounted to approximately 36% and 37%,
respectively, of the Company's net accounts receivable balance. For the six
months ended June 30, 1999, revenues from the Company's five largest customers
accounted for 24% (unaudited) of total revenues. At June 30, 1999 one customer
individually accounted for 11% (unaudited) of the net accounts receivable
balance.
FIXED ASSETS
Depreciation of computer and office equipment and furniture and fixtures is
provided for using the straight-line method over their estimated useful lives of
three years to five years. Amortization of leasehold improvements is provided
for over the lesser of the term of the related lease or the estimated useful
life of the improvement. Accumulated amortization includes the amortization of
assets recorded under capital leases. The cost of additions and betterments are
capitalized, and repairs and maintenance costs are charged to operations in the
periods incurred. Depreciation and amortization expense has been included in
general and administrative expense.
INCOME TAXES
The Company recognizes deferred taxes by the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax basis of assets and liabilities at enacted statutory tax rates in effect for
the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when it is more likely than not that deferred tax assets will not be
realized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market accounts and all highly
liquid investments purchased with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, accounts payable and accrued liabilities, approximate
fair value because of their short maturities. The carrying amount of the
Company's note payable approximates the fair value of such instruments based
upon management's best estimate of interest rates that would be available to the
Company for
similar debt obligations at December 31, 1996, 1997 and 1998.
F-8
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Significant
estimates and assumptions made by the Company include those related to the
useful lives and recoverability of fixed assets, recoverability of deferred tax
assets, allowance for doubtful accounts and the fair value of products and
services exchanged in barter transactions.
NET LOSS PER SHARE
Basic loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted loss per share is computed
using the weighted-average number of common and common stock equivalent shares
outstanding during the period. Common equivalent shares are excluded from the
computation if their effect is antidilutive.
As the Company reported net losses from inception to June 30, 1999, all
66,228 and 114,009 of the options outstanding at December 31, 1997 and 1998,
respectively, and 114,009 (unaudited) and 1,126,100 (unaudited) of the options
outstanding at June 30, 1998 and 1999, respectively, were antidilutive and
therefore, there were no reconciling items between basic and diluted loss per
share for the years then ended. There were no options outstanding as of
December 31, 1996.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common stock
outstanding giving effect for the one for one conversion of all 6,666,667 shares
of the Class B to common stock.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). This statement requires companies to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The Company adopted SFAS No. 130 in fiscal year 1998. There was no difference
between net income and comprehensive income for the Inception Period and the
years ended December 31, 1997 and 1998, and for the six months ended June 30,
1998 (unaudited) and 1999 (unaudited).
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which established
standards for reporting information about operating segments in annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 was adopted by
the Company at December 31, 1998. Adoption of SFAS No. 131 had no impact on the
Company's results of operations, financial position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard is not expected
to have a significant impact on the Company's results of operations, cash flows
or financial position.
F-9
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In February 1998, FASB issued SFAS No. 132, "Employees' Disclosures about
Pension and Other Postretirement Benefits" ("SFAS No. 132"), which revises
employers' disclosures about pension and other postretirement benefit plans.
SFAS No. 132 does not change the measurement or recognition of those plans. SFAS
No. 132 is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 132 has not had an impact on the Company's results of
operations, financial position or cash flows.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 is
tentatively effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of this statement to
have a significant impact on the Company's results of operations, cash flows or
financial position.
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and office equipment........................... $266,264 $ 542,144 $ 615,365
Computer software costs................................. -- -- 196,190
Furniture and fixtures.................................. 11,275 34,307 61,639
Leasehold improvements.................................. 451 10,133 10,133
Capital leases.......................................... -- 43,822 272,514
-------- --------- ---------
277,990 630,406 1,155,841
Less accumulated depreciation and amortization........ (45,132) (192,647) (293,546)
-------- --------- ---------
$232,858 $ 437,759 $ 862,295
-------- --------- ---------
-------- --------- ---------
</TABLE>
Depreciation and amortization of fixed assets was approximately $7,471,
$37,661 and $147,515 for the Inception Period and the years ended December 31,
1997 and 1998, respectively, and $59,866 (unaudited) and $176,808 (unaudited)
for the six months ended June 30, 1998 and 1999, respectively.
Computer Software Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specified costs and
amortization of such costs. The Company adopted SOP 98-1 during the first
quarter of 1999. Costs incurred during the preliminary project stage are
expensed as incurred. Computer software costs incurred during the application
development stage are capitalized. Typically, these costs relate to internal
payroll costs of employees directly associated with the development of the
internal use computer software. Amortization commences upon implementation of
the software and is amortized by the straight-line method over the shorter of
three years or the remaining useful life, typically twelve to eighteen months.
4. RELATED-PARTY TRANSACTIONS (SEE NOTE 8 AND "PRIVATE PLACEMENT" UNDER NOTE 11
(UNAUDITED))
The Company entered into advertising transactions with a stockholder in the
amounts of $4,855, $81,239 and $35,070, for the Inception Period and the years
1997 and 1998, respectively.
F-10
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN:
Stock Option Plan
In 1997, the Company's Board of Directors and stockholders adopted the
Company's Stock Option Plan (the "Plan"). The Plan provides for the granting, at
the discretion of the Stock Option Committee of the Board of Directors (the
"SOC"), of: (i) options that are intended to qualify as incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, as amended (the
"Code"), to employees and (ii) options not intended to so qualify to employees,
officers, consultants and directors. The total number of shares of common stock
for which options may be granted under the Plan is 250,000.
The exercise price of all stock options granted under the Plan is
determined by the SOC at the time of grant. The maximum term of each option
granted under the Plan is 10 years from the date of grant. Options generally
vest ratably over a four year period.
As of December 31, 1997 and 1998, an aggregate of 183,772 and 135,991
shares were available for future grants under the Plan, respectively.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock--Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock option issuances. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", whereby compensation expense is recognized ratably over the
vesting period. Had compensation cost for the Company's stock options issued at
the fair value of the Company's stock been determined based on the fair value of
the stock options at the grant date for awards in 1998 consistent with the
provisions of SFAS No. 123, the Company's net loss would have been adjusted to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Net loss
As reported............................................... $1,414,043
Pro forma................................................. $1,426,552
Net loss per share
As reported--basic and diluted............................ $ (0.27)
Pro forma--basic and diluted.............................. $ (0.28)
</TABLE>
The fair value of each option grant is estimated using the minimum value
method of the Black-Scholes option pricing model which assumes no volatility.
The values were obtained using assumptions which were derived using information
supplied by the Company. Changes in the information would affect the assumptions
and the option prices derived from those assumptions. The weighted average
assumptions used for grants made in 1998 were as follows: Risk free interest
rate 5.6%; Expected option life 7 years; Dividend yield 0.0%. As the fiscal year
1997 option grants were made on December 31, 1997, no compensation cost would
have resulted for the fiscal year.
In December 1997, the Company issued options to non-employee consultants to
purchase up to 27,028 shares of the Company's common stock, which vest ratably
over two years. In accordance with Emerging Issues Task Force Abstract
No. 96-18, "Accounting for Equity Investments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services", the
Company is recording the value of the services being received based on the fair
value of the options provided or the services received which ever is more
reliably measured. The fair value of these options has been estimated using the
Black-Scholes pricing model and has been recorded as deferred compensation and
is being amortized as non-cash financial advisory services expense over the
vesting period. Final measurement will occur on the vesting date.
F-11
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN:--(CONTINUED)
The following table summarizes the activity in options under the plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FAIR VALUE/EXERCISE
OPTIONS/ PRICE PER
SHARES OPTION/PER SHARE
--------- -------------------
<S> <C> <C>
Outstanding, January 1, 1997........................................... -- $ --
Granted................................................................ 66,228 $ 1.16
Outstanding, December 31, 1997......................................... 66,228 $ 1.16
Granted................................................................ 73,081 $ 3.02
Forfeited.............................................................. (25,300) $ 2.82
Outstanding, December 31, 1998......................................... 114,009 $ 1.98
Granted (unaudited).................................................... 1,014,891 $ 7.17
Forfeited.............................................................. (2,800) $ 16.06
Outstanding, June 30, 1999 (unaudited)................................. 1,126,100 $ 6.63
</TABLE>
No options were exercisable at December 31, 1997. As of December 31, 1998,
23,566 options were exercisable with a weighted average per share fair
value/exercise price of $1.19.
At December 31, 1997 and 1998, the weighted average remaining contractual
life of the options outstanding was approximately 10 years and 9.47 years,
respectively.
6. DEFINED CONTRIBUTION PLAN
The Company began sponsoring a defined contribution plan for its employees
which was effective January 1, 1998. Under the 401(K) Savings Plan (the "Plan"),
employees are allowed to contribute up to 15% of their salary to the Plan, as
defined. The Company makes voluntary contributions to the Plan matching 50% of
the first 6% of employee contributions, which vest over a period of 4 years at
25% per year starting in the second year of service. The total Company
contribution in 1998 was $24,556.
7. COMMITMENTS
LEASES:
The Company leases office space in New York and California under
non-cancelable operating leases expiring at various dates through 2002. The
following is a schedule of future minimum lease payments under non-cancelable
operating leases as of December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
- --------------------------------------------------------------
<S> <C>
1999.......................................................... $120,799
2000.......................................................... 79,250
2001.......................................................... 79,568
2002.......................................................... 81,954
--------
$361,571
--------
--------
</TABLE>
Rent expense was $5,332, $16,439 and $90,693 for the periods ended December
31, 1996, 1997 and 1998, respectively.
The Company leases equipment under capital lease agreements which expire in
fiscal 1999. At December 31, 1998, future minimum lease payments due under
capital leases, together with the present
value of such payments is $33,910, less $2,146 representing interest.
8. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY
In July 1996, the Company entered into a promissory note agreement with a
former holder of class A (the "holder"). Under the agreement, the Company
received $260,000 during 1996 and an additional
F-12
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY--(CONTINUED)
$240,000 during 1997. At the time of issuance, the note was equal to the fair
value of shares received upon conversion. This note, and the interest related
thereto, was converted into 999,600 shares of common stock at $.54 per share in
September 1997.
In September 1997, the Company entered into a promissory note agreement
with the holder. Under the agreement, the Company received $150,000 during 1997
and an additional $350,000 during 1998. At the time of issuance, the note was
equal to the fair value of shares received upon conversion. This note, and the
interest related thereto, was converted into 715,008 shares of common stock at
$.73 per share in September 1998.
In December 1997, the Company entered into a promissory note agreement with
the holder. Under this agreement, the Company received $200,000 during 1998. The
terms of the agreement call for 36 equal monthly payments of principal and
accrued interest. At December 31 1998, minimum future payments due under notes
payable were $72,222 and $66,667 for the years 1999 and 2000, respectively.
In July 1998, the Company entered into an agreement with the holder under
which the holder agreed to purchase at a future date 50,000 shares of class A.
During the course of 1998, and in January 1999, the holder advanced the Company
$1,270,000 and $120,000, respectively, at an interest rate of prime plus 3%. At
the time of issuance, the face amount of the note was equal to the fair value of
shares to be received upon conversion. On January 20, 1999, the outstanding
principal balance of $1,390,000 plus interest was converted into the agreed upon
50,000 class A and the Company received additional cash of $3,575,000 for the
remaining class A. See Note 11, Subsequent Events (unaudited).
9. CAPITAL STOCK
At December 31, 1998, the authorized capital stock of the Company consisted
of 10,000,000 shares of common stock, $.01 par value per share, 50,000 shares of
class A, $100 par value, and 1,000,000 shares of class B preferred stock, $.01
par value. No shares of class A or class B preferred stock were issued or
outstanding at December 31, 1998. The Board of Directors (the "Board") of the
Company has the authority to issue preferred stock in classes with rights and
privileges determined by the Board. Upon formation of the Company, 3,999,576
shares of $.01 par value common stock were issued to the founders.
In 1997, the Board approved a 1 for 1,176 common stock split, which has
been retroactively restated to the inception date. However, the retroactive
restatement of the common stock, $.01 par value, at inception exceeded the
beginning capital infusion of $30,000, resulting in negative additional paid-in
capital at December 31, 1996 of $9,967.
10. INCOME TAXES
There is no current provision for corporate income taxes as the Company
generated a net operating loss for tax purposes.
F-13
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
The components of the net deferred tax asset as of December 31, 1996, 1997
and 1998 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998
-------- ------------ --------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforward.................................... $102,063 $206,169 $757,574
Allowance for doubtful accounts................................ 1,150 5,842 57,500
Accrued expenses............................................... -- -- 33,120
Other.......................................................... -- -- 3,450
-------- -------- --------
Total deferred tax assets................................... 103,213 212,011 851,644
Deferred tax liabilities:
Depreciation and amortization.................................. 2,417 13,869 14,155
-------- -------- --------
Total deferred tax liabilities.............................. 2,417 13,869 14,155
-------- -------- --------
Net deferred tax asset........................................... 100,796 198,142 837,489
Less: valuation allowance........................................ 100,796 198,142 837,489
-------- -------- --------
Deferred tax asset............................................... $ -- $ -- $ --
-------- -------- --------
-------- -------- --------
</TABLE>
The net deferred tax asset has been fully reserved due to the uncertainty
of the Company's ability to realize this asset in the future.
As of December 31, 1998, the Company had available for federal income tax
purposes net operating loss carryforwards of approximately $1,575,000 which
expire in the years 2011 through 2018.
11. SUBSEQUENT EVENTS (UNAUDITED):
PREFERRED STOCK
The class A is convertible into common stock at prices and at times subject
to the provisions set forth in the Company's restated Certificate of
Incorporation. In the event of a public offering of the Company's shares with
gross proceeds and an offering price as defined, the class A will be
automatically converted into common stock at the conversion rates as stated in
the Company's restated Certificate of Incorporation. Convertible preferred
stockholders maintain voting rights equivalent to the number of shares of common
stock on an as if converted basis.
In January 1999, the Company issued 50,000 shares of the class A through a
private placement, in consideration for net proceeds of approximately
$5,000,000, inclusive of the conversion of $1,390,000 of advances plus interest.
The holders of the class A are entitled to receive cumulative or noncumulative
dividends when and if declared by the Board. These dividends are in preference
to any declaration or payment of any dividend on the common stock of the
Company. All or any portion of the preferred shares are redeemable at the option
of the holders at any time after August 1, 2003 for $100 per share (par value),
plus accrued and unpaid dividends at the redemption date.
In the event of liquidation, the holders of the class A have a liquidation
preference over holders of common stock. Such preference is equal to the
original cost of the class of preferred stock, plus any declared or unpaid
dividends.
In June 1999, the Company repurchased all outstanding shares of the
class A. See "Private Placement" below.
WARRANTS
In March 1999, the Company issued to Allen & Co. warrants to purchase
168,350 shares of the Company's common stock, (which was increased in June 1999
to a total of 221,683 shares of common stock), for financial advisory services
provided plus three payments of $100,000 due on June 30, 1999, 2000 and 2001 in
exchange for financial advisory services to be provided from non-employee
consultants. In
F-14
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
accordance with EITF 96-18, the Company is recording the value of the services
being received based on the fair value of the warrants provided or the services
received which ever is more reliably measured. The fair value of these warrants
is estimated using the Black-Scholes pricing model and is expensed over the
vesting period. Final measurement will occur on the vesting date. As the
warrants vested upon issuance, all of the expense was recognized as non-cash
financial advisory service expense in the six months ended June 30, 1999
(unaudited).
LEASE AGREEMENT
In March 1999, the Company entered into a secured financing agreement with
a leasing company for the leasing of equipment in an amount up to $1,000,000.
The lease has a one-year availability period and a term of 36 months, with
interest and principal payable monthly. Through July 1999, the Company has
leased approximately $812,000 of equipment under the lease. These items have
been accounted for as a capital lease.
1999 EQUITY COMPENSATION PLAN
In June 1999, the Company's Board of Directors and stockholders adopted the
Company's Equity Compensation Plan (the "1999 Plan"). The 1999 Plan provides for
the granting, at the discretion of a committee of the board of: (i) options that
are intended to qualify as incentive stock options, within the meaning of
Section 422 of the Code, to employees and (ii) options not intended to so
qualify to employees, officers, consultants and directors. The Company has
2,000,000 shares of common stock authorized for grants under the 1999 Plan.
Options to purchase 43,385 shares of common stock have been granted under
the 1999 Plan.
The exercise price of all stock options granted under the 1999 Plan is
determined by the committee of the board at the time of the grant. The maximum
term of each option granted under the 1999 Plan is 10 years from the date of
grant. Options generally vest ratably over a four-year period.
AUTHORIZED SHARES
In June 1999, the Company's board of directors and stockholders amended the
Company's Certificate of Incorporation to create the class B, $.01 par value and
authorized 6,700,000 shares of the class B. The previously existing class B
preferred stock became the class C preferred stock, no par value. Additionally,
the number of authorized shares of common stock was increased to 50,000,000
shares.
PRIVATE PLACEMENT
In June 1999, the Company completed a private placement and issued
6,666,667 shares of class B, in consideration for net proceeds of $40,000,000.
Subsequently, the Company repurchased all 50,000 shares of class A and 1,714,608
shares of common stock for $24,000,000. The repurchased class A was cancelled.
Each share of the class B is convertible into one share of common stock and
automatically converts at this one for one ratio upon completion of the
Company's IPO assuming net proceeds of at least $20 million and a per share
price of at least $10.50.
At any time after May 1, 2004, the class B is redeemable, at the option of
the holders, at a per share price equal to 125% of the per share purchase price,
adjusted for stock splits, dividends, stock options and the like, plus any
accrued but unpaid dividends as of the redemption date. The class B will be
accreted to its redeemable value over the five-year period from the date of
issuance to the redemption date. The accretion will be recorded as preferred
stockholder's dividend and included in the earnings per share calculation in
accordance with SFAS 128, "Earnings per Share."
As the Class B is only convertible upon closing of the Company's IPO, which
is outside the control of the holder, in accordance with EITF D-60 "Accounting
for the Issuance of Convertible Preferred Stock and Debt Securities with a
Nondetachable Conversion Feature," the Company looked to the commitment date as
the measurement date in determining whether the issuance of the Class B included
a beneficial conversion
F-15
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
feature. It was determined that as the issuance price equaled the common stock
fair value on that date, no beneficial conversion feature exists.
The holders of the class B will be entitled to receive dividends when and
if declared by the Board. These dividends are in preference to any declaration
or payment of any dividend on the common stock of the Company.
In the event of liquidation, the holders of the class B have a liquidation
preference over holders of common stock. Such preference is equal to 125% of the
original cost of the class B, plus any declared or unpaid dividends.
The class B stockholders maintain voting rights equivalent to the number of
shares of common stock on an as if converted basis.
SIGNIFICANT CONTRACTS
In June 1999, the Company entered into a two-year sponsorship agreement
with Excite under which Excite agreed to promote webstakes.com through ad banner
placements and links to webstakes.com and its promotions on Excite.com,
WebCrawler.com and Classified2000.com and through the use of a webstakes.com
personalized front page made available by Excite. As part of this agreement, the
Company received a guarantee of a total number of impressions per year. The fee
to be paid to Excite under this agreement is $5.6 million, $685,000 of which has
been paid, and the balance of which is due 10 days following the completion of
the Company's IPO. At Home Corporation, the parent company of Excite, is a
stockholder of the Company. The fee paid to date is recorded as a prepaid
expense and amortized as the payments are due ratably over the two-year term of
the contract. See "Use of Proceeds."
In June 1999, the Company entered into a services agreement with
MatchLogic, Inc., a wholly owned subsidiary of Excite, pursuant to which
MatchLogic will provide ad serving and targeting, data processing, analysis and
enhancement services to the Company. The term of the agreement is two years. The
fee to be paid to MatchLogic under this agreement is $13.1 million,
$2.5 million of which has been paid and the balance of which is due 10 days
following completion of the Company's IPO. The fee paid to date is recorded as a
prepaid expense and amortized as the payments are due ratably over the two-year
term of the contract. See "Use of Proceeds."
In June 1999, the Company prepaid $800,000 to National Broadcasting
Company, Inc. ("NBC"), for various advertisements that will appear on NBC
television.
Additionally, in June 1999, the Company entered into an agreement with NBC
Multimedia, Inc. whereby the Company will provide online sweepstakes services
for NBC.com and NBC Interactive Neighborhood, in exchange for which the Company
will receive placement on the NBC.com home page. This agreement is being
accounted for in accordance with the Company's barter revenue policy (Note 2).
STOCK OPTION PLAN
In April 1999, the Company's board of directors and shareholders increased
the number of options issuable under the Stock Option Plan to 450,000.
Upon closing of the Company's IPO, each non-employee director will receive
options to purchase up to 16,000 shares of the Company's common stock, which
vest ratably over four years. The Company has accounted for these options in
accordance with APB 25 as the Company has adopted the disclosure only provisions
of FAS 123.
F-16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 15,985
NASD filing fee............................................... 6,250
Nasdaq National Market listing fee............................ *
Printing and engraving expenses............................... 250,000
Legal fees and expenses....................................... 300,000
Accounting fees and expenses.................................. *
Blue Sky fees and expenses.................................... 15,000
Transfer agent fees........................................... *
Miscellaneous fees and expenses............................... *
--------
Total.................................................... $ *
</TABLE>
- ------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors,
officers and certain other persons in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
The Registrant's certificate of incorporation and bylaws provide that, to
the fullest extent permitted by the laws of the state of Delaware, no director
will be personally liable to the Registrant or its stockholders for monetary
damages for breach of fiduciary duty as a director. Furthermore, the
Registrant's certificate of incorporation provides that, except as prohibited by
law, each of the Registrant's directors and officers is entitled to be
indemnified by the Registrant against all expenses and liability incurred in
connection with any legal proceeding brought against him or her by virtue of his
or her position as a director or officer. This right to indemnification may
extend to a person serving as an employee or other representative of the
Registrant or a subsidiary of the Registrant. A person entitled to
indemnification is entitled to have the Registrant advance to him or her the
expenses of a legal proceeding brought against him or her.
These provisions of the certificate of incorporation and the bylaws do not
eliminate the fiduciary duties of the directors and officers of the Registrant,
and in appropriate circumstances, equitable remedies such as injunctive or other
forms of relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, and for
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision does not affect a director's responsibilities
under any other law, such as the federal securities laws or state or federal
environmental laws.
The Delaware General Corporation Law also allows the Registrant to purchase
insurance covering the Registrant's directors and officers against liability
asserted against them in their capacity as directors and officers. The
Registrant expects to obtain directors' and officers' liability insurance. The
Underwriting Agreement also provides for the indemnification of officers,
directors and controlling persons of the Registrant against certain liabilities.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. The Registrant is not aware of any threatened litigation
or proceeding that may result in a claim for such indemnification.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Common Stock and Preferred Stock. The Registrant has issued and sold the
following securities since June 1996:
In June 1996, Webstakes, Inc., a New York corporation, reincorporated as
Netstakes, Inc., a Delaware corporation. In connection with the reincorporation,
the Registrant issued shares of its common stock to holders of Webstakes, Inc.
(New York) common stock. As part of that transaction, the three incorporating
shareholders received 3,528,000 shares of common stock of the Registrant in
exchange for $30,029 in cash.
On September 20, 1997, the Registrant issued and sold an aggregate of
999,600 shares of common stock, par value $.01, to an investor in consideration
for cancellation of $543,243 in outstanding indebtedness. As part of the same
transaction, and in consideration for extension of a $500,000 line of credit,
the Registrant granted the investor options that were later exercised for
715,008 shares of the Registrant's common stock.
On September 28, 1998, an investor exercised an option the Registrant had
granted to it as part of the earlier line of credit arrangement, and the
Registrant issued the investor 715,008 shares of common stock, par value $.01,
in consideration for cancellation of $524,826 in outstanding indebtedness.
On January 20, 1999, the Registrant issued 50,000 shares of class A
mandatorily redeemable convertible preferred stock, par value $100.00, to an
investor in exchange for $3,575,000 in cash and approximately $1,390,000 in
additional loans made by the investor to Webstakes. Such shares were
subsequently redeemed by the Company.
On March 2, 1999, in exchange for investment advisory services, the
Registrant issued warrants to an investment banking firm to purchase 168,350
shares (which was subsequently increased in June 1999 to 221,683 shares) of
common stock, par value $.01. The exercise price of the warrants is $6.00. The
advisory services were valued at $459,593 by the Company.
On June 14, 1999, the Registrant issued 6,666,667 shares of class B
mandatorily redeemable convertible preferred stock, par value $.01, to a group
of investors for a total purchase price of $40,000,000.
Options. The registrant from time to time has granted stock options to
employees and consultants as consideration for services received. The following
table sets forth certain information regarding such grants.
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
--------- ------------
<S> <C> <C>
January 1, 1998 to December 31, 1998............................... 89,300 $ 1.16-14.96
January 1, 1999 to June 14, 1999................................... 404,085 $ 1.16-18.70
</TABLE>
None of these options have been exercised.
All options granted to Registrant's officers, directors, employees and
consultants were made in reliance on Rule 701 under the Securities Act as
transactions pursuant to a compensatory benefit plan or a written contract
relating to compensation.
All other sales were made in reliance on Section 4(2) of the Securities Act
regarding transactions by the issuer not involving a public offering and/or
Regulation D promulgated under the Securities Act. These sales were made without
general solicitation or advertising. Each purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment and
represented to the Registrant that the shares were being acquired for investment
and not with a view toward distribution.
ITEM 16(A). EXHIBITS AND FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation
3.2 -- Certificate of Amendment to the Certificate of Incorporation, dated February 23, 1998
3.3 -- Certificate of Amendment to the Certificate of Incorporation, dated January 17, 1999
3.4 -- Certificate of Amendment to the Certificate of Incorporation, dated June 11, 1999
3.5+ -- Amended and Restated Bylaws
4.1* -- Specimen Certificate of Common Stock
5.1 -- Opinion of Reed Smith Shaw & McClay LLP
10.1+ -- Netstakes, Inc. Stock Option Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.2+ -- 1999 Equity Compensation Plan
10.3+ -- Master Lease Agreement No. L6731 with Leasing Technologies International, Inc. dated November 19,
1998.
10.4 -- Master Services Agreement between Registrant and Frontier Global Center dated February 8, 1999
10.5 -- Letter Agreement between Registrant and Steven H. Krein, dated June 11, 1999
10.6 -- Letter Agreement between Registrant and Daniel Feldman, dated June 11, 1999
10.7 -- Stock Purchase Agreement dated June 11, 1999
11.1* -- Statement re: computation of per share earnings
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 5.1)
23.3 -- Consent of Forrester Research
25+ -- Powers of Attorney
27.1+ -- Financial data schedule
99.1+ -- Consent of Nominee Director of Lisa Crane
99.2+ -- Consent of Nominee Director of Kristopher Wood
99.3 -- Consent of Nominee Director of Dirk Hall
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
ITEM 16(B). EXHIBITS AND FINANCIAL STATEMENTS
The following financial statement schedule is filed herewith accompanied by
a report of independent accountants for such schedule: Schedule II--Valuation
and Qualifying Accounts.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule
424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<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, State of New
York, on July 23, 1999.
WEBSTAKES.COM, INC.
By: ________/s/ STEVEN H. KREIN_______
Steven H. Krein
Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------------- --------------
<S> <C> <C>
/s/ STEVEN H. KREIN Chief Executive Officer and Director July 23, 1999
- ------------------------------------------ (Principal Executive Officer)
Steven H. Krein
DANIEL J. FELDMAN* President and Director July 23, 1999
- ------------------------------------------
Daniel J. Feldman
/s/ THOMAS E. BROPHY Vice President of Finance and July 23, 1999
- ------------------------------------------ Chief Financial Officer;
Thomas E. Brophy (Principal Accounting Officer)
ARNOLD GREENBERG* Director July 23, 1999
- ------------------------------------------
Arnold Greenberg
*by Steven H. Krein as Attorney-in-fact
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Webstakes.com, Inc.:
In connection with our audits of the financial statements of Webstakes.com, Inc.
as of December 31, 1998 and 1997 and for each of the two years in the period
ended December 31,1998 and the period from January 8, 1996 (inception) to
December 31, 1996, which financial statements are included in the Prospectus, we
have also audited the financial statement schedule listed in Part II herein.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
February 19, 1999
1301 Avenue of the Americas
New York, N.Y.
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
WEBSTAKES.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the period from January 6, 1996 (inception)
to December 31, 1996:
Provision for doubtful accounts................... $ -- $ 2,499 $ -- $ 2,499
-------- -------- -------- --------
-------- -------- -------- --------
For the year ended December 31, 1997:
Provision for doubtful accounts................... $ 2,499 $ 10,880 $ 679 $ 12,700
-------- -------- -------- --------
-------- -------- -------- --------
For the year ended December 31, 1998:
Provision for doubtful accounts................... $ 12,700 $208,604 $ 96,304 $125,000
-------- -------- -------- --------
-------- -------- -------- --------
For the six months ended June 30, 1999:
Provision for doubtful accounts (unaudited)....... $125,000 $215,805 $ 26,091 $314,714
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1* -- Form of Underwriting Agreement
3.1 -- Certificate of Incorporation
3.2 -- Certificate of Amendment to the Certificate of Incorporation, dated February 23, 1998
3.3 -- Certificate of Amendment to the Certificate of Incorporation, dated January 17, 1999
3.4 -- Certificate of Amendment to the Certificate of Incorporation, dated June 11, 1999
3.5+ -- Amended and Restated Bylaws
4.1* -- Specimen Certificate of Common Stock
5.1 -- Opinion of Reed Smith Shaw & McClay LLP
10.1+ -- Netstakes, Inc. Stock Option Plan
10.2+ -- 1999 Equity Compensation Plan
10.3+ -- Master Lease Agreement No. L6731 with Leasing Technologies International, Inc. dated
November 19, 1998.
10.4 -- Master Service Agreement between Registrant and Frontier GlobalCenter dated
February 8, 1999
10.5 -- Letter Agreement between Registrant and Steven H. Krein, dated June 11, 1999
10.6 -- Letter Agreement between Registrant and Daniel Feldman, dated June 11, 1999
10.7 -- Stock Purchase Agreement dated June 11, 1999
11.1* -- Statement re: computation of per share earnings
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2 -- Consent of Reed Smith Shaw & McClay LLP (included in Exhibit 5.1)
23.3 -- Consent of Forrester Research
25+ -- Powers of Attorney
27.1+ -- Financial data schedule
99.1+ -- Consent of Nominee Director Lisa Crane
99.2+ -- Consent of Nominee Director Kristopher Wood
99.3 -- Consent of Nominee Director Dirk Hall
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
NETSTAKES, INC.
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
ARTICLE I
---------
The name of the Corporation is Netstakes, Inc.
ARTICLE II
----------
The registered office of the Corporation in the State of Delaware is
located at 1013 Centre Road, Wilmington, Delaware, County of New Castle. The
name of the Corporation's registered agent in the State of Delaware at such
address is Corporation Service Company.
ARTICLE III
-----------
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 Delaware.
<PAGE>
ARTICLE IV
----------
The total number of shares of stock which the Corporation shall have
authority to issue is 10,000 shares of Common Stock, with a par value of $.01
per share.
ARTICLE V
---------
Election of directors need not be by ballot unless the By-Laws of the
Corporation shall so provide.
ARTICLE VI
-----------
In furtherance and not in limitation of the power conferred upon the
Board of Directors by law, the Board of Directors shall have power to make,
adopt, alter, amend and repeal, from time to time, the By-Laws of the
Corporation, subject to the right of the stockholders entitled to vote with
respect thereto to alter and repeal By-Laws made by the Directors.
ARTICLE VII
-----------
The incorporator of the Corporation is Celeste M. Garrison, whose
mailing address is c/o Reed, Smith Shaw & McClay 2500 One Liberty Place, 1650
Market Street, Philadelphia, PA 19103.
ARTICLE VIII
------------
Personal Liability of Directors.
--------------------------------
1. To the fullest extent that the laws of the State of Delaware, as
the same exist or may hereafter be amended, permit elimination of the personal
liability of directors, no director of
-2-
<PAGE>
this Corporation shall be personally liable to this Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
2. The provisions of this Article shall be deemed to be a contract
with each director of this Corporation who serves as such at any time while
this Article is in effect, and each such director shall be deemed to be serving
as such in reliance on the provisions of this Article. Any amendment or repeal
of this Article or adoption of any By-Law of this Corporation or other
provision of the Certificate of Incorporation of this Corporation which has the
effect of increasing director liability shall operate prospectively only and
shall not affect any action taken, or any failure to act, by a director of this
Corporation prior to such amendment, repeal, By-Law or other provision becoming
effective.
ARTICLE IX
-----------
Indemnification of, and Advancement of Expenses to,
Directors, Officers and others.
------------------------------------------------------
1. Right to Indemnification. Except as prohibited by law, every
director and officer of the Corporation shall be entitled as of right to be
indemnified by the Corporation against all expenses and liability (as those
terms are defined below in this Paragraph) incurred by such person in
connection with any actual or threatened claim, action, suit or proceeding,
whether civil, criminal, administrative, investigative or other, or
-3-
<PAGE>
whether brought by or against such person or by or in the right of the
Corporation or otherwise, in which such person may be involved, as a party or
otherwise, by reason of such person being or having been a director or officer
of the Corporation or a subsidiary of the Corporation or by reason of the fact
that such person is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or other
entity (such claim, action, suit or proceeding hereinafter being referred to as
an "Action"); provided, however, that no such right to indemnification shall
exist with respect to an Action brought by an indemnitee (as defined below)
against the Corporation (an "Indemnitee Action") except as provided in the last
sentence of this Paragraph. Persons who are not directors or officers of the
Corporation may be similarly indemnified in respect of service to the
Corporation or a subsidiary of the Corporation or to another such entity at the
request of the Corporation to the extent the Board of Directors of the
Corporation at any time designates any of such persons as entitled to the
benefits of this Article. As used in this Article, "indemnitee" includes each
director and officer of the Corporation and each other person designated by the
Board of Directors of the Corporation as entitled to the benefits of this
Article; "expenses" means all expenses actually and reasonably incurred,
including fees and expenses of counsel selected by an indemnitee; and
"liability" means all liability incurred, including the amounts of any
judgments, excise taxes, fines or
-4-
<PAGE>
penalties and any amounts paid in settlement. An indemnitee shall be entitled
to be indemnified pursuant to this Article against expenses incurred in
connection with an Indemnitee Action if (i) the Indemnitee Action is instituted
under Paragraph 3 of this Article and the indemnitee is successful in whole or
in part in such Indemnitee Action, (ii) the indemnitee is successful in whole
or in part in another Indemnitee Action for which expenses are claimed or (iii)
the indemnification for expenses is included in a settlement of, or is awarded
by a court in, such other Indemnitee Action.
2. Right to Advancement of Expenses. Every indemnitee shall be
entitled as of right to have the expenses of the indemnitee in defending any
Action or in bringing and pursuing any Indemnitee Action under Paragraph 3 of
this Article paid in advance by the Corporation prior to final disposition of
the Action or Indemnitee Action, provided that the Corporation receives a
written undertaking by or on behalf of the indemnitee to repay the amount
advanced if it should ultimately be determined that the indemnitee is not
entitled to be indemnified for the expenses.
3. Right of Indemnitee to Bring Action. If a written claim for
indemnification under Paragraph 1 of this Article or for advancement of
expenses under Paragraph 2 of this Article is not paid in full by the
Corporation within 30 days after the claim has been received by the
Corporation, the indemnitee may at any time
-5-
<PAGE>
thereafter bring an Indemnitee Action to recover the unpaid amount of the claim
and, if successful in whole or in part, the indemnitee shall also be entitled
to be paid the expense of bringing and pursuing such Indemnitee Action. The
only defense to an Indemnitee Action to recover on a claim for indemnification
under Paragraph 1 of this Article shall be that the conduct of the indemnitee
was such that under Delaware law the Corporation is prohibited from
indemnifying the indemnitee for the amount claimed, but the burden of proving
such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel and
stockholders) to have made a determination prior to the commencement of such
Indemnitee Action that indemnification of the indemnitee is proper in the
circumstances, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or stockholders) that the conduct
of the indemnitee was such that indemnification is prohibited by Delaware law,
shall be a defense to such Indemnitee Action or create a presumption that the
conduct of the indemnitee was such that indemnification is prohibited by
Delaware law. The only defense to an Indemnitee Action to recover on a claim
for advancement of expenses under Paragraph 2 of this Article shall be failure
by the indemnitee to provide the undertaking required by Paragraph 2 of this
Article.
4. Funding and Insurance. The Corporation may create a trust fund,
grant a security interest, cause a letter of credit to
-6-
<PAGE>
be issued or use other means (whether or not similar to the foregoing) to
ensure the payment of all sums required to he paid by the Corporation to effect
indemnification as provided in this Article. The Corporation may purchase and
maintain insurance to protect itself and any indemnitee against any expenses or
liability incurred by the indemnitee in connection with any Action, whether or
not the Corporation would have the power to indemnify the indemnitee against
the expenses or liability by law or under the provisions of this Article.
5. Non-Exclusivity; Nature and Extent of Rights. The rights to
indemnification and advancement of expenses provided for in this Article shall
(i) not be deemed exclusive of any other rights, whether now existing or
hereafter created, to which any indemnitee may be entitled under any agreement,
provision in the Certificate of Incorporation or By-Laws of the Corporation,
vote of stockholders or disinterested directors or otherwise, (ii) be deemed to
create contractual rights in favor of each indemnitee who serves at any time
while this Article is in effect (and each such indemnitee shall be deemed to be
serving in reliance on the provisions of this Article), (iii) continue as to
each indemnitee who has ceased to have the status pursuant to which the
indemnitee was entitled or was designated as entitled to indemnification under
this Article and inure to the benefit of the heirs and legal representatives of
each indemnitee and (iv) be applicable to Actions commenced after this Article
becomes effective, whether arising from acts or omissions occurring before or
after this
-7-
<PAGE>
Article becomes effective. Any amendment or repeal of this Article or adoption
of any By-Law of this Corporation or other provision of the Certificate of
Incorporation of this Corporation which has the effect of limiting in any way
the rights to indemnification or advancement of expenses provided for in this
Article shall operate prospectively only and shall not affect any action taken,
or any failure to act, by an indemnitee prior to such amendment, repeal, By-Law
or other provision becoming effective.
6. Partial Indemnity. If an indemnitee is entitled under any provision
of this Article to indemnification by the Corporation for some or a portion of
the expenses or liability incurred by the indemnitee in the preparation,
investigation, defense, appeal or settlement of any Action or Indemnitee Action
but not, however, for the total amount thereof, the Corporation shall indemnify
the indemnitee for the portion of such expenses or liability to which the
indemnitee is entitled.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 5th
day of June, 1996.
/s/ Celeste M. Garrison
-----------------------
Celeste M. Garrison
Incorporator
-8-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NETSTAKES, INC.
NETSTAKES, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
By unanimous written consent, in accordance with Sections 228
and 141(f) of the General Corporation Law of the State of Delaware, the
stockholders and directors of the Corporation have duly adopted, in accordance
with the provisions of Section 242 of the said General Corporation Law of the
State of Delaware, an amendment to the Certificate of Incorporation of the
Corporation whereby Article IV thereof is changed so that, as amended, said
Article shall be and read as follows:
"The total number of shares of stock which the corporation shall have
authority to issue is 10,000,000 shares of Common Stock, with a par
value of $.01 per share.
Each one (1) share of Common Stock of the Corporation issued and
outstanding immediately prior to the close of business on January 23,
1998, that being the time when the amendment of this Article IV of the
Certificate of Incorporation shall have become effective, shall be
increased and changed and converted into one thousand one hundred and
seventy six (1176) fully paid and nonassessable shares of Common
Stock, par value $.01 per share, of the Corporation."
IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Amendment to be duly executed and the corporate seal to be
hereunto affixed as of the 23rd day of February, 1998.
By: /s/ Steven H. Krein
---------------------------------
Steven H. Krein, President
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF
NETSTAKES, INC.
Pursuant to the provisions of Section 242 of the General Corporation
Law of the State of Delaware, the undersigned Delaware corporation hereby adopts
the following Certificate of Amendment to its Certificate of Incorporation:
FIRST: The name of the corporation is Netstakes, Inc. (the "Corporation").
SECOND: The Certificate of Incorporation of the Corporation is hereby amended
as set forth below.
Article IV of the Certificate of Incorporation is hereby amended to
provide in its entirety as follows:
Article IV
A. General
The total number of shares of stock that the Corporation shall have
authority to issue is 11,050,000 shares of capital stock, classified as (1)
10,000,000 shares of common stock, par value $0.01 per share, designated as
"Common Stock" ("Common Stock"), (2) 50,000 shares of preferred stock, par value
$100.00 per share, designated as "Class A Convertible Redeemable Preferred
Stock" ("Class A Preferred Stock"), and (3) 1,000,000 shares of preferred stock,
par value $100.00 per share, designated as "Class B Preferred Stock" ("Class B
Preferred Stock").
B. Waivers Permitted
Notwithstanding anything to the contrary herein, any condition,
requirement, or covenant contained in this Article may be waived in writing by
the person or entity (each, a "Person") or Persons for whose benefit such
condition, requirement, or covenant is made.
C. Common Stock
1. Rights; Voting. Each share of Common Stock of the Corporation shall
have identical rights and privileges in every respect. Each holder of shares of
Common Stock shall be entitled to vote upon all matters submitted to a vote of
the stockholders of the Corporation (other than those matters that, in
accordance with the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, need not be submitted to such holder) and
shall be entitled to one vote for each share of Common Stock held. Any action of
the Corporation that, under the provisions of the Delaware General Corporation
Law or any other applicable law, is required to be authorized or approved by the
holders of a majority of the outstanding shares of Common Stock shall,
notwithstanding any such law, not be deemed effectively and properly authorized
or approved unless authorized or approved by the vote or written consent of the
holders of more than two-thirds of the outstanding shares of Common Stock.
2. Dividends. Subject to the prior rights and preferences, if any,
applicable to shares of the Class A Preferred Stock and Class B Preferred Stock
or any series thereof, the holders of shares of the Common Stock shall be
entitled to receive such dividends (payable in cash, stock, or
1
<PAGE>
otherwise) as may be declared thereon by the board of directors at any time and
from time to time out of any funds of the Corporation legally available
therefor.
3. Liquidation Distribution. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation, after
distribution in full of the preferential amounts, if any, to be distributed to
the holders of shares of the Class A Preferred Stock and Class B Preferred Stock
or any series thereof, the holders of shares of the Common Stock shall be
entitled to receive all of the remaining assets of the Corporation available for
distribution to its stockholders, ratably in proportion to the number of shares
of the Common Stock held by them. For the purposes of this paragraph 3, neither
the voluntary sale, conveyance, exchange, or transfer (for cash, shares of
stock, securities, or other consideration) of all or substantially all of the
property or assets of the Corporation nor the consolidation or merger of the
Corporation with any other Person nor the conversion of the Corporation shall be
deemed to be a voluntary or involuntary liquidation, dissolution, or winding up
of the Corporation.
D. Class A Preferred Stock
1. Rank. The Class A Preferred Stock shall, with respect to the payment
of dividends and upon liquidation, dissolution, or winding up, rank senior and
prior to the Common Stock and any other stock issued by the Corporation other
than stock that, with the consent of the holders of Class A Preferred Stock
required by subparagraph 6(c) of this section D, is expressly made senior or
equal to the Class A Preferred Stock with respect thereto (the Common Stock and
such other securities being herein called the "Junior Securities").
2. Dividends.
(a) General. The holders of shares of Class A Preferred Stock
shall be entitled to receive, when, as, and if declared by the board of
directors or a duly authorized committee thereof (an "Authorized Board
Committee"), cumulative cash dividends out of funds legally available therefor,
at the annual rate of $12.75 per share of Class A Preferred Stock, and no more,
in preference to dividends on shares of Junior Securities. Dividends on each
share of Class A Preferred Stock shall be fully cumulative and shall accrue
(whether or not declared) on a daily basis from its date of issuance. Such
dividends shall be payable quarterly on March 31, June 30, September 30, and
December 31 each year commencing on the first such date to occur after the
issuance of any Class A Preferred Stock (each of such dates being a "Class A
Dividend Payment Date" and each period between such dates (or between the date
of issue and the first Class A Dividend Payment Date thereafter, as appropriate)
being a "Class A Dividend Period") to stockholders of record of Class A
Preferred Stock on the record date, not exceeding 60 days preceding such Class A
Dividend Payment Date, that is fixed for this purpose by the board of directors
or an Authorized Board Committee in advance of payment of each particular
dividend. Accumulated unpaid dividends for any past Class A Dividend Period may
be declared by the board of directors (or an Authorized Board Committee) and
paid on any date fixed by the board of directors (or an Authorized Board
Committee), whether or not a regular Class A Dividend Payment Date, to holders
of record on the books of the Corporation on such record date as may be fixed by
the board of directors (or an Authorized Board Committee). No interest or sum of
money in lieu of interest shall be payable in respect of any accumulated unpaid
dividends except to the extent contemplated by subparagraph 4(f) of this section
D.
2
<PAGE>
(b) No Dividends on Junior Securities. So long as any share of
Class A Preferred Stock is outstanding, the Corporation shall not (i) declare,
pay, or set apart for payment any dividend on Junior Securities or (ii) make any
payment on account of, or set apart for payment, money for a sinking or other
similar fund for the purchase, redemption, retirement, or other acquisition for
value of any of, or redeem, purchase, retire, or otherwise acquire for value,
any Junior Securities or any warrants, rights, calls, or options exercisable for
or convertible into any Junior Securities (other than, pursuant to the terms of
the Corporation's Employee Stock Option Plan dated February 15, 1998 (the
"Employee Stock Option Plan") or any other agreements or arrangements approved
by the holders of a majority of the outstanding Class A Preferred Stock,
payments, purchases, or acquisitions for value of Common Stock or options, stock
appreciation rights, or similar arrangements held directly by employees or
former employees), or (iii) make any distribution in respect of Junior
Securities or any warrants, rights, calls, or options exercisable for or
convertible into Junior Securities, in any such case either directly or
indirectly, and whether in cash, obligations or shares of the Corporation, or
other property, and shall not permit any entity directly or indirectly
controlled by the Corporation to purchase, redeem, or otherwise acquire for
value any Junior Securities or any warrants, rights, calls, or options
exercisable for or convertible into Junior Securities (other than, pursuant to
the terms of the Corporation's Employee Stock Option Plan or agreements or
arrangements approved by the holders of a majority of the outstanding Class A
Preferred Stock, purchases, redemptions, or acquisitions for value of Common
Stock or options, stock appreciation rights, or similar arrangements held
directly by employees or former employees); provided, however, nothing contained
herein shall prevent the Corporation from repurchasing shares of Common Stock as
may be required by law or by the terms of the Corporation's Employee Stock
Option Plan or any other agreements or arrangements that are approved by the
holders of a majority of the outstanding Class A Preferred Stock.
(c) Order of Payment. Dividends on Class A Preferred Stock
shall be paid in the chronological order in which they accrue and no dividend
(or portion thereof) due with respect to any Class A Dividend Period may be paid
on any share of Class A Preferred Stock, whether as a result of redemption,
liquidation, or otherwise, unless the dividend due with respect to such Class A
Dividend Period (or an equivalent portion thereof) on each other share of Class
A Preferred Stock is paid or provided for at the same time.
3. Liquidation Preference.
(a) Priority. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation, then,
before any dividend, distribution, or payment shall be made to the holders of
any Junior Securities, and subject to the rights of creditors and holders of
shares of stock ranking senior to the Class A Preferred Stock upon dissolution,
liquidation, and winding up of the affairs of the Corporation, if any, the
holders of Class A Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders an amount in cash equal to $100.00 for each share outstanding,
together with an amount in cash equal to all accrued and unpaid dividends
thereon to the date fixed for liquidation, dissolution, or winding up. Except as
provided in this paragraph, holders of Class A Preferred Stock shall not be
entitled to any distribution in the event of liquidation, dissolution, or
winding up of the affairs of the Corporation.
(b) Events Not Constituting Liquidation. For the purposes of
this paragraph 3, neither the voluntary sale, conveyance, exchange, or transfer
(for cash, shares of stock, securities, or other consideration) of all or
substantially all of the property or assets of the Corporation nor the
3
<PAGE>
consolidation or merger of the Corporation with any other Person nor the
conversion of the Corporation shall be deemed to be a voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation.
4. Redemption.
(a) At Option of Holder. At any time and from time to time
after August 1, 2003, or during the existence of an Event of Default or
following a Failure to Fund, any holder of Class A Preferred Stock may, by
sending written notice (each, a "Put Notice") to the Corporation, require the
Corporation to redeem all or any portion of the Class A Preferred Stock held by
such holder (the shares to which such Put Notice relates being called the
"Tendered Shares") for $100.00 plus accrued and unpaid dividends thereon the
date fixed for redemption; provided, however, that if a Put Notice is given as a
result of a Failure to Fund, the number of Tendered Shares may not exceed (i)
the amount remaining in the Controlled Account (as that term is defined in that
certain Preferred Stock Purchase Agreement dated as of January 8, 1999, executed
by Stone Investments, Inc., a Delaware corporation ("Stone"), and the
Corporation (the "Preferred Stock Purchase Agreement")) at the date of the
Failure to Fund divided by (ii) $100. Within five days of its receipt of a Put
Notice (including a Subsequent Put Notice), the Corporation shall deliver a copy
thereof to every other holder of record of Class A Preferred Stock. Each holder
of Class A Preferred Stock that actually gives a Put Notice to the Corporation
within five days after its receipt of the copy of a Put Notice given by another
holder (a "Subsequent Put Notice") shall be deemed to have given such Subsequent
Put Notice on the same date as the original Put Notice was actually given. Upon
receipt of any Put Notice, the Corporation shall be obligated to redeem for cash
the Tendered Shares within 60 days after the Corporation's receipt of such Put
Notice; provided, however, that if the Corporation does not have sufficient
funds that are legally available for such redemption, (i) the Corporation shall
redeem so many of the Tendered Shares as it may lawfully redeem, (ii) if the
Corporation cannot redeem all of the Tendered Shares, the Corporation shall
redeem the Tendered Shares in the chronological order in which the Put Notices
related thereto were given or deemed given and shall redeem the Tendered Shares
subject to Put Notices given or deemed given on the same date pro rata, (iii)
the Corporation shall promptly take such action as is lawful and possible for it
to cause sufficient funds to become legally available to redeem all Tendered
Shares, (iv) Tendered Shares not redeemed shall remain outstanding shares for
all purposes until redeemed and paid for in full, and (v) a holder of Tendered
Shares may, by written notice to the Corporation given at any time after the
60th day after giving a Put Notice but prior to the time payment in full is made
to such holder, revoke such Put Notice with respect to any or all Tendered
Shares that have not then been redeemed. The fact that an Event of Default
ceases to exist after a Put Notice has been given but before the redemption of
the Tendered Shares does not negate the obligation of the Corporation to redeem
such shares. A "Failure to Fund" has the meaning given it in the Preferred Stock
Purchase Agreement.
(b) At Option of Company. To the extent the Corporation has
funds legally available for such redemption, the Corporation, at the option of
the board of directors or an Authorized Board Committee, may redeem all (but not
less than all) the outstanding shares of Class A Preferred Stock at any time
after August 1, 2003, upon notice given as hereinafter specified, at $100.00 per
share plus accrued and unpaid dividends thereon to the date fixed for
redemption. Notice of every redemption of shares of Class A Preferred Stock
pursuant to this paragraph (b) (a "Redemption Notice") shall be mailed by first
class mail, postage prepaid, not less than 20 days nor more than 60 days prior
to the redemption date addressed to the holder(s) of record of the shares to be
redeemed; provided, however, that the failure to give such Redemption Notice or
any defect therein or in the mailing thereof shall not affect the validity of
the proceeding for the redemption of
4
<PAGE>
any shares to be redeemed except as to the holder to whom the Corporation has
failed to give such notice or except as to the holder to whom notice was
defective. Each Redemption Notice shall state: (i) the redemption date; (ii) the
redemption price; (iii) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (iv) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date.
(c) Deposit of Funds. If a Put Notice or a Redemption Notice
has been given in accordance with subparagraph (4)(a) or (b) of this section D
and if, on or before the redemption date specified in such notice, all funds
necessary for such redemption have been placed in trust for the pro rata benefit
of the holders of the shares to be redeemed so as to be and to continue to be
available therefor, then, from and after the redemption date, dividends on the
shares of the Class A Preferred Stock to be redeemed shall cease to accrue and
such shares shall no longer be deemed to be outstanding and shall not have the
status of shares of Class A Preferred Stock, and all rights of the holders
thereof as stockholders of the Corporation with respect to such shares (except
the right to receive from the Corporation amounts due in connection with such
redemption) shall cease. Upon surrender of the certificates for any shares to be
redeemed (properly endorsed or assigned for transfer), such shares shall be
redeemed by the Corporation at the redemption price described above. If fewer
than all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed shares
without cost to the holder thereof.
(d) Return of Funds. Any funds deposited with a bank or trust
company for the purpose of redeeming the Class A Preferred Stock and unclaimed
at the end of one year from the date fixed for redemption shall be repaid to the
Corporation upon its request, after which repayment the holders of shares called
for redemption shall look only to the Corporation for payment of the redemption
price. Interest accrued on such funds shall be paid to the Corporation from time
to time.
(e) No Reissuance. Shares of Class A Preferred Stock that have
been issued and reacquired in any manner, including shares purchased or
redeemed, shall be deemed retired and shall be canceled and may not under any
circumstances thereafter be issued or otherwise disposed of by the Corporation.
(f) Interest on Late Redemption Payments. If the Corporation
fails to redeem any share of Class A Preferred Stock on the date such redemption
is to be made under this Article IV, in addition to any other remedies to which
the holders of such share of Class A Preferred Stock may be entitled, the
Corporation shall be required to pay interest on the amount to be paid to redeem
such share at a rate from day to day in effect that equals the lesser of the
highest lawful rate and the prime rate of interest, as then most recently
reported in The Wall Street Journal, plus 5%, from the date such share was to be
redeemed through and including the date on which such share is redeemed.
5. Conversion.
(a) Right to Convert. The holder of any share of Class A
Preferred Stock may at any time (except that if any such share has been tendered
pursuant to subparagraph 4(a) of this section D or has been properly called for
redemption pursuant to subparagraph 4(b) of this section D, then, as to such
share, such right shall terminate at the close of business on the date fixed for
its redemption, unless the Corporation defaults in its obligation to provide
sufficient money for the redemption of such share) convert such share into a
number of fully paid and nonassessable shares
5
<PAGE>
of Common Stock at the rate of 45.69936 shares of Common Stock for each share of
Class A Preferred Stock surrendered for conversion, subject to adjustment as
provided for in this paragraph 5. Such right shall be exercised by the surrender
of the share to be converted to the Corporation at any time during normal
business hours at the office or agency then maintained by it for payment of
dividends on the shares of the Class A Preferred Stock or, if none, the
principal executive offices of the Corporation (the "Payment Office"),
accompanied by written notice to the Corporation of such holder's election to
convert and (if required by the Corporation or any conversion agent) by an
instrument of transfer, in form satisfactory to the Corporation and to any
conversion agent, duly executed by the registered holder or by such holder's
duly authorized attorney, and transfer tax stamps or funds therefor, if required
pursuant to subparagraph 5(h) of this section D.
(b) Conversion Mechanics. As promptly as practicable after the
surrender for conversion of any share of the Class A Preferred Stock in the
manner provided in subparagraph 5(a) and the payment in cash of any amount
required by the provisions of subparagraph 5(h), the Corporation will deliver or
cause to be delivered at the Payment Office, to or upon the written order of the
holder of such share, certificates representing the number of full shares of
Common Stock issuable upon such conversion, issued in such name or names as such
holder may direct. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the share in
proper order for conversion, and all rights of the holder of such share of Class
A Preferred Stock as a holder of such share shall cease at such time and the
Person(s) in whose name(s) the certificates for such shares of Common Stock are
to be issued shall be treated for all purposes as having become the record
holder(s) thereof at such time.
(c) Dividends on Converted Stock. The registered holder of any share
of Class A Preferred Stock that is converted at a time that there are accrued
and unpaid dividends on such share shall continue to be entitled to receive such
dividends notwithstanding the conversion thereof (but such share shall not
accrue dividends after the date of conversion), which dividends shall be paid at
the time dividends due with respect to the same Class A Dividend Period(s) are
paid on other shares of Class A Preferred Stock or upon liquidation of the
Corporation, whichever first occurs.
(d) Adjustments to Number of Shares. The number of shares of Common
Stock issuable upon conversion of each share of Class A Preferred Stock shall be
adjusted as follows:
(i) If the Corporation (A) pays a dividend or makes a
distribution on its Common Stock in shares of its capital stock (whether shares
of Common Stock or of capital stock of any other class), (B) subdivides its
outstanding shares of Common Stock into a greater number of shares, (C) combines
its outstanding shares of Common Stock into a smaller number of shares, or (D)
issues by reclassification of its shares of Common Stock any shares of capital
stock of the Corporation (including any reclassification in connection with a
merger or consolidation in which the Corporation is the surviving corporation),
then the number of shares of Common Stock issuable upon conversion of each share
of Class A Preferred Stock shall be adjusted so that the holder of any share of
the Class A Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number and kind of shares of capital stock that such
holder would have owned immediately following such action had such share been
converted immediately prior thereto. An adjustment made pursuant to this
subparagraph 5(d) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination, or
reclassification.
6
<PAGE>
(ii) If the Corporation issues rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the current market price per
share (as determined pursuant to subparagraph 5(d)(iv) below) of the Common
Stock on the record date mentioned below, the conversion rate shall be adjusted
so that the same shall equal the rate determined by multiplying the conversion
rate in effect immediately prior to the date of issuance of such rights or
warrants by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or warrants plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or warrants plus the
number of shares that the aggregate offering price of the total number of shares
so offered would purchase at such current market price. Such adjustment shall
become effective, retroactively, immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. For
the purposes of this subparagraph 5(d)(ii), the issuance of rights or warrants
to subscribe for or purchase stock or securities convertible into shares of
Common Stock shall be deemed to be the issuance of rights or warrants to
purchase the shares of Common Stock into which such stock or securities are
convertible at an aggregate offering price equal to the aggregate offering price
of such stock or securities plus the minimum aggregate amount (if any) payable
upon conversion of such stock or securities into Common Stock.
(iii) If the Corporation distributes to all holders of its
Common Stock evidences of its indebtedness or assets (excluding any cash
dividend paid from retained earnings of the Corporation) or rights or warrants
to subscribe to securities of the Corporation (excluding those referred to in
subparagraph 5(d)(ii) above), then in each such case the conversion rate shall
be adjusted so that the same shall equal the rate determined by multiplying the
conversion rate in effect immediately prior to the date of such distribution by
a fraction of which the numerator shall be the current market price per share
(determined as provided in subparagraph 5(d)(iv) below) of the Common Stock on
the record date mentioned below (which will be prior to the distribution), and
of which the denominator shall be such current market price per share of Common
Stock less the then fair market value (as reasonably determined by the board of
directors of the Corporation) of the portion of the assets or evidences of
indebtedness so distributed or of such subscription rights or warrants
applicable to one share of Common Stock. Such adjustment shall become effective,
retroactively, immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(iv) For the purpose of any computation under subparagraphs
5(d)(ii) and 5(d)(iii) above and under subparagraph 5(e), the current market
price per share of Common Stock on any date shall be deemed to be the average of
the daily closing prices for 30 consecutive trading days commencing 45 trading
days before the day in question. The "closing price" on any trading day shall
mean the reported closing price on such day on the New York Stock Exchange or on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any such exchange, then the average of the reported closing bid and
asked prices in the over-the-counter market as reported on NASDAQ or a similar
reporting service or, if no such quotations are available, the fair market price
as reasonably determined by the board of directors of the Corporation. A
"trading day" is a day on which the New York Stock Exchange, principal national
securities exchange, or over-the-counter market, as appropriate, is open for
trading.
7
<PAGE>
(v) In any case in which this subparagraph 5(d) shall require
that an adjustment be made effective, retroactively, immediately following a
record date, the Corporation may elect to defer (but only until five business
days following the mailing by the Corporation of the certificate of independent
public accountants described in subparagraph 5(d)(vii) below) issuing to the
holder of any shares converted after such record date (A) the shares of Common
Stock and other capital stock of the Corporation issuable upon such conversion
over and above (B) the shares of Common Stock and other capital stock of the
Corporation issuable upon such conversion only on the basis of the conversion
rate prior to adjustment.
(vi) No adjustment in the conversion rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments that by reason of this
subparagraph 5(d)(vi) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; and, provided further, that
adjustment shall be required and made in accordance with the provisions of this
subparagraph 5(d) (other than this subparagraph 5(d)(vi)) not later than such
time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. All calculations under
this paragraph (vi) shall be made to the nearest one millionth of a share.
(vii) Whenever the conversion rate is adjusted as herein
provided, the Corporation shall promptly (A) file with the conversion agent, if
any, a certificate of a firm of independent accountants selected by the board of
directors (who may be the regular accountants employed by the Corporation)
setting forth the conversion rate after such adjustment and setting forth a
brief statement of the facts requiring such adjustment and (B) mail or cause to
be mailed a notice of such adjustment to the holders of shares of the Class A
Preferred Stock.
(e) Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of any share or shares of Class A Preferred Stock. If
more than one such share of Class A Preferred Stock is surrendered for
conversion at the same time by the same holder, the number of full shares that
are issuable upon the conversion thereof shall be computed on the basis of the
aggregate number of shares so surrendered. If any fractional interest in a share
of Common Stock would, except for the provisions of this subparagraph 5(e), be
deliverable upon the conversion of any share or shares, the Corporation shall,
in lieu of delivering the fractional share therefor, adjust such fractional
interest by payment to the holder of such surrendered share or shares of an
amount in cash equal (computed to the nearest cent) to the current market value
of such fractional interest on the last trading day prior to the date of
conversion, computed in accordance with subparagraph 5(d)(iv) of this section D.
(f) Mergers; Etc. If there is (i) any consolidation, merger, or
conversion to which the Corporation is a party, other than a consolidation or a
merger that does not result in any reclassification of, or change in,
outstanding shares of the Common Stock, (ii) any sale or conveyance to another
Person of all or substantially all of the assets of the Corporation, or (iii)
any other event that causes the holders of Common Stock to receive a different
or additional kind or amount of shares of stock or other securities or other
property (other than an event for which an adjustment in the kind and amount of
shares of stock or other securities or other property for which the Class A
Preferred Stock is convertible is otherwise made pursuant to this paragraph 5),
then the holder of each share of Class A Preferred Stock then outstanding shall
have the right upon conversion pursuant to the terms hereof to receive the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale, conveyance, or other event by a holder of the
number of shares of Common Stock issuable upon conversion of such
8
<PAGE>
share immediately prior to such consolidation, merger, sale, conveyance, or
other event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph 5. The provisions
of this subparagraph (f) shall similarly apply to successive consolidations,
mergers, conversions, sales, conveyances, and other events.
(g) Reserves. The Corporation covenants that it will at all times
reserve and keep available, solely for the purpose of issue upon conversion of
the shares of Class A Preferred Stock, such number of shares of Common Stock as
shall be issuable upon the conversion of all such outstanding shares, provided,
that nothing contained herein shall be construed to preclude the Corporation
from satisfying its obligations in respect of the conversion of shares of Class
A Preferred Stock by delivery of shares of Common Stock that are held in the
treasury of the Corporation.
(h) No Charges. The issuance of certificates for shares of Common
Stock upon conversion of Class A Preferred Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than that of the holder of the
share or shares converted, the Person(s) requesting the issuance thereof shall
pay to the Corporation the amount of any tax that may be payable in respect of
any transfer involved in such issuance or shall establish to the satisfaction of
the Corporation that such tax has been paid.
(i) Conversion Shares. The shares of Common Stock and other
securities issued upon conversion of Class A Preferred Stock and any other
securities into which the Common Stock or other such securities are changed,
reclassified, split, combined, or converted or for which they are exchanged by
amendment to the Corporation's Certificate of Incorporation or by consolidation,
merger, or otherwise, and any securities paid as a dividend thereon are
collectively called the "Conversion Shares." Appropriate adjustment shall be
made to the terms of this section D, including the term "Common Stock," to give
effect to each such change, reclassification, split, combination, conversion,
exchange, or dividend.
6. Voting Rights.
(a) Generally. Except as otherwise required by law or as
expressly provided herein, each share of Class A Preferred Stock shall entitle
the holder thereof to notice of any stockholders' meeting in accordance with the
by-laws of the Corporation and to vote upon all matters submitted to a vote of
stockholders. Each share of Class A Preferred Stock shall be entitled to the
number of votes on any matter equal to the number of shares of Common Stock into
which such share of Class A Preferred Stock could be converted on the record
date for the vote or written consent of stockholders with respect to such
matter. Fractional votes shall not, however, be permitted and any fractional
voting rights (after aggregating all shares of Common Stock into which shares of
Class A Preferred Stock held by each holder could be converted) shall be rounded
downward to the nearest whole number. Except as otherwise required by law or
expressly provided herein, the holders of Class A Preferred Stock and Common
Stock shall vote together and not as separate classes or series.
9
<PAGE>
(b) Election of Directors.
(i) The holders of Class A Preferred Stock, Existing Stone
Common Stock (hereinafter defined), and Conversion Shares, collectively, shall
have, at all times, the right to elect the percentage of directors of the
Corporation, rounded to the next highest whole number, that equals their
Ownership Percentage. As used herein, the term "Ownership Percentage" means, at
any time, the percentage obtained by dividing (A) the number of shares of Common
Stock into which the outstanding shares of Class A Preferred Stock could be
converted at such time plus the number of shares of Existing Stone Common Stock
and Conversion Shares divided by (B) the number of shares of Common Stock
actually outstanding at such time plus the number of shares of Common Stock into
which the outstanding shares of Class A Preferred Stock could be converted at
such time; provided, however, that in no event shall the number of directors to
be elected by the holders of Class A Preferred Stock, Existing Stone Common
Stock, and Conversion Shares pursuant to this subparagraph 6(b)(i) be less than
one.
(ii) During the continuance of an Event of Default, the holders
of shares of Class A Preferred Stock shall have the following additional voting
rights with respect to the election of directors:
(A) The size of the board of directors of the Corporation
shall automatically be increased by a number equal to one plus the number of
directors previously constituting the entire board and the holders of Class A
Preferred Stock shall have the exclusive right to elect the persons to fill such
vacancies. Such voting right shall continue for the Class A Preferred Stock
until such time as no Event of Default exists, at which time such voting right
of the holders of the Class A Preferred Stock shall terminate, subject to
revesting upon the occurrence of any Event of Default, the size of the board of
directors shall be reduced to the number of directors in place immediately prior
to its increase pursuant to this subparagraph, and the term of each of the
directors who was elected by the holders of Class A Preferred Stock pursuant to
this subparagraph shall terminate.
(B) The voting right provided in this subparagraph
6(b)(ii) may be exercised initially either at a special meeting of the holders
of the Class A Preferred Stock, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors and,
thereafter, at annual meetings.
(C) Upon any termination of the voting rights of the
holders of Class A Preferred Stock pursuant to this subparagraph 6(b)(ii),
subject to the requirements of the Delaware General Corporation Law, the term of
office of each director elected by the holders of Class A Preferred Stock
pursuant to this subparagraph 6(b)(ii) shall terminate (and each such director
will take any action reasonably requested by the other directors or the officers
of the Corporation to evidence the fact that such director no longer serves on
the board of directors).
(iii) For purposes of this paragraph 6(b), the "Special
Voting Stock" is the Existing Stone Common Stock, Conversion Shares, and Class A
Preferred Stock when subparagraph 6(b)(i) (or any director elected pursuant to
such subparagraph) is involved and is the Class A Preferred Stock when
subparagraph 6(b)(ii) (or any director elected pursuant to such subparagraph) is
involved; the "Special Voting Holders" are the holders of the Special Voting
Stock; and the "Other Holders" are all holders of capital stock other than the
Special Voting Holders. At any meeting held for the purpose of electing one or
more directors at which the Special Voting
10
<PAGE>
Holders have the right to elect one or more directors as provided in this
subparagraph 6(b), the presence in person or by proxy of Special Voting Holders
who own a majority of the Special Voting Stock shall be required and be
sufficient to constitute a quorum of such class(es) for the election of a
director by such class(es). At any such meeting or adjournment thereof (A) the
absence of a quorum of the holders of Special Voting Stock having such right
shall not prevent the election of any director(s) other than those to be elected
solely by the holders of Special Voting Stock and the absence of a quorum or
quorums of the Other Holders entitled to elect any other director(s) shall not
prevent the election of the director(s) to be elected by the holders of the
Special Voting Stock (B) except as otherwise required by law, in the absence of
a quorum of the Special Voting Holders, a majority of the Special Voting Holders
present in person or by proxy shall have the power to adjourn the meeting for
the election of a director or directors that the Special Voting Holders are
entitled to elect, from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
(iv) Any vacancy in the board of directors in respect
of any director elected by the Special Voting Holders shall be filled by the
vote of the holders of the Special Voting Holders at a special meeting called in
accordance with the procedures set forth in this subparagraph 6(b), or, if no
such special meeting shall be called, at the next annual meeting of
stockholders. No director elected by the holders Special Voting Stock pursuant
to this subparagraph 6(b) may be removed except by operation of this Certificate
of Incorporation or vote of the holders of the Special Voting Stock.
(v) At any time when the voting right provided under
this subparagraph 6(b) is vested in the Special Voting Holders, and if such
right has not already been initially exercised, a duly authorized officer of the
Corporation shall, upon the written request of the holder(s) of record of at
least 10% of the outstanding Special Voting Stock, addressed to the Secretary of
the Corporation, call a special meeting of the Special Voting Holders. Such
meeting shall be held at the earliest practicable date upon the notice required
for annual meetings of stockholders at the place where the last annual meeting
of stockholders of the Corporation was held or the Corporation's principal
executive office. If such meeting is not called by a duly authorized officer of
the Corporation within ten days after such notice is given, then the holder(s)
of record of at least 10% of the outstanding Special Voting Stock may designate
in writing one of their number to call such meeting at the expense of the
Corporation, and such meeting may be called by such Person so designated upon
the notice required for annual meetings of stockholders and shall be held at the
place where the last annual meeting of stockholders of the Corporation was held
or the Corporation's principal executive office. Any holder of Special Voting
Stock shall have access to the stock books of the Corporation for the purpose of
causing a meeting of stockholders to be called pursuant to the provisions of
this paragraph.
(c) Special Matters. So long as any shares of Class A Preferred
Stock remain outstanding, the Corporation will not, either directly or
indirectly or through merger or consolidation with any other Person or
otherwise, without the affirmative vote at a meeting or the written consent with
or without a meeting of the holders of at least a majority in number of shares
of Class A Preferred Stock then outstanding:
(i) Amend, alter, or repeal any of the provisions of this
Certificate of Incorporation or the by-laws of the Corporation so as in any such
case to affect adversely the preferences, rights, or powers of the Class A
Preferred Stock; provided, however, that the amendment or alteration of the
provisions of this Certificate of Incorporation or the by-laws of the
11
<PAGE>
Corporation so as to authorize or create, or to increase the authorized amount
of, any Junior Securities shall not be deemed to affect adversely the powers,
rights, or preferences of the holders of shares of Class A Preferred Stock.
(ii) Authorize, create, issue, or increase the authorized
amount of, any shares of any class or any security convertible into shares of
any class ranking on a parity with or senior to shares of Class A Preferred
Stock in the distribution of assets on any liquidation, dissolution, or winding
up of the Corporation or in the payment of dividends.
(iii) Borrow or agree to borrow more than $250,000 in any
transaction or series of related transactions.
(iv) Permit any sale, transfer, issuance, or redemption or
series of sales, transfers, issuances, or redemptions (or any combination
thereof) of shares of the Corporation's capital stock by the holders thereof or
by the Corporation that results in the outstanding Class A Preferred Stock and
Conversion Shares, in the aggregate, constituting less than 25% of the
outstanding Voting Securities of the Corporation or being entitled to less than
25% of the Equity Value of the Corporation.
(v) Sell or lease all or a substantial part of its assets.
(vi) Engage in any transaction or series of related transactions
requiring an aggregate payment of, or having an aggregate value of, at least
$50,000 with any Affiliate.
(vii) Be a party to any merger or consolidation with or into
another Person or convert from a Delaware corporation to any other type of
entity.
(viii) Apply for or consent to the appointment of a receiver,
custodian, trustee, intervenor, or liquidator of all or a substantial part of
its assets, voluntarily become the subject of a bankruptcy, reorganization, or
insolvency proceeding or become insolvent or admit in writing that it is unable
to pay its debts as they become due, make a general assignment for the benefit
of creditors, file a petition or answer seeking reorganization or an arrangement
with creditors or attempt to take advantage of any bankruptcy or insolvency
laws, file an answer admitting the material allegations of, or consent to, or
default in answering, a petition filed against it in any bankruptcy,
reorganization, or insolvency proceeding, or voluntarily become the subject of
an order for relief under any bankruptcy, reorganization, or insolvency
proceeding.
As used herein, the term "Voting Securities" means securities
entitled to vote in the election of one or more directors; the term "Equity
Value" means, at any time, the net worth of the Corporation, as reflected on the
then most recent regularly prepared balance sheet of the Corporation; and the
term "Affiliate" means, with respect to any Person, any other Person that
controls, is controlled by, or is under common control with such first Person
and any family member of such first Person.
7. Preemptive Rights. If the Corporation proposes to issue or sell
(a) any unissued or treasury shares of any class of Common Stock of the
Corporation (whether now or hereafter authorized) (other than any share subject
to options outstanding on January 8, 1999, pursuant to the Employee Stock Option
Plan), (b) any obligations, evidences of indebtedness, or other securities of
the Corporation convertible into or exchangeable for, or carrying or accompanied
by any rights
12
<PAGE>
to receive, purchase, or subscribe to any such unissued or treasury shares of
Common Stock, or (c) any right to subscribe to or to receive, or any warrant or
option for the purchase of, any of the foregoing securities (all of the
foregoing being called "equity securities" herein), the Corporation shall give
each holder of Class A Preferred Stock (but only to the extent that an
adjustment is not required to be made in the number and/or type of securities
issuable upon conversion of such Class A Preferred Stock pursuant to this
Article as a result of such issuance or sale) and each holder of Existing Stone
Common Stock and of Conversion Shares at least 30 days' advance written notice
of such proposal (the "Issuance Notice") and each such holder shall have the
preemptive right, exercisable by written notice to the Corporation within 25
days after such Issuance Notice is given, to purchase or acquire a portion of
the equity securities proposed to be so issued or sold that equals, after the
issuance of all such equity securities, including those to be issued or sold
pursuant to such preemptive right, the percentage of outstanding Common Stock
into which such Class A Preferred Stock could be converted or the percentage of
Existing Stone Common Stock or Conversion Shares, as appropriate, owned by such
holder. Any equity securities purported to be issued or sold in violation of
this provision shall be void and deemed for all purposes to have never been
issued or sold.
8. Right to Force Purchase or Sale.
(a) General. The holders of Class A Preferred Stock, Conversion
Shares, and the shares of Common Stock owned by Stone on January 8, 1999 (the
"Existing Stone Common Stock") shall have certain rights to purchase all of the
other Common Stock of the Corporation or to have the holders of all of the other
Common Stock purchase the Class A Preferred Stock, Conversion Shares, and
Existing Stone Common Stock on the terms set forth in this paragraph 8.
(b) Timing. A Buy-Sell Notice (hereinafter defined) may be given (i)
by the holders of a majority of the outstanding Class A Preferred Stock,
Conversion Shares, and Existing Stone Common Stock at any time during the
existence of an Event of Default or (ii) by the holders of a majority of the
outstanding Existing Stone Common Stock and Conversion Shares at any time after
August 1, 2003. The Person or Persons giving a Buy-Sell Notice are called,
whether one or more, the "Invoking Holders."
(c) Buy-Sell Notice. The Invoking Holders may offer to buy all
(but not less than all) of the outstanding Common Stock (other than the Existing
Stone Common Stock and Conversion Shares) (the "Target Common Stock") by giving
to each holder of Target Common Stock (each, a "Member of the Common Group") a
written notice (the "Buy-Sell Notice") that contains (i) the offer, (ii) the
price per share at which the Invoking Holders are willing to purchase all (but
not less than all) of the Target Common Stock (the "Buy-Sell Purchase Price"),
as it may be adjusted pursuant to subparagraph 8(j) (the "Adjusted Buy-Sell
Purchase Price"), and (iii) an offer to sell all outstanding shares of Target
Stone Stock, whether or not owned by an Invoking Holder, to one or more Members
of the Common Group for their Adjusted Buy-Sell Purchase Price (on an
as-if-converted basis with respect to any Class A Preferred Stock included in
such offer). The offer to purchase or sell shares will be irrevocable for a
period of 60 days from receipt of the Buy-Sell Notice. As used herein, the term
"Target Stone Stock" means the Class A Preferred Stock (other than any shares
with respect to which a Put Notice has been given), the Existing Stone Common
Stock, and the Conversion Shares, if the Buy-Sell Notice is given during the
existence of an Event of Default, and the Existing Stone Common Stock and the
Conversion Shares, if the Buy-Sell Notice is given at any other time and the
term "Members of the Stone Group" means the Person or Persons who own the Target
Stone Stock. The Invoking Holders shall send, at the time they send the Buy-
13
<PAGE>
Sell Notice to the Members of the Common Group, a copy of the Buy-Sell Notice to
each other holder of Class A Preferred Stock, Existing Stone Common Stock, and
Conversion Shares, if the Buy-Sell Notice is given during the continuance of an
Event of Default, or to each other holder of Existing Stone Common Stock and
Conversion Shares, if the Buy-Sell Notice is given at any other time.
(d) Right of Members of Common Group. One or more of the Members of
the Common Group may elect within the 60-day period to purchase all (but not
less then all) the Target Stone Stock for the relevant Adjusted Buy-Sell
Purchase Price by sending written notice to the holders of the Target Stone
Stock (the "Common Group Purchase Notice"). If, within the 60-day period, no
Common Group Purchase Notice is given, all Members of the Common Group will be
deemed to have elected to sell their Target Common Stock to the Invoking Holders
and/or other Members of the Stone Group for the relevant Adjusted Buy-Sell
Purchase Price. The Member(s) of the Common Group who send a Common Group
Purchase Notice shall send, at the time the Common Group Purchase Notice is
given, a copy of the Common Group Purchase Notice to each other Member of the
Common Group.
(e) Right to Participate. Notwithstanding who gives the Invoking
Notice, each Member of the Stone Group may participate in the purchase of Target
Common Stock if the Common Group Purchase Notice is not given and if such Person
gives written notice to all other Members of the Stone Group at least 20 days
before the closing is to occur. Notwithstanding who gives the Common Group
Purchase Notice, each holder of Target Common Stock may participate in the
purchase of Target Stone Stock if the Common Group Purchase Notice is given and
if such holder gives written notice to all other holders of Target Common Stock
at least 20 days before the closing is to occur.
(f) Payment of Purchase Price. The Adjusted Buy-Sell Purchase Price
will be payable in cash or other immediately available funds at the time of the
consummation of the sale of the Target Common Stock or Target Stone Stock, as
appropriate (the "Subject Shares").
(g) Closing. The closing of any sale of Subject Shares under this
paragraph 8 will be consummated on the 90th day after the Buy-Sell Notice is
given (or if such day is not a business day, the first business day thereafter)
unless an earlier date is agreed to by each Person that is purchasing Subject
Shares (each being called a "Buying Holder") and each Person that is selling
Subject Shares (each being called a "Selling Holder"). The closing will be held
at the principal place of business of the Corporation or at such other location
to which the Buying Holders who are to purchase a majority of the shares to be
sold (a "Majority of the Buying Holders") and the Selling Holders who hold a
majority of the shares to be sold (a "Majority of the Selling Holders") agree.
At the closing, each Buying Holder will deliver the Adjusted Buy-Sell Purchase
Price and each Selling Holder will execute and deliver the assignments and other
documents, with customary warranties of title, as will be necessary to convey
the Subject Shares to the Buying Holders free and clear of all liens, claims,
and encumbrances (other than those existing under securities laws, if any), with
all required transfer tax stamps affixed. If a Selling Holder fails or refuses
to execute any instrument required to consummate the sale of its shares under
this paragraph 8, the Person selected as their representative by a Majority of
the Buying Holders (the "Buying Holders' Representative") is hereby granted the
irrevocable power of attorney, which will be binding on such Selling Holder as
to all third Persons, to execute and deliver on behalf of such Selling Holder
all instruments required to consummate the purchase. The power of attorney is
coupled with an interest and is irrevocable by death, insolvency, dissolution,
or otherwise.
14
<PAGE>
(h) Payment of Debts: Offset. If, at the date of the closing, a
Selling Holder has any outstanding debts to the Corporation or to a Buying
Holder relating to the Corporation, all proceeds of the purchase price due the
Selling Holder for its Subject Shares will be paid to the Corporation or the
Buying Holder (pro rata in accordance with the amounts owed by the Selling
Holder to each) for and on behalf of the Selling Holder until all the debts have
been paid and discharged in full.
(i) Release of Guaranties. If a Selling Holder or any of its
Affiliates is the guarantor of any debt of the Corporation, the Corporation and
the Buying Holders shall use commercially reasonable efforts to have all such
guaranties fully and unconditionally released at the time the closing of the
purchase and sale of Subject Shares under this paragraph 8 occurs or as soon
thereafter as is practical.
(j) Operations in Pre-Closing Period. From the date a Buy-Sell
Notice is given until the date the closing occurs under this paragraph 8 or, if
earlier, the date on which a Majority of the Buying Holders and a Majority of
the Selling Holders agree not to proceed with such closing, the Corporation will
continue to be operated in the ordinary course, as if the closing were not going
to occur, and the directors of the Corporation will exercise their power and
authority in good faith and without regard to the fact that such closing may
occur; provided, however, that, (i) any and all distributions received by any
Selling Holder from the Corporation during such period with respect to Subject
Shares shall be credited against and reduce the price otherwise payable to the
Selling Holder for such shares; (ii) without the approval of a Majority of the
Selling Holders and a Majority of the Buying Holders, the Corporation shall not
issue or sell any shares of capital stock (other than pursuant to options, stock
appreciation rights, or similar arrangements held directly by employees or
former employees pursuant to the terms of the Corporation's Employee Stock
Option Plan or any other agreements or arrangements approved by the holders of a
majority of the outstanding Class A Preferred Stock or upon conversion of any
debt incurred without violation of this Article IV prior to the date the
Buy-Sell Notice is given) or any warrants, rights, calls, options, or debt
exercisable for or convertible into any capital stock; and (iii) without the
approval of a Majority of the Selling Holders and a Majority of the Buying
Holders, the Corporation shall not enter into any contracts or agreements, or
otherwise agree, to sell or otherwise dispose of all or substantially all of its
properties or assets; provided, however, the Corporation shall be authorized to
consummate any transactions that were the subject of binding contractual
obligations entered into prior to the commencement of such period.
(k) Default by Buying Holders. In the event the Buying Holders
default in their obligation to purchase the Subject Shares of any Selling
Holder, then the Selling Holders may, in addition to all other remedies
available for such default under this paragraph 8, at law, or in equity, (i)
seek specific performance of the Buying Holders' obligations under this
paragraph 8 or (ii) purchase the Subject Shares of all Members of the Common
Group (if a Member of the Common Group is the defaulting Buying Holder) or
purchase the Subject Shares of all Members of the Stone Group (if a Member of
the Stone Group is the defaulting Buying Holder) in accordance with this
paragraph 8 except that the Adjusted Buy-Sell Purchase Price for the Subject
Shares of the Buying Holders shall equal 75% of the Adjusted Buy-Sell Purchase
Price established by the Buy-Sell Notice originally given by the Invoking
Holders in accordance with subparagraph 8(b), as adjusted in accordance with
subparagraph 8(j), or (iii) refuse to sell any of their Subject Shares.
(l) Allocation Among Buying Holders. The Buying Holders may allocate
the Subject Shares purchased from the Selling Holders in such proportions as
they agree upon among
15
<PAGE>
themselves. In the absence of such agreement, they shall allocate the Subject
Shares to be purchased by them in accordance with their respective ownership of
Target Stone Stock or Target Common Stock, as appropriate.
(m) Decisions By Buying and Selling Holders. Whenever the Buying
Holders or Selling Holders are required or permitted to approve any matter or
make a decision with respect to any matter under this paragraph 8, the approval
or decision of Buying Holders who are to purchase a majority of the Subject
Shares or of Selling Holders who are to sell a majority of the Subject Shares,
as appropriate, shall be binding on all Buying Holders or Selling Holders,
respectively.
(n) Treatment of Class A Preferred Stock. For purposes of this
paragraph 8, each share of Class A Preferred Stock will be deemed to be the
number of shares of Common Stock into which it would be convertible (assuming it
could be converted) at the date the Buy-Sell Notice is given and the price to be
paid for a share of Class A Preferred Stock will be based on such concept.
(o) Binding Effect. Each holder of Common Stock, Class A Preferred
Stock, Existing Stone Common Stock, and Conversion Shares shall be bound by the
provisions of this paragraph 8, in accordance with its terms, whether or not
such holder affirmatively takes any action under this paragraph 8.
9 Event of Default. As used herein, the term "Event of Default"
means:
(a) the existence, at any date, of unpaid dividends on the Class A
Preferred Stock in an aggregate amount equal to or exceeding the amount of
dividends payable thereon for four quarterly Class A Dividend Periods (whether
or not consecutive); or
(b) the failure of the Corporation to redeem any Tendered Shares
as required by this Article; or
(c) the purported taking by the Corporation of any action that
requires the consent or vote of the holders of Class A Preferred Stock without
obtaining the necessary consent or vote; or
(d) the failure of the Corporation to take any action (other than
one described in subparagraph 9(a) or 9(b) above) required to be taken by it
under this section D if such failure continues for ten days after notice thereof
is given to the Corporation by the holder(s) of at least 10% of the outstanding
Class A Preferred Stock; or
(e) the breach by the Corporation or any of its Affiliates of any
written agreement between the Corporation or any of its Affiliates, on the one
hand, and any holder of Class A Preferred Stock or any of its Affiliates, on the
other hand, or the default by the Corporation or any of its Affiliates in the
payment of any obligation for borrowed money owed to any holder of Class A
Preferred Stock or any of its Affiliates that, in either case, continues for ten
days after notice thereof is given to the Corporation or such Affiliate by the
holder(s) of at least 10% of the outstanding Class A Preferred Stock; or
(f) any Change in Control occurs without the prior approval of the
holders of a majority of the outstanding Class A Preferred Stock; or
16
<PAGE>
(g) the failure of the Members of the Common Group to fulfill
their obligations under paragraph 8; or
(h) the failure of the Corporation to use funds drawn from the
Controlled Account (as defined in the Preferred Stock Purchase Agreement)
consistently in all material respects with the uses specified in the relevant
request for withdrawal submitted pursuant to the Preferred Stock Purchase
Agreement (unless such use was otherwise approved by the holders of a majority
of the outstanding Class A Preferred Stock) ; or
(i) the Corporation (i) has applied for or consented to the
appointment of a receiver, custodian, trustee, intervenor, or liquidator of all
or a substantial part of its assets, (ii) has voluntarily become the subject of
a bankruptcy, reorganization, or insolvency proceeding or become insolvent or
admitted in writing that it is unable to pay its debts as they become due, (iii)
has made a general assignment for the benefit of creditors, (iv) has filed a
petition or answer seeking reorganization or an arrangement with creditors or
attempted to take advantage of any bankruptcy or insolvency laws, (v) has filed
an answer admitting the material allegations of, or consented to, or defaulted
in answering, a petition filed against it in any bankruptcy, reorganization, or
insolvency proceeding, or (vi) is the subject of an order for relief under any
bankruptcy, reorganization, or insolvency proceeding; or
(j) an order, judgment, or decree has been entered by any court of
competent jurisdiction or other competent authority approving a petition
appointing a receiver, custodian, trustee, intervenor, or liquidator of the
Corporation or of all or substantially all of its assets (unless such order,
judgment, or decree has been dismissed within 30 days after the entry thereof);
or a complaint or petition has been filed against the Corporation seeking or
instituting a bankruptcy, insolvency, reorganization, rehabilitation, or
receivership proceeding of the Corporation (unless such proceeding has been
dismissed within 30 days after the filing thereof); or
(k) the Corporation is in default of an obligation for borrowed
money of at least $250,000 or is in default of its obligations under that
certain Registration Rights Agreement dated as of January 8, 1999, executed by
the Corporation and Stone.
As used herein, the term "Change in Control" means the failure of Steven
Krein or Daniel Feldman to be actively involved on a day-to-day basis in
performing for the Corporation the duties normally performed by senior
executives of comparable corporations or to own, collectively, outstanding
capital stock of the Corporation entitling them to at least a majority of the
distributions payable with respect to capital stock of the Corporation (other
than distributions payable at fair market rates to holders of preferred stock
and, if different, distributions payable to Stone and its successors and
assigns) or to own capital stock of the Corporation that entitles him to at
least 10% of the distributions of the Corporation (other than distributions
payable at fair market rates to holders of preferred stock).
E. Provisions Relating to the Class B Preferred Stock.
10. Issuable in Series. The Class B Preferred Stock may be issued from time
to time in one or more series, the shares of each series to have such
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof, as are stated and expressed
17
<PAGE>
herein and in the resolution or resolutions providing for the issue of such
series adopted by the board of directors of the Corporation as hereafter
prescribed.
11 Authority to Create. Authority is hereby expressly granted to and
vested in the board of directors of the Corporation to authorize the issuance of
the Class B Preferred Stock from time to time in one or more series, and with
respect to each series of the Class B Preferred Stock, to fix and state by the
resolution or resolutions from time to time adopted providing for the issuance
thereof the following:
(a) whether or not the series is to have voting rights, full,
special, or limited, or is to be without voting rights, and whether or not such
series is to be entitled to vote as a separate class either alone or together
with the holders of one or more other classes or series of stock;
(b) the number of shares to constitute the series and the
designations thereof;
(c) the preferences, and relative, participating, optional, or other
special rights, if any, and the qualifications, limitations, or restrictions
thereof, if any, with respect to any series;
(d) whether or not the shares of any series shall be redeemable at
the option of the Corporation or the holders thereof or upon the happening of
any specified event, and, if redeemable, the redemption price or prices (which
may be payable in the form of cash, notes, securities, or other property), and
the time or times at which, and the terms and conditions upon which, such shares
shall be redeemable and the manner of redemption;
(e) whether or not the shares of a series shall be subject to the
operation of retirement or sinking funds to be applied to the purchase or
redemption of such shares for retirement, and, if such retirement or sinking
fund or funds are to be established, the annual amount thereof, and the terms
and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock
of the Corporation, or other property, the conditions upon which and the times
when such dividends are payable, the preference to or the relation to the
payment of dividends payable on any other class or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof which the
holders of any series thereof shall be entitled to receive upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
(h) whether or not the shares of any series, at the option of the
Corporation or the holder thereof or upon the happening of any specified event,
shall be convertible into or exchangeable for, the shares of any other class or
classes or of any other series of the same or any other class or classes of
stock, securities, or other property of the Corporation and the conversion price
or prices or ratio or ratios or the rate or rates at which such exchange may be
made, with such adjustments, if any, as shall be stated and expressed or
provided for in such resolution or resolutions; and
(i) such other special rights and protective provisions with respect
to any class or series as may to the board of directors of the Corporation seem
advisable.
18
<PAGE>
12 Variations Among Series. The shares of each series of the Class B
Preferred Stock may vary from the shares of any other series thereof in any or
all of the foregoing respects. The board of directors of the Corporation may
increase the number of shares of the Class B Preferred Stock designated for any
existing series by a resolution adding to such series authorized and unissued
shares of the Class B Preferred Stock not designated for any other series. The
board of directors of the Corporation may decrease the number of shares of the
Class B Preferred Stock designated for any existing series by a resolution
subtracting from such series authorized and unissued shares of the Class B
Preferred Stock designated for such existing series, and the shares so
subtracted shall become authorized, unissued, and undesignated shares of the
Class B Preferred Stock.
F. Notices.
Unless otherwise provided in this Article IV or by applicable law, all
notices, requests, demands, and other communications under this Article IV shall
be in writing and shall be personally delivered, delivered by facsimile or
courier service, or mailed, certified with first class postage prepaid, to the
address set forth on the books of the Corporation, in the case of communications
to a stockholder, and to the registered office of the Corporation in the State
of Delaware or the chief executive offices of the Corporation, in the case of
communications to the Corporation. Each such notice, request, demand, or other
communication shall be deemed to have been given and received (whether actually
received or not) on the date of actual delivery thereof, if personally delivered
or delivered by facsimile transmission (if receipt is confirmed at the time of
such transmission by telephone or facsimile-machine-generated confirmation), or
on the third day following the date of mailing, if mailed in accordance with
this paragraph, or on the day specified for delivery to the courier service (if
such day is one on which the courier service will give normal assurances that
such specified delivery will be made). Any notice, request, demand, or other
communication given otherwise than in accordance with this paragraph shall be
deemed to have been given on the date actually received. Any stockholder may
change its address for purposes of this paragraph by giving written notice of
such change to the Corporation in the manner hereinabove provided. Whenever any
notice is required to be given by law or by this Article IV, a written waiver
thereof, signed by the Person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of that notice.
G. Business Days. If any action is to be taken under the provisions of this
Article IV on a date that is a date on which national banks in the State of New
York are permitted to be closed, such action may be taken on the first day
thereafter on which national banks in the State of New York are not permitted to
be closed.
THIRD: The amendment of the Certificate of Incorporation of the Corporation
herein certified has been duly adopted in accordance with the provisions
of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
FOURTH: The effective time of the amendment herein certified shall be the
date of filing this Certificate of Amendment with the Delaware
Secretary of State.
[THIS SPACE LEFT BLANK INTENTIONALLY.]
19
<PAGE>
IN WITNESS WHEREOF, Netstakes, Inc. has caused these presents to be signed
in its name and on its behalf by its President on this 17th day of
January, 1999.
NETSTAKES, INC.
A Delaware Corporation
By: /s/ Steven H. Krein
-----------------------------
Name: Steven H. Krein
-----------------------------
Its: President
-----------------------------
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF
NETSTAKES, INC.
Pursuant to the provisions of Section 242 of the General Corporation Law
of the State of Delaware, the undersigned Delaware corporation hereby adopts the
following Certificate of Amendment to its Certificate of Incorporation:
FIRST: The name of the corporation is Netstakes, Inc. (the
"Corporation").
SECOND: The Certificate of Incorporation of the Corporation is
hereby amended as set forth below.
Article I of the Certificate of Incorporation is hereby amended to provide
in its entirety as follows:
Article I
The name of the Corporation is Webstakes.com, Inc.
Article IV of the Certificate of Incorporation is hereby amended to
provide in its entirety as follows:
Article IV
A. General
The total number of shares of stock that the Corporation shall have
authority to issue is 57,750,000 shares of capital stock, classified as (1)
50,000,000 shares of common stock, par value $0.01 per share, designated as
"Common Stock" ("Common Stock"), (2) 50,000 shares of preferred stock par value
$100 per share designated as Class A Convertible Redeemable Preferred Stock
("Class A Preferred Stock"), (3) 6,700,000 shares of preferred stock, par value
$.01 per share, designated as "Class B Convertible Redeemable Preferred Stock"
("Class B Preferred Stock"), and (3) 1,000,000 shares of preferred stock, no par
value per share, designated as "Class C Preferred Stock" ("Class C Preferred
Stock").
B. Waivers Permitted
Notwithstanding anything to the contrary herein, any right, condition,
requirement, or covenant contained in this Article may be waived in writing by
the person or entity (each, a "Person" or "Persons") for whose benefit such
right, condition, requirement, or covenant is made.
C. Common Stock
<PAGE>
1. Rights; Voting. Each share of Common Stock of the Corporation shall
have identical rights and privileges in every respect. Each holder of shares of
Common Stock shall be entitled to vote upon all matters submitted to a vote of
the stockholders of the Corporation (other than those matters that, in
accordance with the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation, need not be submitted to such holder) and
shall be entitled to one vote for each share of Common Stock held.
Until all of the Class A Preferred Stock is redeemed or purchased by the
Corporation, any action of the Corporation that, under the provisions of the
Delaware General Corporation Law or any other applicable law, is required to be
authorized or approved by the holders of a majority of the outstanding shares of
Common Stock shall, notwithstanding any such law, not be deemed effectively and
properly authorized or approved unless authorized or approved by the vote or
written consent of the holders of more than two-thirds of the outstanding shares
of Common Stock. Upon the redemption or purchase by the Corporation of all of
the Class A Preferred Stock, the provisions of the foregoing sentence shall
cease to be operative.
2. Dividends. Subject to the prior rights and preferences, if any,
applicable to shares of the Class A Preferred Stock and Class B Preferred Stock
or any series thereof, the holders of shares of the Common Stock shall be
entitled to receive such dividends (payable in cash, stock, or otherwise) as may
be declared thereon by the board of directors of the Corporation (or an
authorized committee of the board of directors) at any time and from time to
time out of any funds of the Corporation legally available therefor.
3. Liquidation Distribution. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation, after distribution
in full of the preferred amounts, if any, to be distributed to the holders of
shares of the Class A Preferred Stock and Class B Preferred Stock or any series
thereof, the holders of shares of the Common Stock shall be entitled to receive
all of the remaining assets of the Corporation available for distribution to its
stockholders, ratably in proportion to the number of shares of the Common Stock
held by them. For the purposes of this paragraph 3, neither the voluntary sale,
conveyance, exchange, or transfer (for cash, shares of stock, securities, or
other consideration) of all or substantially all of the property or assets of
the Corporation nor the consolidation or merger of the Corporation with any
other Person nor the conversion of the Corporation shall be deemed to be a
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation.
D. Class A Preferred Stock
1. Rank. The Class A Preferred Stock shall, with respect to the payment of
dividends and upon liquidation, dissolution, or winding up, rank senior and
prior to the Common Stock and any other stock issued by the Corporation other
than stock that, with the consent of the holders of Class A Preferred Stock
required by subparagraph 6(c) of this section D, is expressly made senior or
equal to the Class A Preferred Stock with respect thereto (the Common Stock and
such other securities being herein called the "Class A Junior Securities").
2. Dividends.
(a) General. The holders of shares of Class A Preferred Stock shall
be entitled to receive, when, as, and if declared by the board of directors or a
duly authorized committee thereof (an "Authorized Board Committee"), cumulative
cash dividends out of funds legally available
-2-
<PAGE>
therefor, at the annual rate of $12.75 per share of Class A Preferred Stock, and
no more, in preference to dividends on shares of Junior Securities. Dividends on
each share of Class A Preferred Stock shall be fully cumulative and shall accrue
(whether or not declared) on a daily basis from its date of issuance. Such
dividends shall be payable quarterly on March 31, June 30, September 30, and
December 31 each year commencing on the first such date to occur after the
issuance of any Class A Preferred Stock (each of such dates being a "Class A
Dividend Payment Date" and each period between such dates (or between the date
of issue and the first Class A Dividend Payment Date thereafter, as appropriate)
being a "Class A Dividend Period") to stockholders of record of Class A
Preferred Stock on the record date, not exceeding 60 days preceding such Class A
Dividend Payment Date, that is fixed for this purpose by the board of directors
or an Authorized Board Committee in advance of payment of each particular
dividend. Accumulated unpaid dividends for any past Class A Dividend Period may
be declared by the board of directors (or an Authorized Board Committee) and
paid on any date fixed by the board of directors (or an Authorized Board
Committee), whether or not a regular Class A Dividend Payment Date, to holders
of record on the books of the Corporation on such record date as may be fixed by
the board of directors (or an Authorized Board Committee). No interest or sum of
money in lieu of interest shall be payable in respect of any accumulated unpaid
dividends except to the extent contemplated by subparagraph 4(f) of this section
D.
(b) No Dividends on Class A Junior Securities. So long as any share
of Class A Preferred Stock is outstanding, the Corporation shall not (i)
declare, pay, or set apart for payment any dividend on Class A Junior Securities
or (ii) make any payment on account of, or set apart for payment, money for a
sinking or other similar fund for the purchase, redemption, retirement, or other
acquisition for value of any of, or redeem, purchase, retire, or otherwise
acquire for value, any Class A Junior Securities or any warrants, rights, calls,
or options exercisable for or convertible into any Class A Junior Securities
(other than, pursuant to the terms of the Corporation's Employee Stock Option
Plan dated February 15, 1998 (the "Employee Stock Option Plan") or any other
agreements or arrangements approved by the holders of a majority of the
outstanding Class A Preferred Stock, payments, purchases, or acquisitions for
value of Common Stock or options, stock appreciation rights, or similar
arrangements held directly by employees or former employees), or (iii) make any
distribution in respect of Class A Junior Securities or any warrants, rights,
calls, or options exercisable for or convertible into Class A Junior Securities,
in any such case either directly or indirectly, and whether in cash, obligations
or shares of the Corporation, or other property, and shall not permit any entity
directly or indirectly controlled by the Corporation to purchase, redeem, or
otherwise acquire for value any Class A Junior Securities or any warrants,
rights, calls, or options exercisable for or convertible into Class A Junior
Securities (other than, pursuant to the terms of the Corporation's Employee
Stock Option Plan or agreements or arrangements approved by the holders of a
majority of the outstanding Class A Preferred Stock, purchases, redemptions, or
acquisitions for value of Common Stock or options, stock appreciation rights, or
similar arrangements held directly by employees or former employees); provided,
however, nothing contained herein shall prevent the Corporation from
repurchasing shares of Common Stock as may be required by law or by the terms of
the Corporation's Employee Stock Option Plan or any other agreements or
arrangements that are approved by the holders of a majority of the outstanding
Class A Preferred Stock.
(c) Order of Payment. Dividends on Class A Preferred Stock shall be
paid in the chronological order in which they accrue and no dividend (or portion
thereof) due with respect to any Class A Dividend Period may be paid on any
share of Class A Preferred Stock, whether as a result of redemption,
liquidation, or otherwise, unless the dividend due with respect to such Class A
-3-
<PAGE>
Dividend Period (or an equivalent portion thereof) on each other share of Class
A Preferred Stock is paid or provided for at the same time.
3. Liquidation Preference.
(a) Priority. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation, then,
before any dividend, distribution, or payment shall be made to the holders of
any Class A Junior Securities, and subject to the rights of creditors and
holders of shares of stock ranking senior to the Class A Preferred Stock upon
dissolution, liquidation, and winding up of the affairs of the Corporation, if
any, the holders of Class A Preferred Stock then outstanding shall be entitled
to be paid out of the assets of the Corporation available for distribution to
its stockholders an amount in cash equal to $100.00 for each share outstanding,
together with an amount in cash equal to all accrued and unpaid dividends
thereon to the date fixed for liquidation, dissolution, or winding up. Except as
provided in this paragraph, holders of Class A Preferred Stock shall not be
entitled to any distribution in the event of liquidation, dissolution, or
winding up of the affairs of the Corporation.
(b) Events Not Constituting Liquidation. For the purposes of this
paragraph 3, neither the voluntary sale, conveyance, exchange, or transfer (for
cash, shares of stock, securities, or other consideration) of all or
substantially all of the property or assets of the Corporation nor the
consolidation or merger of the Corporation with any other Person nor the
conversion of the Corporation shall be deemed to be a voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation.
4. Redemption.
(a) At Option of Holder. At any time and from time to time after
August 1, 2003, or during the existence of an Event of Default or following a
Failure to Fund, any holder of Class A Preferred Stock may, by sending written
notice (each, a "Class A Put Notice") to the Corporation, require the
Corporation to redeem all or any portion of the Class A Preferred Stock held by
such holder (the shares to which such Class A Put Notice relates being called
the "Class A Tendered Shares") for $100.00 plus accrued and unpaid dividends
thereon the date fixed for redemption; provided, however, that if a Class A Put
Notice is given as a result of a Failure to Fund, the number of Class A Tendered
Shares may not exceed (i) the amount remaining in the Controlled Account (as
that term is defined in that certain Preferred Stock Purchase Agreement dated as
of January 20, 1999, executed by Stone Investments, Inc., a Delaware corporation
("Stone"), and the Corporation (the "Preferred Stock Purchase Agreement")) at
the date of the Failure to Fund divided by (ii) $100. Within five days of its
receipt of a Class A Put Notice (including a Subsequent Class A Put Notice), the
Corporation shall deliver a copy thereof to every other holder of record of
Class A Preferred Stock. Each holder of Class A Preferred Stock that actually
gives a Class A Put Notice to the Corporation within five days after its receipt
of the copy of a Class A Put Notice given by another holder (a "Class A
Subsequent Put Notice") shall be deemed to have given such Subsequent Class A
Put Notice on the same date as the original Class A Put Notice was actually
given. Upon receipt of any Class A Put Notice, the Corporation shall be
obligated to redeem for cash the Class A Tendered Shares within 60 days after
the Corporation's receipt of such Class A Put Notice; provided, however, that if
the Corporation does not have sufficient funds that are legally available for
such redemption, (i) the Corporation shall redeem so many of the Class A
Tendered Shares as it may lawfully redeem, (ii) if the Corporation cannot redeem
all of the Class A Tendered Shares, the Corporation shall redeem the Class A
Tendered Shares in the chronological order in which the
-4-
<PAGE>
Class A Put Notices related thereto were given or deemed given and shall redeem
the Class A Tendered Shares subject to Class A Put Notices given or deemed given
on the same date pro rata, (iii) the Corporation shall promptly take such action
as is lawful and possible for it to cause sufficient funds to become legally
available to redeem all Class A Tendered Shares, (iv) Class A Tendered Shares
not redeemed shall remain outstanding shares for all purposes until redeemed and
paid for in full, and (v) a holder of Class A Tendered Shares may, by written
notice to the Corporation given at any time after the 60th day after giving a
Class A Put Notice but prior to the time payment in full is made to such holder,
revoke such Class A Put Notice with respect to any or all Class A Tendered
Shares that have not then been redeemed. The fact that an Event of Default
ceases to exist after a Class A Put Notice has been given but before the
redemption of the Class A Tendered Shares does not negate the obligation of the
Corporation to redeem such shares. A "Failure to Fund" has the meaning given it
in the Preferred Stock Purchase Agreement.
(b) At Option of Company. To the extent the Corporation has funds
legally available for such redemption, the Corporation, at the option of the
board of directors or an Authorized Board Committee, may redeem all (but not
less than all) the outstanding shares of Class A Preferred Stock at any time
after August 1, 2003, upon notice given as hereinafter specified, at $100.00 per
share plus accrued and unpaid dividends thereon to the date fixed for
redemption. Notice of every redemption of shares of Class A Preferred Stock
pursuant to this paragraph (b) (a "Class A Redemption Notice") shall be mailed
by first class mail, postage prepaid, not less than 20 days nor more than 60
days prior to the redemption date addressed to the holder(s) of record of the
shares to be redeemed; provided, however, that the failure to give such Class A
Redemption Notice or any defect therein or in the mailing thereof shall not
affect the validity of the proceeding for the redemption of any shares to be
redeemed except as to the holder to whom the Corporation has failed to give such
notice or except as to the holder to whom notice was defective. Each Class A
Redemption Notice shall state: (i) the redemption date; (ii) the redemption
price; (iii) the place or places where certificates for such shares are to be
surrendered for payment of the redemption price; and (iv) that dividends on the
shares to be redeemed will cease to accrue on such redemption date.
(c) Deposit of Funds. If a Class A Put Notice or a Class A
Redemption Notice has been given in accordance with subparagraph (4)(a) or (b)
of this section D and if, on or before the redemption date specified in such
notice, all funds necessary for such redemption have been placed in trust for
the pro rata benefit of the holders of the shares to be redeemed so as to be and
to continue to be available therefor, then, from and after the redemption date,
dividends on the shares of the Class A Preferred Stock to be redeemed shall
cease to accrue and such shares shall no longer be deemed to be outstanding and
shall not have the status of shares of Class A Preferred Stock, and all rights
of the holders thereof as stockholders of the Corporation with respect to such
shares (except the right to receive from the Corporation amounts due in
connection with such redemption) shall cease. Upon surrender of the certificates
for any shares to be redeemed (properly endorsed or assigned for transfer), such
shares shall be redeemed by the Corporation at the redemption price described
above. If fewer than all the shares represented by any such certificate are
redeemed, a new certificate or certificates shall be issued representing the
unredeemed shares without cost to the holder thereof.
(d) Return of Funds. Any funds deposited with a bank or trust
company for the purpose of redeeming the Class A Preferred Stock and unclaimed
at the end of one year from the date fixed for redemption shall be repaid to the
Corporation upon its request, after which repayment the holders of shares called
for redemption shall look only to the Corporation for payment of the redemption
price. Interest accrued on such funds shall be paid to the Corporation from time
to time.
-5-
<PAGE>
(e) No Reissuance. Shares of Class A Preferred Stock that have been
issued and reacquired in any manner, including shares purchased or redeemed,
shall be deemed retired and shall be canceled and may not under any
circumstances thereafter be issued or otherwise disposed of by the Corporation.
(f) Interest on Late Redemption Payments. If the Corporation fails
to redeem any share of Class A Preferred Stock on the date such redemption is to
be made under this Article IV, in addition to any other remedies to which the
holders of such share of Class A Preferred Stock may be entitled, the
Corporation shall be required to pay interest on the amount to be paid to redeem
such share at a rate from day to day in effect that equals the lesser of the
highest lawful rate and the prime rate of interest, as then most recently
reported in The Wall Street Journal, plus 5%, from the date such share was to be
redeemed through and including the date on which such share is redeemed.
5. Conversion.
(a) Right to Convert. The holder of any share of Class A Preferred
Stock may at any time (except that if any such share has been tendered pursuant
to subparagraph 4(a) of this section D or has been properly called for
redemption pursuant to subparagraph 4(b) of this section D, then, as to such
share, such right shall terminate at the close of business on the date fixed for
its redemption, unless the Corporation defaults in its obligation to provide
sufficient money for the redemption of such share) convert such share into a
number of fully paid and nonassessable shares of Common Stock at the rate of
45.69936 shares of Common Stock for each share of Class A Preferred Stock
surrendered for conversion, subject to adjustment as provided for in this
paragraph 5. Such right shall be exercised by the surrender of the share to be
converted to the Corporation at any time during normal business hours at the
office or agency then maintained by it for payment of dividends on the shares of
the Class A Preferred Stock or, if none, the principal executive offices of the
Corporation (the "Payment Office"), accompanied by written notice to the
Corporation of such holder's election to convert and (if required by the
Corporation or any conversion agent) by an instrument of transfer, in form
satisfactory to the Corporation and to any conversion agent, duly executed by
the registered holder or by such holder's duly authorized attorney, and transfer
tax stamps or funds therefor, if required pursuant to subparagraph 5(i) of this
section D.
(b) [Intentionally Omitted]
(c) Conversion Mechanics. As promptly as practicable after the
surrender for conversion of any share of the Class A Preferred Stock in the
manner provided in subparagraph 5(a) and the payment in cash of any amount
required by the provisions of subparagraph 5(i), the Corporation will deliver or
cause to be delivered at the Payment Office, to or upon the written order of the
holder of such share, certificates representing the number of full shares of
Common Stock issuable upon such conversion, issued in such name or names as such
holder may direct. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the share in
proper order for conversion, and all rights of the holder of such share of Class
A Preferred Stock as a holder of such share shall cease at such time and the
Person(s) in whose name(s) the certificates for such shares of Common Stock are
to be issued shall be treated for all purposes as having become the record
holder(s) thereof at such time.
-6-
<PAGE>
(d) Dividends on Converted Stock. The registered holder of any share
of Class A Preferred Stock that is converted at a time that there are accrued
and unpaid dividends on such share shall continue to be entitled to receive such
dividends notwithstanding the conversion thereof (but such share shall not
accrue dividends after the date of conversion), which dividends shall be paid at
the time dividends due with respect to the same Class A Dividend Period(s) are
paid on other shares of Class A Preferred Stock or upon liquidation of the
Corporation, whichever first occurs.
(e) Adjustments to Number of Shares. The number of shares of Common
Stock issuable upon conversion of each share of Class A Preferred Stock shall be
adjusted as follows:
(i) If the Corporation (A) pays a dividend or makes a
distribution on its Common Stock in shares of its capital stock (whether shares
of Common Stock or of capital stock of any other class), (B) subdivides its
outstanding shares of Common Stock into a greater number of shares, (C) combines
its outstanding shares of Common Stock into a smaller number of shares, or (D)
issues by reclassification of its shares of Common Stock any shares of capital
stock of the Corporation (including any reclassification in connection with a
merger or consolidation in which the Corporation is the surviving corporation),
then the number of shares of Common Stock issuable upon conversion of each share
of Class A Preferred Stock shall be adjusted so that the holder of any share of
the Class A Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number and kind of shares of capital stock that such
holder would have owned immediately following such action had such share been
converted immediately prior thereto. An adjustment made pursuant to this
subparagraph 5(e) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination, or
reclassification.
(ii) If the Corporation issues rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the current market price per
share (as determined pursuant to subparagraph 5(e)(iv) below) of the Common
Stock on the record date mentioned below, the conversion rate shall be adjusted
so that the same shall equal the rate determined by multiplying the conversion
rate in effect immediately prior to the date of issuance of such rights or
warrants by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or warrants plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or warrants plus the
number of shares that the aggregate offering price of the total number of shares
so offered would purchase at such current market price. Such adjustment shall
become effective, retroactively, immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. For
the purposes of this subparagraph 5(e)(ii), the issuance of rights or warrants
to subscribe for or purchase stock or securities convertible into shares of
Common Stock shall be deemed to be the issuance of rights or warrants to
purchase the shares of Common Stock into which such stock or securities are
convertible at an aggregate offering price equal to the aggregate offering price
of such stock or securities plus the minimum aggregate amount (if any) payable
upon conversion of such stock or securities into Common Stock.
(iii) If the Corporation distributes to all holders of its
Common Stock evidences of its indebtedness or assets (excluding any cash
dividend paid from retained earnings of the Corporation) or rights or warrants
to subscribe to securities of the Corporation (excluding
-7-
<PAGE>
those referred to in subparagraph 5(e)(ii) above), then in each such case the
conversion rate shall be adjusted so that the same shall equal the rate
determined by multiplying the conversion rate in effect immediately prior to the
date of such distribution by a fraction of which the numerator shall be the
current market price per share (determined as provided in subparagraph 5(e)(iv)
below) of the Common Stock on the record date mentioned below (which will be
prior to the distribution), and of which the denominator shall be such current
market price per share of Common Stock less the then fair market value (as
reasonably determined by the board of directors of the Corporation) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights or warrants applicable to one share of Common Stock. Such
adjustment shall become effective, retroactively, immediately after the record
date for the determination of stockholders entitled to receive such
distribution.
(iv) For the purpose of any computation under subparagraphs
5(e)(ii) and 5(e)(iii) above and under subparagraph 5(f), the current market
price per share of Common Stock on any date shall be deemed to be the average of
the daily closing prices for 30 consecutive trading days commencing 45 trading
days before the day in question. The "closing price" on any trading day shall
mean the reported closing price on such day on the New York Stock Exchange or on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any such exchange, then the average of the reported closing bid and
asked prices in the over-the-counter market as reported on NASDAQ or a similar
reporting service or, if no such quotations are available, the fair market price
as reasonably determined by the board of directors of the Corporation. A
"trading day" is a day on which the New York Stock Exchange, principal national
securities exchange, or over-the-counter market, as appropriate, is open for
trading.
(v) In any case in which this subparagraph 5(e) shall require
that an adjustment be made effective, retroactively, immediately following a
record date, the Corporation may elect to defer (but only until five business
days following the mailing by the Corporation of the certificate of independent
public accountants described in subparagraph 5(e)(vii) below) issuing to the
holder of any shares converted after such record date (A) the shares of Common
Stock and other capital stock of the Corporation issuable upon such conversion
over and above (B) the shares of Common Stock and other capital stock of the
Corporation issuable upon such conversion only on the basis of the conversion
rate prior to adjustment.
(vi) No adjustment in the conversion rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments that by reason of this
subparagraph 5(e)(vi) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; and, provided further, that
adjustment shall be required and made in accordance with the provisions of this
subparagraph 5(e) (other than this subparagraph 5(e)(vi)) not later than such
time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. All calculations under
this paragraph (vi) shall be made to the nearest one millionth of a share.
(vii) Whenever the conversion rate is adjusted as herein
provided, the Corporation shall promptly (A) file with the conversion agent, if
any, a certificate of a firm of independent accountants selected by the board of
directors (who may be the regular accountants employed by the Corporation)
setting forth the conversion rate after such adjustment and setting forth a
brief statement of the facts requiring such adjustment and (B) mail or cause to
be mailed a notice of such adjustment to the holders of shares of the Class A
Preferred Stock.
-8-
<PAGE>
(f) Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of any share or shares of Class A Preferred Stock. If
more than one such share of Class A Preferred Stock is surrendered for
conversion at the same time by the same holder, the number of full shares that
are issuable upon the conversion thereof shall be computed on the basis of the
aggregate number of shares so surrendered. If any fractional interest in a share
of Common Stock would, except for the provisions of this subparagraph 5(f), be
deliverable upon the conversion of any share or shares, the Corporation shall,
in lieu of delivering the fractional share therefor, adjust such fractional
interest by payment to the holder of such surrendered share or shares of an
amount in cash equal (computed to the nearest cent) to the current market value
of such fractional interest on the last trading day prior to the date of
conversion, computed in accordance with subparagraph 5(e)(iv) of this section D.
(g) Mergers; Etc. If there is (i) any consolidation, merger, or
conversion to which the Corporation is a party, other than a consolidation or a
merger that does not result in any reclassification of, or change in,
outstanding shares of the Common Stock, (ii) any sale or conveyance to another
Person of all or substantially all of the assets of the Corporation, or (iii)
any other event that causes the holders of Common Stock to receive a different
or additional kind or amount of shares of stock or other securities or other
property (other than an event for which an adjustment in the kind and amount of
shares of stock or other securities or other property for which the Class A
Preferred Stock is convertible is otherwise made pursuant to this paragraph 5),
then the holder of each share of Class A Preferred Stock then outstanding shall
have the right upon conversion pursuant to the terms hereof to receive the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale, conveyance, or other event by a holder of the
number of shares of Common Stock issuable upon conversion of such share
immediately prior to such consolidation, merger, sale, conveyance, or other
event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph 5. The provisions
of this subparagraph (g) shall similarly apply to successive consolidations,
mergers, conversions, sales, conveyances, and other events.
(h) Reserves. The Corporation covenants that it will at all times
reserve and keep available, solely for the purpose of issue upon conversion of
the shares of Class A Preferred Stock, such number of shares of Common Stock as
shall be issuable upon the conversion of all such outstanding shares, provided,
that nothing contained herein shall be construed to preclude the Corporation
from satisfying its obligations in respect of the conversion of shares of Class
A Preferred Stock by delivery of shares of Common Stock that are held in the
treasury of the Corporation.
(i) No Charges. The issuance of certificates for shares of Common
Stock upon conversion of Class A Preferred Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than that of the holder of the
share or shares converted, the Person(s) requesting the issuance thereof shall
pay to the Corporation the amount of any tax that may be payable in respect of
any transfer involved in such issuance or shall establish to the satisfaction of
the Corporation that such tax has been paid.
(j) Conversion Shares. The shares of Common Stock and other
securities issued upon conversion of Class A Preferred Stock and any other
securities into which the Common Stock or other such securities are changed,
reclassified, split, combined, or converted or for which
-9-
<PAGE>
they are exchanged by amendment to the Corporation's Certificate of
Incorporation or by consolidation, merger, or otherwise, and any securities paid
as a dividend thereon are collectively called the "Conversion Shares."
Appropriate adjustment shall be made to the terms of this section D, including
the term "Common Stock," to give effect to each such change, reclassification,
split, combination, conversion, exchange, or dividend.
6. Voting Rights.
(a) Generally. Except as otherwise required by law or as expressly
provided herein, each share of Class A Preferred Stock shall entitle the holder
thereof to notice of any stockholders' meeting in accordance with the by-laws of
the Corporation and to vote upon all matters submitted to a vote of
stockholders. Each share of Class A Preferred Stock shall be entitled to the
number of votes on any matter equal to the number of shares of Common Stock into
which such share of Class A Preferred Stock could be converted on the record
date for the vote or written consent of stockholders with respect to such
matter. Fractional votes shall not, however, be permitted and any fractional
voting rights (after aggregating all shares of Common Stock into which shares of
Class A Preferred Stock held by each holder could be converted) shall be rounded
downward to the nearest whole number. Except as otherwise required by law or
expressly provided herein, the holders of Class A Preferred Stock and Common
Stock shall vote together and not as separate classes or series.
(b) Election of Directors.
(i) The holders of Class A Preferred Stock, Existing Stone
Common Stock (hereinafter defined), and Conversion Shares, collectively, shall
have, at all times, the right to elect the percentage of directors of the
Corporation, rounded to the next highest whole number, that equals their
Ownership Percentage. As used herein, the term "Ownership Percentage" means, at
any time, the percentage obtained by dividing (A) the number of shares of Common
Stock into which the outstanding shares of Class A Preferred Stock could be
converted at such time plus the number of shares of Existing Stone Common Stock
and Conversion Shares divided by (B) the number of shares of Common Stock
actually outstanding at such time plus the number of shares of Common Stock into
which the outstanding shares of Class A Preferred Stock could be converted at
such time; provided, however, that in no event shall the number of directors to
be elected by the holders of Class A Preferred Stock, Existing Stone Common
Stock, and Conversion Shares pursuant to this subparagraph 6(b)(i) be less than
one.
(ii) During the continuance of an Event of Default, the
holders of shares of Class A Preferred Stock shall have the following additional
voting rights with respect to the election of directors:
(A) The size of the board of directors of the Corporation
shall automatically be increased by a number equal to one plus the number of
directors previously constituting the entire board and the holders of Class A
Preferred Stock shall have the exclusive right to elect the persons to fill such
vacancies. Such voting right shall continue for the Class A Preferred Stock
until such time as no Event of Default exists, at which time such voting right
of the holders of the Class A Preferred Stock shall terminate, subject to
revesting upon the occurrence of any Event of Default, the size of the board of
directors shall be reduced to the number of directors in place immediately prior
to its increase pursuant to this subparagraph, and the term of each of the
-10-
<PAGE>
directors who was elected by the holders of Class A Preferred Stock pursuant to
this subparagraph shall terminate.
(B) The voting right provided in this subparagraph 6(b)(ii)
may be exercised initially either at a special meeting of the holders of the
Class A Preferred Stock, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors and,
thereafter, at annual meetings.
(C) Upon any termination of the voting rights of the holders
of Class A Preferred Stock pursuant to this subparagraph 6(b)(ii), subject to
the requirements of the Delaware General Corporation Law, the term of office of
each director elected by the holders of Class A Preferred Stock pursuant to this
subparagraph 6(b)(ii) shall terminate (and each such director will take any
action reasonably requested by the other directors or the officers of the
Corporation to evidence the fact that such director no longer serves on the
board of directors).
(iii) For purposes of this paragraph 6(b), the "Special Voting
Stock" is the Existing Stone Common Stock, Conversion Shares, and Class A
Preferred Stock when subparagraph 6(b)(i) (or any director elected pursuant to
such subparagraph) is involved and is the Class A Preferred Stock when
subparagraph 6(b)(ii) (or any director elected pursuant to such subparagraph) is
involved; the "Special Voting Holders" are the holders of the Special Voting
Stock; and the "Other Holders" are all holders of capital stock other than the
Special Voting Holders. At any meeting held for the purpose of electing one or
more directors at which the Special Voting Holders have the right to elect one
or more directors as provided in this subparagraph 6(b), the presence in person
or by proxy of Special Voting Holders who own a majority of the Special Voting
Stock shall be required and be sufficient to constitute a quorum of such
class(es) for the election of a director by such class(es). At any such meeting
or adjournment thereof (A) the absence of a quorum of the holders of Special
Voting Stock having such right shall not prevent the election of any director(s)
other than those to be elected solely by the holders of Special Voting Stock and
the absence of a quorum or quorums of the Other Holders entitled to elect any
other director(s) shall not prevent the election of the director(s) to be
elected by the holders of the Special Voting Stock (B) except as otherwise
required by law, in the absence of a quorum of the Special Voting Holders, a
majority of the Special Voting Holders present in person or by proxy shall have
the power to adjourn the meeting for the election of a director or directors
that the Special Voting Holders are entitled to elect, from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present.
(iv) Any vacancy in the board of directors in respect of any
director elected by the Special Voting Holders shall be filled by the vote of
the holders of the Special Voting Holders at a special meeting called in
accordance with the procedures set forth in this subparagraph 6(b), or, if no
such special meeting shall be called, at the next annual meeting of
stockholders. No director elected by the holders Special Voting Stock pursuant
to this subparagraph 6(b) may be removed except by operation of this Certificate
of Incorporation or vote of the holders of the Special Voting Stock.
(v) At any time when the voting right provided under this
subparagraph 6(b) is vested in the Special Voting Holders, and if such right has
not already been initially exercised, a duly authorized officer of the
Corporation shall, upon the written request of the holder(s) of record of at
least 10% of the outstanding Special Voting Stock, addressed to the Secretary of
the Corporation, call a special meeting of the Special Voting Holders. Such
meeting shall be held at
-11-
<PAGE>
the earliest practicable date upon the notice required for annual meetings of
stockholders at the place where the last annual meeting of stockholders of the
Corporation was held or the Corporation's principal executive office. If such
meeting is not called by a duly authorized officer of the Corporation within ten
days after such notice is given, then the holder(s) of record of at least 10% of
the outstanding Special Voting Stock may designate in writing one of their
number to call such meeting at the expense of the Corporation, and such meeting
may be called by such Person so designated upon the notice required for annual
meetings of stockholders and shall be held at the place where the last annual
meeting of stockholders of the Corporation was held or the Corporation's
principal executive office. Any holder of Special Voting Stock shall have access
to the stock books of the Corporation for the purpose of causing a meeting of
stockholders to be called pursuant to the provisions of this paragraph.
(c) Special Matters. So long as any shares of Class A Preferred
Stock remain outstanding, the Corporation will not, either directly or
indirectly or through merger or consolidation with any other Person or
otherwise, without the affirmative vote at a meeting or the written consent with
or without a meeting of the holders of at least a majority in number of shares
of Class A Preferred Stock then outstanding:
(i) Amend, alter, or repeal any of the provisions of this
Certificate of Incorporation or the by-laws of the Corporation so as in any such
case to affect adversely the preferences, rights, or powers of the Class A
Preferred Stock; provided, however, that the amendment or alteration of the
provisions of this Certificate of Incorporation or the by-laws of the
Corporation so as to authorize or create, or to increase the authorized amount
of, any Junior Securities shall not be deemed to affect adversely the powers,
rights, or preferences of the holders of shares of Class A Preferred Stock.
(ii) Authorize, create, issue, or increase the authorized
amount of, any shares of any class or any security convertible into shares of
any class ranking on a parity with or senior to shares of Class A Preferred
Stock in the distribution of assets on any liquidation, dissolution, or winding
up of the Corporation or in the payment of dividends.
(iii) Borrow or agree to borrow more than $250,000 in any
transaction or series of related transactions.
(iv) Permit any sale, transfer, issuance, or redemption or
series of sales, transfers, issuances, or redemptions (or any combination
thereof) of shares of the Corporation's capital stock by the holders thereof or
by the Corporation that results in the outstanding Class A Preferred Stock and
Conversion Shares, in the aggregate, constituting less than 25% of the
outstanding Voting Securities of the Corporation or being entitled to less than
25% of the Equity Value of the Corporation.
(v) Sell or lease all or a substantial part of its assets.
(vi) Engage in any transaction or series of related
transactions requiring an aggregate payment of, or having an aggregate value of,
at least $50,000 with any Affiliate.
(vii) Be a party to any merger or consolidation with or into
another Person or convert from a Delaware corporation to any other type of
entity.
-12-
<PAGE>
(viii) Apply for or consent to the appointment of a receiver,
custodian, trustee, intervenor, or liquidator of all or a substantial part of
its assets, voluntarily become the subject of a bankruptcy, reorganization, or
insolvency proceeding or become insolvent or admit in writing that it is unable
to pay its debts as they become due, make a general assignment for the benefit
of creditors, file a petition or answer seeking reorganization or an arrangement
with creditors or attempt to take advantage of any bankruptcy or insolvency
laws, file an answer admitting the material allegations of, or consent to, or
default in answering, a petition filed against it in any bankruptcy,
reorganization, or insolvency proceeding, or voluntarily become the subject of
an order for relief under any bankruptcy, reorganization, or insolvency
proceeding.
As used herein, the term "Voting Securities" means securities entitled to
vote in the election of one or more directors; the term "Equity Value" means, at
any time, the net worth of the Corporation, as reflected on the then most recent
regularly prepared balance sheet of the Corporation; and the term "Affiliate"
means, with respect to any Person, any other Person that controls, is controlled
by, or is under common control with such first Person and any family member of
such first Person.
7. Preemptive Rights. If the Corporation proposes to issue or sell (a) any
unissued or treasury shares of any class of Common Stock of the Corporation
(whether now or hereafter authorized) (other than any share subject to options
outstanding on January 20, 1999, pursuant to the Employee Stock Option Plan),
(b) any obligations, evidences of indebtedness, or other securities of the
Corporation convertible into or exchangeable for, or carrying or accompanied by
any rights to receive, purchase, or subscribe to any such unissued or treasury
shares of Common Stock, or (c) any right to subscribe to or to receive, or any
warrant or option for the purchase of, any of the foregoing securities (all of
the foregoing being called "equity securities" herein), the Corporation shall
give each holder of Class A Preferred Stock (but only to the extent that an
adjustment is not required to be made in the number and/or type of securities
issuable upon conversion of such Class A Preferred Stock pursuant to this
Article as a result of such issuance or sale) and each holder of Existing Stone
Common Stock and of Conversion Shares at least 30 days' advance written notice
of such proposal (the "Class A Issuance Notice") and each such holder shall have
the preemptive right, exercisable by written notice to the Corporation within 25
days after such Class A Issuance Notice is given, to purchase or acquire a
portion of the equity securities proposed to be so issued or sold that equals,
after the issuance of all such equity securities, including those to be issued
or sold pursuant to such preemptive right, the percentage of outstanding Common
Stock into which such Class A Preferred Stock could be converted or the
percentage of Existing Stone Common Stock or Conversion Shares, as appropriate,
owned by such holder. Any equity securities purported to be issued or sold in
violation of this provision shall be void and deemed for all purposes to have
never been issued or sold.
8. Right to Force Purchase or Sale.
(a) General. The holders of Class A Preferred Stock, Conversion
Shares, and the shares of Common Stock owned by Stone on January 20, 1999 (the
"Existing Stone Common Stock") shall have certain rights to purchase all of the
other Common Stock of the Corporation or to have the holders of all of the other
Common Stock purchase the Class A Preferred Stock, Conversion Shares, and
Existing Stone Common Stock on the terms set forth in this paragraph 8.
(b) Timing. A Buy-Sell Notice (hereinafter defined) may be given (i)
by the holders of a majority of the outstanding Class A Preferred Stock,
Conversion Shares, and Existing
-13-
<PAGE>
Stone Common Stock at any time during the existence of an Event of Default or
(ii) by the holders of a majority of the outstanding Existing Stone Common Stock
and Conversion Shares at any time after August 1, 2003. The Person or Persons
giving a Buy-Sell Notice are called, whether one or more, the "Invoking
Holders."
(c) Buy-Sell Notice. The Invoking Holders may offer to buy all (but
not less than all) of the outstanding Common Stock (other than the Existing
Stone Common Stock and Conversion Shares) (the "Target Common Stock") by giving
to each holder of Target Common Stock (each, a "Member of the Common Group") a
written notice (the "Buy-Sell Notice") that contains (i) the offer, (ii) the
price per share at which the Invoking Holders are willing to purchase all (but
not less than all) of the Target Common Stock (the "Buy-Sell Purchase Price"),
as it may be adjusted pursuant to subparagraph 8(j) (the "Adjusted Buy-Sell
Purchase Price"), and (iii) an offer to sell all outstanding shares of Target
Stone Stock, whether or not owned by an Invoking Holder, to one or more Members
of the Common Group for their Adjusted Buy-Sell Purchase Price (on an
as-if-converted basis with respect to any Class A Preferred Stock included in
such offer). The offer to purchase or sell shares will be irrevocable for a
period of 60 days from receipt of the Buy-Sell Notice. As used herein, the term
"Target Stone Stock" means the Class A Preferred Stock (other than any shares
with respect to which a Put Notice has been given), the Existing Stone Common
Stock, and the Conversion Shares, if the Buy-Sell Notice is given during the
existence of an Event of Default, and the Existing Stone Common Stock and the
Conversion Shares, if the Buy-Sell Notice is given at any other time and the
term "Members of the Stone Group" means the Person or Persons who own the Target
Stone Stock. The Invoking Holders shall send, at the time they send the Buy-Sell
Notice to the Members of the Common Group, a copy of the Buy-Sell Notice to each
other holder of Class A Preferred Stock, Existing Stone Common Stock, and
Conversion Shares, if the Buy-Sell Notice is given during the continuance of an
Event of Default, or to each other holder of Existing Stone Common Stock and
Conversion Shares, if the Buy-Sell Notice is given at any other time.
(d) Right of Members of Common Group. One or more of the Members of
the Common Group may elect within the 60-day period to purchase all (but not
less then all) the Target Stone Stock for the relevant Adjusted Buy-Sell
Purchase Price by sending written notice to the holders of the Target Stone
Stock (the "Common Group Purchase Notice"). If, within the 60-day period, no
Common Group Purchase Notice is given, all Members of the Common Group will be
deemed to have elected to sell their Target Common Stock to the Invoking Holders
and/or other Members of the Stone Group for the relevant Adjusted Buy-Sell
Purchase Price. The Member(s) of the Common Group who send a Common Group
Purchase Notice shall send, at the time the Common Group Purchase Notice is
given, a copy of the Common Group Purchase Notice to each other Member of the
Common Group.
(e) Right to Participate. Notwithstanding who gives the Invoking
Notice, each Member of the Stone Group may participate in the purchase of Target
Common Stock if the Common Group Purchase Notice is not given and if such Person
gives written notice to all other Members of the Stone Group at least 20 days
before the closing is to occur. Notwithstanding who gives the Common Group
Purchase Notice, each holder of Target Common Stock may participate in the
purchase of Target Stone Stock if the Common Group Purchase Notice is given and
if such holder gives written notice to all other holders of Target Common Stock
at least 20 days before the closing is to occur.
-14-
<PAGE>
(f) Payment of Purchase Price. The Adjusted Buy-Sell Purchase Price
will be payable in cash or other immediately available funds at the time of the
consummation of the sale of the Target Common Stock or Target Stone Stock, as
appropriate (the "Subject Shares").
(g) Closing. The closing of any sale of Subject Shares under this
paragraph 8 will be consummated on the 90th day after the Buy-Sell Notice is
given (or if such day is not a business day, the first business day thereafter)
unless an earlier date is agreed to by each Person that is purchasing Subject
Shares (each being called a "Buying Holder") and each Person that is selling
Subject Shares (each being called a "Selling Holder"). The closing will be held
at the principal place of business of the Corporation or at such other location
to which the Buying Holders who are to purchase a majority of the shares to be
sold (a "Majority of the Buying Holders") and the Selling Holders who hold a
majority of the shares to be sold (a "Majority of the Selling Holders") agree.
At the closing, each Buying Holder will deliver the Adjusted Buy-Sell Purchase
Price and each Selling Holder will execute and deliver the assignments and other
documents, with customary warranties of title, as will be necessary to convey
the Subject Shares to the Buying Holders free and clear of all liens, claims,
and encumbrances (other than those existing under securities laws, if any), with
all required transfer tax stamps affixed. If a Selling Holder fails or refuses
to execute any instrument required to consummate the sale of its shares under
this paragraph 8, the Person selected as their representative by a Majority of
the Buying Holders (the "Buying Holders' Representative") is hereby granted the
irrevocable power of attorney, which will be binding on such Selling Holder as
to all third Persons, to execute and deliver on behalf of such Selling Holder
all instruments required to consummate the purchase. The power of attorney is
coupled with an interest and is irrevocable by death, insolvency, dissolution,
or otherwise.
(h) Payment of Debts: Offset. If, at the date of the closing, a
Selling Holder has any outstanding debts to the Corporation or to a Buying
Holder relating to the Corporation, all proceeds of the purchase price due the
Selling Holder for its Subject Shares will be paid to the Corporation or the
Buying Holder (pro rata in accordance with the amounts owed by the Selling
Holder to each) for and on behalf of the Selling Holder until all the debts have
been paid and discharged in full.
(i) Release of Guaranties. If a Selling Holder or any of its
Affiliates is the guarantor of any debt of the Corporation, the Corporation and
the Buying Holders shall use commercially reasonable efforts to have all such
guaranties fully and unconditionally released at the time the closing of the
purchase and sale of Subject Shares under this paragraph 8 occurs or as soon
thereafter as is practical.
(j) Operations in Pre-Closing Period. From the date a Buy-Sell
Notice is given until the date the closing occurs under this paragraph 8 or, if
earlier, the date on which a Majority of the Buying Holders and a Majority of
the Selling Holders agree not to proceed with such closing, the Corporation will
continue to be operated in the ordinary course, as if the closing were not going
to occur, and the directors of the Corporation will exercise their power and
authority in good faith and without regard to the fact that such closing may
occur; provided, however, that, (i) any and all distributions received by any
Selling Holder from the Corporation during such period with respect to Subject
Shares shall be credited against and reduce the price otherwise payable to the
Selling Holder for such shares; (ii) without the approval of a Majority of the
Selling Holders and a Majority of the Buying Holders, the Corporation shall not
issue or sell any shares of capital stock (other than pursuant to options, stock
appreciation rights, or similar arrangements held directly by employees or
former employees pursuant to the terms of the Corporation's Employee Stock
Option Plan or any
-15-
<PAGE>
other agreements or arrangements approved by the holders of a majority of the
outstanding Class A Preferred Stock or upon conversion of any debt incurred
without violation of this Article IV prior to the date the Buy-Sell Notice is
given) or any warrants, rights, calls, options, or debt exercisable for or
convertible into any capital stock; and (iii) without the approval of a Majority
of the Selling Holders and a Majority of the Buying Holders, the Corporation
shall not enter into any contracts or agreements, or otherwise agree, to sell or
otherwise dispose of all or substantially all of its properties or assets;
provided, however, the Corporation shall be authorized to consummate any
transactions that were the subject of binding contractual obligations entered
into prior to the commencement of such period.
(k) Default by Buying Holders. In the event the Buying Holders
default in their obligation to purchase the Subject Shares of any Selling
Holder, then the Selling Holders may, in addition to all other remedies
available for such default under this paragraph 8, at law, or in equity, (i)
seek specific performance of the Buying Holders' obligations under this
paragraph 8 or (ii) purchase the Subject Shares of all Members of the Common
Group (if a Member of the Common Group is the defaulting Buying Holder) or
purchase the Subject Shares of all Members of the Stone Group (if a Member of
the Stone Group is the defaulting Buying Holder) in accordance with this
paragraph 8 except that the Adjusted Buy-Sell Purchase Price for the Subject
Shares of the Buying Holders shall equal 75% of the Adjusted Buy-Sell Purchase
Price established by the Buy-Sell Notice originally given by the Invoking
Holders in accordance with subparagraph 8(b), as adjusted in accordance with
subparagraph 8(j), or (iii) refuse to sell any of their Subject Shares.
(l) Allocation Among Buying Holders. The Buying Holders may allocate
the Subject Shares purchased from the Selling Holders in such proportions as
they agree upon among themselves. In the absence of such agreement, they shall
allocate the Subject Shares to be purchased by them in accordance with their
respective ownership of Target Stone Stock or Target Common Stock, as
appropriate.
(m) Decisions By Buying and Selling Holders. Whenever the Buying
Holders or Selling Holders are required or permitted to approve any matter or
make a decision with respect to any matter under this paragraph 8, the approval
or decision of Buying Holders who are to purchase a majority of the Subject
Shares or of Selling Holders who are to sell a majority of the Subject Shares,
as appropriate, shall be binding on all Buying Holders or Selling Holders,
respectively.
(n) Treatment of Class A Preferred Stock. For purposes of this
paragraph 8, each share of Class A Preferred Stock will be deemed to be the
number of shares of Common Stock into which it would be convertible (assuming it
could be converted) at the date the Buy-Sell Notice is given and the price to be
paid for a share of Class A Preferred Stock will be based on such concept.
(o) Binding Effect. Each holder of Common Stock, Class A Preferred
Stock, Existing Stone Common Stock, and Conversion Shares shall be bound by the
provisions of this paragraph 8, in accordance with its terms, whether or not
such holder affirmatively takes any action under this paragraph 8.
9. Event of Default. As used herein, the term "Event of Default"
means:
-16-
<PAGE>
(a) the existence, at any date, of unpaid dividends on the Class A
Preferred Stock in an aggregate amount equal to or exceeding the amount of
dividends payable thereon for four quarterly Class A Dividend Periods (whether
or not consecutive); or
(b) the failure of the Corporation to redeem any Tendered Shares as
required by this Article; or
(c) the purported taking by the Corporation of any action that
requires the consent or vote of the holders of Class A Preferred Stock without
obtaining the necessary consent or vote; or
(d) the failure of the Corporation to take any action (other than
one described in subparagraph 9(a) or 9(b) above) required to be taken by it
under this section D if such failure continues for ten days after notice thereof
is given to the Corporation by the holder(s) of at least 10% of the outstanding
Class A Preferred Stock; or
(e) the breach by the Corporation or any of its Affiliates of any
written agreement between the Corporation or any of its Affiliates, on the one
hand, and any holder of Class A Preferred Stock or any of its Affiliates, on the
other hand, or the default by the Corporation or any of its Affiliates in the
payment of any obligation for borrowed money owed to any holder of Class A
Preferred Stock or any of its Affiliates that, in either case, continues for ten
days after notice thereof is given to the Corporation or such Affiliate by the
holder(s) of at least 10% of the outstanding Class A Preferred Stock; or
(f) any Change in Control occurs without the prior approval of the
holders of a majority of the outstanding Class A Preferred Stock; or
(g) the failure of the Members of the Common Group to fulfill their
obligations under paragraph 8; or
(h) the failure of the Corporation to use funds drawn from the
Controlled Account (as defined in the Preferred Stock Purchase Agreement)
consistently in all material respects with the uses specified in the relevant
request for withdrawal submitted pursuant to the Preferred Stock Purchase
Agreement (unless such use was otherwise approved by the holders of a majority
of the outstanding Class A Preferred Stock) ; or
(i) the Corporation (i) has applied for or consented to the
appointment of a receiver, custodian, trustee, intervenor, or liquidator of all
or a substantial part of its assets, (ii) has voluntarily become the subject of
a bankruptcy, reorganization, or insolvency proceeding or become insolvent or
admitted in writing that it is unable to pay its debts as they become due, (iii)
has made a general assignment for the benefit of creditors, (iv) has filed a
petition or answer seeking reorganization or an arrangement with creditors or
attempted to take advantage of any bankruptcy or insolvency laws, (v) has filed
an answer admitting the material allegations of, or consented to, or defaulted
in answering, a petition filed against it in any bankruptcy, reorganization, or
insolvency proceeding, or (vi) is the subject of an order for relief under any
bankruptcy, reorganization, or insolvency proceeding; or
(j) an order, judgment, or decree has been entered by any court of
competent jurisdiction or other competent authority approving a petition
appointing a receiver, custodian,
-17-
<PAGE>
trustee, intervenor, or liquidator of the Corporation or of all or substantially
all of its assets (unless such order, judgment, or decree has been dismissed
within 30 days after the entry thereof); or a complaint or petition has been
filed against the Corporation seeking or instituting a bankruptcy, insolvency,
reorganization, rehabilitation, or receivership proceeding of the Corporation
(unless such proceeding has been dismissed within 30 days after the filing
thereof); or
(k) the Corporation is in default of an obligation for borrowed
money of at least $250,000 or is in default of its obligations under that
certain Registration Rights Agreement dated as of January 20, 1999, executed by
the Corporation and Stone.
As used herein, the term "Change in Control" means the failure of Steven
Krein or Daniel Feldman to be actively involved on a day-to-day basis in
performing for the Corporation the duties normally performed by senior
executives of comparable corporations or to own, collectively, outstanding
capital stock of the Corporation entitling them to at least a majority of the
distributions payable with respect to capital stock of the Corporation (other
than distributions payable at fair market rates to holders of preferred stock
and, if different, distributions payable to Stone and its successors and
assigns) or to own capital stock of the Corporation that entitles him to at
least 10% of the distributions of the Corporation (other than distributions
payable at fair market rates to holders of preferred stock).
E. Class B Preferred Stock
1. Rank. The Class B Preferred Stock shall, with respect to the payment of
dividends and upon liquidation, dissolution or winding up, rank senior and prior
to the Common Stock, the Class A Preferred Stock and any other stock issued by
the Corporation other than stock that, with the consent of the holders of Class
B Preferred Stock required by subparagraph 6(b) of this section E, is expressly
made senior or equal to the Class B Preferred Stock with respect thereto (the
Common Stock, the Class A Preferred Stock and such other securities that are not
so expressly made senior or equal to the Class B Preferred Stock being herein
called the "Class B Junior Securities").
2. Dividends. The holders of Class B Preferred Stock shall be entitled to
receive with respect to each share of Class B Preferred Stock, if and when cash
dividends are paid on Common Stock, cash dividends out of funds legally
available therefor, in an amount equal to the dividend then being paid on one
share of Common Stock multiplied by the number of shares of Common Stock into
which such share of Class B Preferred Stock is then convertible. Dividends shall
not be declared on Common Stock without (i) the dividend required by this
subparagraph being simultaneously declared on the Class B Preferred Stock and
(ii) the consent of holders of a majority of the shares of Class B Preferred
Stock then outstanding.
3. Liquidation Preference.
(a) Priority. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the Corporation, then,
before any dividend, distribution, or payment shall be made to the holders of
any Class B Junior Securities, and subject to the rights of creditors and
holders of shares of stock ranking senior to the Class B Preferred Stock upon
dissolution, liquidation, and winding up of the affairs of the Corporation, if
any, the holders of Class B Preferred Stock then outstanding shall be entitled
to be paid out of the assets of the Corporation available for distribution to
its stockholders an amount in cash equal to $7.50 for each share of Class B
Preferred Stock outstanding, together with an amount in cash equal to all
declared but unpaid dividends thereon to the date fixed for liquidation,
dissolution, or winding up
-18-
<PAGE>
(the "Preferred Amount") (provided that no such liquidation, dissolution or
winding up shall affect the rights of conversion under Paragraph 5). Except as
provided in this paragraph, holders of Class B Preferred Stock shall not be
entitled to any additional distribution in the event of liquidation,
dissolution, or winding up of the affairs of the Corporation. If upon the
occurrence of such event, the assets and funds available for distribution among
the holders of Class B Preferred Stock shall be insufficient to permit the
payment to such holders of the full Preferred Amount, then the entire assets and
funds of the Corporation legally available for distribution to the stockholders
shall be distributed among the holders of the Class B Preferred Stock in
proportion to the full Preferred Amount each such holder of Class B Preferred
Stock is otherwise entitled to receive.
(b) Events Constituting Liquidation. For the purposes of this
Paragraph 3, a liquidation event shall include, but not be limited to, the
voluntary sale, conveyance, exchange, or transfer (for cash, shares of stock,
securities, or other consideration) of all or substantially all of the property
or assets of the Corporation, the consolidation or merger of the Corporation
with any other Person, the conversion of the Corporation or any business
combination or similar event.
4. Redemption.
(a) At Option of Holder. At any time and from time to time on or
after June 1, 2004, any holder of Class B Preferred Stock may, by sending
written notice (each, a "Class B Put Notice") to the Corporation, require the
Corporation to redeem all of the Class B Preferred Stock held by such holder
(the shares to which such Class B Put Notice relates being called the "Tendered
Shares") for $7.50 plus declared but unpaid dividends thereon as of the date
fixed for redemption (the "Redemption Price"). Within five days of its receipt
of a Class B Put Notice (including a Subsequent Class B Put Notice), the
Corporation shall deliver a copy thereof to every other holder of record of
Class B Preferred Stock. Each holder of Class B Preferred Stock that actually
gives a Class B Put Notice to the Corporation within five days after its receipt
of the copy of a Class B Put Notice given by another holder (a "Class B
Subsequent Put Notice") shall be deemed to have given such Class B Subsequent
Put Notice on the same date as the original Class B Put Notice was actually
given. Upon receipt of any Class B Put Notice, the Corporation shall be
obligated to redeem for cash the Tendered Shares within 30 days after the
Corporation's receipt of such Class B Put Notice; provided, however, that if the
Corporation does not have sufficient funds that are legally available for such
redemption, (i) the Corporation shall redeem so many of the Tendered Shares as
it may lawfully redeem, (ii) if the Corporation cannot redeem all of the
Tendered Shares, the Corporation shall redeem the Tendered Shares in the
chronological order in which the Class B Put Notices related thereto were given
or deemed given and shall redeem the Tendered Shares subject to Class B Put
Notices given or deemed given on the same date pro rata, (iii) the Corporation
shall promptly take such action as is lawful and possible for it to cause
sufficient funds to become legally available to redeem all Tendered Shares,
including but not limited to a sale of the Corporation or a sale of all or
substantially all of its assets, (iv) Tendered Shares not redeemed shall remain
outstanding shares for all purposes until redeemed and paid for in full, and (v)
a holder of Tendered Shares may, by written notice to the Corporation given at
any time after the 60th day after giving a Class B Put Notice but prior to the
time payment in full is made to such holder, revoke such Class B Put Notice with
respect to any or all Tendered Shares that have not then been redeemed.
(b) At Option of Company. To the extent the Corporation has funds
legally available for such redemption, the Corporation, at the option of the
board of directors of the Corporation (or an authorized committee of the board
of directors), may redeem all (but not less
-19-
<PAGE>
than all) the outstanding shares of Class B Preferred Stock at any time on or
after June 1, 2004, upon notice given as hereinafter specified, at the Fair
Market Value thereof at the date fixed for redemption. Notice of every
redemption of shares of Class B Preferred Stock pursuant to this paragraph (b)
(a "Redemption Notice") shall be mailed by first Series mail, postage prepaid,
not less than 20 days nor more than 60 days prior to the redemption date
addressed to the holder(s) of record of the shares to be redeemed; provided,
however, that the failure to give such Redemption Notice or any defect therein
or in the mailing thereof shall not affect the validity of the proceeding for
the redemption of any shares to be redeemed except as to the holder to whom the
Corporation has failed to give such notice or except as to the holder to whom
notice was defective. Each Redemption Notice shall state: (i) the redemption
date; (ii) the redemption price; and (iii) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price. The term "Fair Market Value" means the value determined by the Value
Determination Procedure, provided however, that such Fair Market Value shall in
no event be less than the Redemption Price. The term "Value Determination
Procedure" means a procedure to determine the fair market value of a share of
Class B Preferred Stock, which determination shall be made in the manner stated
below. The Corporation and the holders of a majority of the outstanding Class B
Preferred Stock may agree on the fair market value of a share of Class B
Preferred Stock in writing after the Corporation sends a written proposal of the
fair market value of a share of Class B Preferred Stock (which proposal shall
accompany the Redemption Notice) and a request that the holders of a majority of
the outstanding Class B Preferred Stock agree that the amount included in such
notice is the fair market value of each share of Class B Preferred Stock (such
notice and request being called the "Valuation Confirmation Request"), and any
amount so agreed upon shall be the final, conclusive determination of Fair
Market Value with respect to each share of Class B Preferred Stock.
Alternatively, the Corporation and the holders of a majority of the outstanding
Class B Preferred Stock may mutually select a single investment banking firm to
determine Fair Market Value. If they do so, they shall use their best efforts to
cause such investment banking firm to determine promptly the fair market value
of a share of Class B Preferred Stock and to give written notice of its
determination to the Corporation and each holder of Class B Preferred Stock
promptly thereafter. The amount so set forth in such notice shall be the final,
conclusive determination of Fair Market Value of each share of Class B Preferred
Stock. If the Corporation and the holders of a majority of the Class B Preferred
Stock neither agree on the Fair Market Value nor mutually select a single
investment banking firm to determine Fair Market Value, each of the Corporation
and the holders of a majority of the Class B Preferred Stock shall have the
right to select an investment banking firm of national reputation who shall
agree on a determination of the fair market value of a share of Class B
Preferred Stock, and if unable to agree, shall select a third investment banking
firm whose determination (which shall not be higher than the higher value
determined nor lower than the lower value determined by the first two
investments banks) shall be the final, conclusive determination of the Fair
Market Value of each share of Class B Preferred Stock. If either party does not
select an investment banking firm within 10 days of receipt of notice of the
selection of an investment banking firm by the other party, the party providing
the notice shall use commercially reasonable efforts to cause the investment
bank it has selected to determine promptly the Fair Market Value. The Fair
Market Value determined by such investment bank shall be the final conclusive
determination of Fair Market Value. The fees of all investment banking firms
selected to determine Fair Market Value pursuant to this subparagraph shall be
paid by the Corporation.
(c) Deposit of Funds. If a Class B Put Notice or a Redemption Notice
has been given in accordance with subparagraph (4)(a) or (b) of this section E
and if, on or before the redemption date specified in such notice, all funds
necessary for such redemption have been placed in trust for the pro rata benefit
of the holders of the shares to be redeemed so as to be
-20-
<PAGE>
and to continue to be available therefor, then, from and after the redemption
date, such shares shall no longer be deemed to be outstanding and shall not have
the status of shares of Class B Preferred Stock, and all rights of the holders
thereof as stockholders of the Corporation with respect to such shares (except
the right to receive from the Corporation amounts due in connection with such
redemption) shall cease. Upon surrender of the certificates for any shares to be
redeemed (properly endorsed or assigned for transfer), such shares shall be
redeemed by the Corporation at the redemption price described above. If fewer
than all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed shares
without cost to the holder thereof.
(d) Return of Funds. Any funds deposited with a bank or trust
company for the purpose of redeeming the Class B Preferred Stock and unclaimed
at the end of one year from the date fixed for redemption shall be repaid to the
Corporation upon its request, after which repayment the holders of shares called
for redemption shall look only to the Corporation for payment of the redemption
price. Interest accrued on such funds shall be paid to the Corporation from time
to time.
(e) No Reissuance. Shares of Class B Preferred Stock that have been
issued and redeemed or converted, shall be deemed retired and shall be canceled
and may not under any circumstances thereafter be issued or otherwise disposed
of by the Corporation.
(f) Interest on Late Redemption Payments. If the Corporation fails
to redeem any share of Class B Preferred Stock on the date such redemption is to
be made under this Paragraph 4, in addition to any other remedies to which the
holders of such share of Class B Preferred Stock may be entitled, the
Corporation shall be required to pay interest on the amount to be paid to redeem
such share at a rate from day to day in effect that equals the lesser of the
highest lawful rate and the prime rate of interest, as then most recently
reported in The Wall Street Journal, plus 5%, from the date such share was to be
redeemed through and including the date on which such share is redeemed.
5. Conversion.
(a) Right to Convert. The holder of any share of Class B Preferred
Stock may at any time (except that if any such share has been tendered pursuant
to subparagraph 4(a) of this section E, then, as to such share, such right shall
terminate at the close of business on the date fixed for its redemption, unless
the Corporation defaults in its obligation to provide sufficient money for the
redemption of such share) convert such share into fully paid and nonassessable
shares of Common Stock at the rate of one share of Common Stock for each share
of Class B Preferred Stock surrendered for conversion, subject to adjustment as
provided for in this paragraph 5 (the "Conversion Rate"). Such right shall be
exercised by the surrender of the share to be converted to the Corporation at
any time during normal business hours at the office or agency then maintained by
it for payment of dividends on the shares of the Class B Preferred Stock or, if
none, the principal executive offices of the Corporation (the "Payment Office"),
accompanied by written notice to the Corporation of such holder's election to
convert and (if required by the Corporation or any conversion agent) by an
instrument of transfer, in form satisfactory to the Corporation and to any
conversion agent, duly executed by the registered holder or by such holder's
duly authorized attorney, and transfer tax stamps or funds therefor, if required
pursuant to subparagraph 5(i) of this section E.
(b) Automatic Conversion. Each share of Class B Preferred Stock
outstanding on the date on which the Initial Public Offering is consummated
shall automatically
-21-
<PAGE>
and without any further action on the part of the Corporation or the holder of
such share of Class B Preferred Stock be converted into fully paid and
nonassessable shares of Common Stock at the rate of one share of Common Stock
for each share of Class B Preferred Stock surrendered for conversion, subject to
adjustment as provided for in this paragraph 5. The term "Initial Public
Offering" means the consummation of a firm commitment public offering of Common
Stock underwritten by a nationally recognized underwriter with net proceeds to
the Corporation of at least $20 million and at a per share price of no less than
$10.50.
(c) Conversion Mechanics. As promptly as practicable after the
surrender for conversion of any share of the Class B Preferred Stock in the
manner provided in subparagraph 5(a) or the automatic conversion of any share of
Class B Preferred Stock, as appropriate, and the payment in cash of any amount
required by the provisions of subparagraph 5(i), the Corporation will deliver or
cause to be delivered at the Payment Office, to or upon the written order of the
holder of such share, certificates representing the number of full shares of
Common Stock issuable upon such conversion, issued in such name or names as such
holder may direct. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the share in
proper order for conversion, and all rights of the holder of such share of Class
B Preferred Stock as a holder of such share shall cease at such time and the
Person(s) in whose name(s) the certificates for such shares of Common Stock are
to be issued shall be treated for all purposes as having become the record
holder(s) thereof at such time.
(d) Dividends on Converted Stock. The registered holder of any share
of Class B Preferred Stock that is converted at a time that there are declared
but unpaid dividends on such share shall continue to be entitled to receive such
dividends notwithstanding the conversion thereof, which dividends shall be paid
at the time the dividends that were declared on Common Stock that gave rise to
the right of the holder of Class B Preferred Stock to receive such dividends are
paid on shares of Common Stock or upon liquidation of the Corporation, whichever
first occurs.
(e) Adjustments to Number of Shares. The number of shares of Common
Stock issuable upon conversion of each share of Class B Preferred Stock shall be
adjusted as follows:
(i) If the Corporation (A) pays a dividend or makes a
distribution on its Common Stock in shares of its capital stock (whether shares
of Common Stock or of capital stock of any other Series), (B) subdivides its
outstanding shares of Common Stock into a greater number of shares, (C) combines
its outstanding shares of Common Stock into a smaller number of shares, or (D)
issues by reclassification of its shares of Common Stock any shares of capital
stock of the Corporation (including any reclassification in connection with a
merger or consolidation in which the Corporation is the surviving corporation),
then the number of shares of Common Stock issuable upon conversion of each share
of Class B Preferred Stock shall be adjusted so that the holder of any share of
the Class B Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number and kind of shares of capital stock that such
holder would have owned immediately following such action had such share been
converted immediately prior thereto. An adjustment made pursuant to this
subparagraph 5(e) shall become effective immediately after the record date in
the case of a dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification.
-22-
<PAGE>
(ii) If the Corporation issues rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the then current market price per
share (as determined pursuant to subparagraph 5(e)(iv) below) of the Common
Stock on the record date for such issuance, the Conversion Rate shall be
adjusted so that the same shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to the date of issuance of such
rights or warrants by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares that the aggregate offering price of the
total number of shares so offered would purchase at such current market price.
Such adjustment shall become effective, retroactively, immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. For the purposes of this subparagraph 5(e)(ii), the issuance
of rights or warrants to subscribe for or purchase stock or securities
convertible into shares of Common Stock shall be deemed to be the issuance of
rights or warrants to purchase the shares of Common Stock into which such stock
or securities are convertible at an aggregate offering price equal to the
aggregate offering price of such stock or securities plus the minimum aggregate
amount (if any) payable upon conversion of such stock or securities into Common
Stock.
(iii) If the Corporation distributes to all holders of its
Common Stock evidences of its indebtedness or assets (excluding any cash
dividend paid from retained earnings of the Corporation) or rights or warrants
to subscribe to securities of the Corporation (excluding those referred to in
subparagraph 5(e)(ii) above), then in each such case the Conversion Rate shall
be adjusted so that the same shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to the date of such distribution by
a fraction of which the numerator shall be the current market price per share
(determined as provided in subparagraph 5(e)(iv) below) of the Common Stock on
the record date mentioned below (which will be prior to the distribution), and
of which the denominator shall be such current market price per share of Common
Stock less the then fair market value (as reasonably determined by the board of
directors of the Corporation or an authorized committee of the board of
directors) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights or warrants applicable to one share
of Common Stock. Such adjustment shall become effective, retroactively,
immediately after the record date for the determination of stockholders entitled
to receive such distribution.
(iv) If the Corporation issues shares of Common Stock or
securities convertible into or exercisable for Common Stock at a price per share
less than $6.00 (subject to adjustment pursuant to Paragraph 5(k)), the
conversion rate shall be adjusted so that the same shall equal the rate
determined by multiplying the conversion rate in effect immediately prior to the
date of issuance of such shares by a fraction of which the numerator shall be
$6.00 (subject to adjustment pursuant to Paragraph 5(k)) and of which the
denominator shall be the price per share of Common Stock at which such shares
are issued. Such adjustment shall become effective on the date of such issuance
of Common Stock (and/or convertible securities). For the purposes of this
subparagraph 5(e)(iv), the issuance of rights or warrants to subscribe for or
purchase Common Stock or stock or securities convertible into or exercisable for
shares of Common Stock shall be deemed to be the issuance of the shares of
Common Stock into which such rights, warrants, stock, or securities are
convertible at an aggregate offering price equal to the aggregate offering price
of such stock or securities plus the minimum aggregate amount (if any) payable
upon conversion or exercise of such stock or securities into Common Stock.
-23-
<PAGE>
(v) For the purpose of any computation under subparagraphs
5(e)(ii), and 5(e)(iii) above and under subparagraph 5(f), the current market
price per share of Common Stock on any date shall be deemed to be the average of
the daily closing prices for 20 consecutive trading days commencing 22 trading
days before the day in question. The "closing price" on any trading day shall
mean the reported closing price on such day on the New York Stock Exchange or on
the principal national securities exchange on which the Common Stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any such exchange, then the average of the reported closing bid and
asked prices in the over-the-counter market as reported on NASDAQ or a similar
reporting service or, if no such quotations are available, the fair market price
as reasonably determined by the board of directors of the Corporation (or an
authorized committee of the board of directors). A "trading day" is a day on
which the New York Stock Exchange, principal national securities exchange, or
over-the-counter market, as appropriate, is open for trading.
(vi) In any case in which this subparagraph 5(e) shall require
that an adjustment be made effective retroactively immediately following a
record date, the Corporation may elect to defer (but only until five business
days following the mailing by the Corporation of the certificate of independent
public accountants described in subparagraph 5(e)(vii) below) issuing to the
holder of any shares converted after such record date (A) the shares of Common
Stock and other capital stock of the Corporation issuable upon such conversion
over and above (B) the shares of Common Stock and other capital stock of the
Corporation issuable upon such conversion only on the basis of the Conversion
Rate prior to adjustment.
(vii) No adjustment in the Conversion Rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that any adjustments that by reason of this
subparagraph 5(e)(vii) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; and, provided further, that
adjustment shall be required and made in accordance with the provisions of this
subparagraph 5(e) (other than this subparagraph 5(e)(vii)) not later than such
time as may be required in order to preserve the tax-free nature of a
distribution to the holders of shares of Common Stock. All calculations under
this paragraph (vii) shall be made to the nearest one millionth of a share.
(viii) Whenever the Conversion Rate is adjusted as herein
provided, the Corporation shall promptly (A) file with the conversion agent, if
any, a certificate of a firm of independent accountants selected by the board of
directors of the Corporation (or an authorized committee of the board of
directors) (who may be the regular accountants employed by the Corporation)
setting forth the conversion rate after such adjustment and setting forth a
brief statement of the facts requiring such adjustment and (B) mail or cause to
be mailed a notice of such adjustment to the holders of shares of the Class B
Preferred Stock.
(f) Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of any share or shares of Class B Preferred Stock. If
more than one such share of Class B Preferred Stock is surrendered for
conversion at the same time by the same holder, the number of full shares that
are issuable upon the conversion thereof shall be computed on the basis of the
aggregate number of shares so surrendered. If any fractional interest in a share
of Common Stock would, except for the provisions of this subparagraph 5(f), be
deliverable upon the conversion of any share or shares, the Corporation shall,
in lieu of delivering the fractional share therefor, round up such fractional
share to the next whole share.
-24-
<PAGE>
(g) Mergers; Etc. If there is (i) any consolidation, merger, or
conversion to which the Corporation is a party, other than a consolidation or a
merger that does not result in any reclassification of, or change in,
outstanding shares of the Common Stock, (ii) any sale or conveyance to another
Person of all or substantially all of the assets of the Corporation, or (iii)
any other event that causes the holders of Common Stock to receive a different
or additional kind or amount of shares of stock or other securities or other
property (other than an event for which an adjustment in the kind and amount of
shares of stock or other securities or other property for which the Class B
Preferred Stock is convertible is otherwise made pursuant to this paragraph 5),
then the holder of each share of Class B Preferred Stock then outstanding shall
have the right upon conversion pursuant to the terms hereof to receive the kind
and amount of shares of stock and other securities and property receivable upon
such consolidation, merger, sale, conveyance, or other event by a holder of the
number of shares of Common Stock issuable upon conversion of such share
immediately prior to such consolidation, merger, sale, conveyance, or other
event, subject to adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph 5. The provisions
of this subparagraph (g) shall similarly apply to successive consolidations,
mergers, conversions, sales, conveyances, and other events.
(h) Reserves. The Corporation covenants that it will at all times
reserve and keep available, solely for the purpose of issue upon conversion of
the shares of Class B Preferred Stock, such number of shares of Common Stock as
shall be issuable upon the conversion of all such outstanding shares, provided,
that nothing contained herein shall be construed to preclude the Corporation
from satisfying its obligations in respect of the conversion of shares of Class
B Preferred Stock by delivery of shares of Common Stock that are held in the
treasury of the Corporation.
(i) No Charges. The issuance of certificates for shares of Common
Stock upon conversion of Class B Preferred Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance. However, if any
such certificate is to be issued in a name other than that of the holder of the
share or shares converted, the Person(s) requesting the issuance thereof shall
pay to the Corporation the amount of any tax that may be payable in respect of
any transfer involved in such issuance or shall establish to the satisfaction of
the Corporation that such tax has been paid.
(j) Conversion Shares. The shares of Common Stock and other
securities issued upon conversion of Class B Preferred Stock and any other
securities into which the Common Stock or other such securities are changed,
reclassified, split, combined, or converted or for which they are exchanged by
amendment to the Corporation's Certificate of Incorporation or by consolidation,
merger, or otherwise, and any securities paid as a dividend thereon are
collectively called the "Conversion Shares." Appropriate adjustment shall be
made to the terms of this section E, including the term "Common Stock," to give
effect to each such change, reclassification, split, combination, conversion,
exchange, or dividend.
(k) Adjustment to Redemption Price. In the event of an adjustment to
the number of shares of Common Stock issuable upon conversion of each share of
Class B Preferred Stock pursuant to Paragraph 5(e)(iv), the dollar value used to
calculate any adjustment pursuant to such paragraph shall be calculated by
multiplying such dollar amount in effect prior to any adjustment by a fraction
the numerator of which is the number of shares of Common Stock issuable upon the
conversion of one share of Class B Preferred Stock prior to any adjustment under
Paragraph 5(e)(iv) and the denominator of which is the number of shares
-25-
<PAGE>
of Common Stock issuable upon the conversion of one share of Class B Preferred
Stock after any adjustment under Paragraph 5(e)(iv).
6. Voting Rights.
(a) Generally. Except as otherwise required by law or as expressly
provided herein, each share of Class B Preferred Stock shall entitle the holder
thereof to notice of any stockholders' meeting in accordance with the by-laws of
the Corporation and to vote upon all matters submitted to a vote of
stockholders. Each share of Class B Preferred Stock shall be entitled to the
number of votes on any matter equal to the number of shares of Common Stock into
which such share of Class B Preferred Stock could be converted on the record
date for the vote or written consent of stockholders with respect to such
matter. Fractional votes shall not, however, be permitted and any fractional
voting rights (after aggregating all shares of Common Stock into which shares of
Class B Preferred Stock held by each holder could be converted) shall be rounded
to the nearest whole number. Except as otherwise required by law or expressly
provided herein, the holders of Class B Preferred Stock and Common Stock shall
vote together and not as separate classes or series.
(b) Director Designees; Observers.
(i) The Corporation will, at the request of holders holding a
majority in interest of either the Class B Preferred Stock or the Common Stock
into which it is converted ("Majority Holders"), during the shorter of (i) the
period that is five years from the date hereof or (ii) the period that is three
years from the date of the consummation of an Initial Public Offering, appoint
two designees of such Majority Holders to the Board of Directors of the
Corporation, and use its best efforts to nominate and cause to be elected and
reelected to the Board of Directors of the Corporation such designees or any
other designees of the Majority Holders as they may direct from time to time
during such three or five year period, as the case may be, including upon the
existence of any vacancy created with respect to any such designees or, at the
request of the Majority Holders to withdraw and substitute any designee of such
Majority Holders. The Corporation will give such designees notice of all
meetings of the Board of Directors of the Corporation at the same time and in
the same manner that directors are notified and will provide compensation to
such designees as set forth for members of the Board of Directors of the
Corporation generally or, if applicable, as set forth for independent members of
the Board of Directors of the Corporation, and will reimburse such designees for
all expenses incurred in attending such meetings, including, but not limited to,
food, transportation and lodging.
(ii) The Corporation will, at the request of any individual
stockholder that holds no less than 333,333 shares of the Class B Preferred
Stock, for so long as such stockholder holds such shares of Class B Preferred
Stock, permit an agent of any such holder to attend all meetings of the Board of
Directors of the Corporation as a non-voting observer (unless an employee of
such holder or such holder's affiliate has been designated to the Board of
Directors of the Corporation pursuant to Section 6(b)(i) hereof). The
Corporation will give such agent notice of all meetings of the Board of
Directors of the Corporation at the same time and in the same manner that
directors are notified and will reimburse such agent for all expenses incurred
in attending such meetings, including, but not limited to, food, transportation
and lodging.
(b) Special Matters. So long as any shares of Class B Preferred
Stock remain outstanding, the Corporation will not, either directly or
indirectly or through merger or consolidation with any other Person or
otherwise, without the affirmative vote at a meeting or the
-26-
<PAGE>
written consent with or without a meeting of the holders of at least a majority
of the shares of Class B Preferred Stock then outstanding:
(i) Amend, alter or repeal any of the provisions of this
Certificate of Incorporation or the by-laws of the Corporation so as in any such
case to affect adversely the preferences, rights, or powers of the Class B
Preferred Stock; provided, however, that the amendment or alteration of the
provisions of this Certificate of Incorporation or the by-laws of the
Corporation so as to authorize or create, or to increase the authorized amount
of, any Junior Securities shall not be deemed to affect adversely the powers,
rights, or preferences of the holders of shares of Class B Preferred Stock.
(ii) Authorize, create, issue or increase the authorized
amount of, any shares of any Series or any security convertible into shares of
any Series ranking on a parity with or senior to shares of Class B Preferred
Stock in the distribution of assets on any liquidation, dissolution, or winding
up of the Corporation or in the payment of dividends.
(iii) Redeem, repurchase or acquire any Junior Securities
(except for shares repurchased from employees, directors or other shareholders
pursuant to a Shareholders Agreement among the holders of the shares of Class B
preferred stock and certain other shareholders pursuant to the terms of the
Company's stock option plans or that certain Shareholders' Agreement between
certain holders of the Corporation's Common Stock and Class B Preferred Stock
dated June 11, 1999.
(iv) Unless such transaction is approved by all of the
Corporation's Disinterested Directors or is an employment or similar contract,
engage in any transaction with any officer, employee, stockholder, or director
of the Corporation if the transaction is of a type that requires approval by the
Corporation's board of directors (or an authorized committee of the board of
directors).
(v) Be a party to any merger or consolidation with or into
another Person or convert from a Delaware corporation to any other type of
entity or sell any assets other than in the ordinary course of business or
engage in a recapitalization or reorganization.
(vi) Enter into or otherwise become a party to any agreement
pursuant to which one or more stockholders of the Corporation transfer capital
stock of the Corporation to one or more third Persons (other than Affiliates of
the transferor(s)) pursuant to which such third Person(s) acquire capital stock
of the Corporation that generally entitles them to elect a majority of the
Corporation's board of directors (or an authorized committee of the board of
directors).
(vii) Make any capital expenditure that exceeds by more than
$500,000 the amount of capital expenditures included in the Approved Annual
Budget (as defined below) or commit to make any such capital expenditure.
(viii) Unless approved by a majority of the members of the
board of directors of the Corporation (or an authorized committee of the board
of directors), hire or terminate the employment of the Corporation's chief
executive officer, chief operating officer, president, chief financial officer,
chief technology officer, chief sales officer or any other officer of equivalent
or senior status.
-27-
<PAGE>
(ix) Unless approved by a majority of the members of the board
of directors of the Corporation (or an authorized committee of the board of
directors), approve any annual budget for the Corporation.
(x) Unless approved by a majority of the members of the board
of directors, permit any lien or encumbrance of assets of the Corporation (other
than those that arise in the ordinary course of business).
(xi) Unless approved by a majority of the members of the board
of directors, incur any indebtedness for borrowed money that exceeds by more
than $200,000 the amount of indebtedness for borrowed money set forth in the
Approved Annual Budget (as defined below).
(xii) Unless approved by a majority of the members of the
board of directors, guaranty any obligation for borrowed money that exceeds by
more than $200,000 the amount of guaranteed indebtedness for borrowed money set
forth in the Approved Annual Budget (as defined below).
(xiii) Liquidate or dissolve the Corporation or apply for or
consent to the appointment of a receiver, custodian, trustee, intervenor, or
liquidator of all or a substantial part of its assets, voluntarily become the
subject of a bankruptcy, reorganization, or insolvency proceeding or become
insolvent or admit in writing that it is unable to pay its debts as they become
due, make a general assignment for the benefit of creditors, file a petition or
answer seeking reorganization or an arrangement with creditors or attempt to
take advantage of any bankruptcy or insolvency laws, file an answer admitting
the material allegations of, or consent to, or default in answering, a petition
filed against it in any bankruptcy, reorganization, or insolvency proceeding, or
voluntarily become the subject of an order for relief under any bankruptcy,
reorganization, or insolvency proceeding.
(xiv) Declare or pay any dividend on the Common Stock.
The term "Affiliate" means, with respect to any Person, any other Person that
controls, is controlled by, or is under common control with such first Person
and any family member of such first Person; the term "Approved Annual Budget"
means, with respect to any fiscal year of the Corporation, the annual budget for
the Corporation for such fiscal year that has been approved by the board of
directors of the Corporation (or an authorized committee of the board of
directors) or the holders of at least 50% of the outstanding Class B Preferred
Stock; provided, however, that if a budget has not been so approved for a fiscal
year, the Approved Budget for the prior fiscal year shall be deemed to be the
Approved Annual Budget until another annual budget is so approved; and the term
"Disinterested Director" means, when used with respect to any matter, a director
who does not have any direct or indirect interest in the matter (other than any
interest that arises from the ownership of securities of the Corporation that is
available to all holders of such securities).
7. Preemptive Rights. If the Corporation proposes to issue or sell (a) any
unissued or treasury shares of any Series of capital stock of the Corporation
(whether now or hereafter authorized) (other than shares issued or sold (i) in
an Initial Public Offering, (ii) in connection with the acquisition of a
business or assets by the Corporation, (iii) to strategic partners pursuant to
transactions in which the Corporation is entering into material agreements for
the acquisition of goods or services to be used in connection with its business
and which
-28-
<PAGE>
transactions are approved by a majority of the board of directors of the
Corporation (or an authorized committee of the board of directors), (iv)
pursuant to options granted to officers, directors, employees or consultants
pursuant to stock option plans approved by a majority of the board of directors
of the Corporation (or an authorized committee of the board of directors) and
stockholders, (v) issued upon exercise of options or warrants outstanding on
April 30, 1999, or upon conversion of convertible securities outstanding on
April 30, 1999, (vi) issued in connection with bank credit lines or equipment
leases or other financing arrangements, or (vii) in connection with any stock
split, stock dividend, conversion or similar event); (b) any obligations,
evidences of indebtedness, or other securities of the Corporation convertible
into or exchangeable for, or carrying or accompanied by any rights to receive,
purchase, or subscribe to any such unissued or treasury shares of Common Stock,
or (c) any right to subscribe to or to receive, or any warrant or option for the
purchase of, any of the foregoing securities (all of the foregoing being called
"equity securities" herein), the Corporation shall give each holder of Class B
Preferred Stock (but only to the extent that an adjustment is not required to be
made in the number and/or type of securities issuable upon conversion of such
Class B Preferred Stock pursuant to this Article as a result of such issuance or
sale) at least 30 days' advance written notice of such proposal (the "Class B
Issuance Notice") and each such holder shall have the preemptive right,
exercisable by written notice to the Corporation within 30 days after such Class
B Issuance Notice is given, to purchase or acquire a portion of the equity
securities proposed to be so issued or sold that equals, after the issuance of
all such equity securities, including those to be issued or sold pursuant to
such preemptive right, the percentage of outstanding Common Stock owned by such
holder (assuming, for this purpose, that all shares of Class B Preferred Stock
are converted into Common Stock). Any equity securities purported to be issued
or sold in violation of this provision shall be void and deemed for all purposes
to have never been issued or sold.
F. Provisions Relating to the Class C Preferred Stock.
1. Issuable in Series. The Class C Preferred Stock may be issued from time
to time in one or more series, the shares of each series to have such
designations and powers, preferences, and rights, and qualifications,
limitations, and restrictions thereof, as are stated and expressed herein and in
the resolution or resolutions providing for the issue of such series adopted by
the board of directors of the Corporation (or an authorized committee of the
board of directors) as hereafter prescribed.
2. Authority to Create. Authority is hereby expressly granted to and
vested in the board of directors of the Corporation (or an authorized committee
of the board of directors) to authorize the issuance of the Class C Preferred
Stock from time to time in one or more series, and with respect to each series
of the Class C Preferred Stock, to fix and state by the resolution or
resolutions from time to time adopted providing for the issuance thereof the
following:
(a) whether or not the series is to have voting rights, full,
special, or limited, or is to be without voting rights, and whether or not such
series is to be entitled to vote as a separate Series either alone or together
with the holders of one or more other classes or series of stock;
(b) the number of shares to constitute the series and the
designations thereof;
(c) the preferences, and relative, participating, optional, or other
special rights, if any, and the qualifications, limitations, or restrictions
thereof, if any, with respect to any series;
-29-
<PAGE>
(d) whether or not the shares of any series shall be redeemable at
the option of the Corporation or the holders thereof or upon the happening of
any specified event, and, if redeemable, the redemption price or prices (which
may be payable in the form of cash, notes, securities, or other property), and
the time or times at which, and the terms and conditions upon which, such shares
shall be redeemable and the manner of redemption;
(e) whether or not the shares of a series shall be subject to the
operation of retirement or sinking funds to be applied to the purchase or
redemption of such shares for retirement, and, if such retirement or sinking
fund or funds are to be established, the annual amount thereof, and the terms
and provisions relative to the operation thereof;
(f) the dividend rate, whether dividends are payable in cash, stock
of the Corporation, or other property, the conditions upon which and the times
when such dividends are payable, the preference to or the relation to the
payment of dividends payable on any other Series or classes or series of stock,
whether or not such dividends shall be cumulative or noncumulative, and if
cumulative, the date or dates from which such dividends shall accumulate;
(g) the preferences, if any, and the amounts thereof which the
holders of any series thereof shall be entitled to receive upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of, the
Corporation;
(h) whether or not the shares of any series, at the option of the
Corporation or the holder thereof or upon the happening of any specified event,
shall be convertible into or exchangeable for, the shares of any other Series or
classes or of any other series of the same or any other Series or classes of
stock, securities, or other property of the Corporation and the conversion price
or prices or ratio or ratios or the rate or rates at which such exchange may be
made, with such adjustments, if any, as shall be stated and expressed or
provided for in such resolution or resolutions; and
(i) such other special rights and protective provisions with respect
to any Series or series as may to the board of directors of the Corporation (or
an authorized committee of the board of directors) deem advisable.
3. Variations Among Series. The shares of each series of the Class C
Preferred Stock may vary from the shares of any other series thereof in any or
all of the foregoing respects. The board of directors of the Corporation (or an
authorized committee of the board of directors) may increase the number of
shares of the Class C Preferred Stock designated for any existing class by a
resolution adding to such series authorized and unissued shares of the Class C
Preferred Stock not designated for any other series. The board of directors of
the Corporation (or an authorized committee of the board of directors) may
decrease the number of shares of the Class C Preferred Stock designated for any
existing class by a resolution subtracting from such series authorized and
unissued shares of the Class C Preferred Stock designated for such existing
series, and the shares so subtracted shall become authorized, unissued, and
undesignated shares of the Class C Preferred Stock.
-30-
<PAGE>
G. Notices.
Unless otherwise provided in this Article IV or by applicable law, all
notices, requests, demands, and other communications under this Article IV shall
be in writing and shall be personally delivered, delivered by facsimile or
courier service, or mailed, certified with first Series postage prepaid, to the
address set forth on the books of the Corporation, in the case of communications
to a stockholder, and to the registered office of the Corporation in the State
of Delaware or the chief executive offices of the Corporation, in the case of
communications to the Corporation. Each such notice, request, demand, or other
communication shall be deemed to have been given and received (whether actually
received or not) on the date of actual delivery thereof, if personally delivered
or delivered by facsimile transmission (if receipt is confirmed at the time of
such transmission by telephone or facsimile-machine-generated confirmation), or
on the third day following the date of mailing, if mailed in accordance with
this paragraph, or on the day specified for delivery to the courier service (if
such day is one on which the courier service will give normal assurances that
such specified delivery will be made). Any notice, request, demand, or other
communication given otherwise than in accordance with this paragraph shall be
deemed to have been given on the date actually received. Any stockholder may
change its address for purposes of this paragraph by giving written notice of
such change to the Corporation in the manner hereinabove provided. Whenever any
notice is required to be given by law or by this Article IV, a written waiver
thereof, signed by the Person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to the giving of that notice.
H. Business Days. If any action is to be taken under the provisions of
this Article IV on a date that is a date on which national banks in the State of
New York are permitted to be closed, such action may be taken on the first day
thereafter on which national banks in the State of New York are not permitted to
be closed.
I. Information Rights. Until the Initial Public Offering is consummated,
each Person who holds shares of Class B Preferred Stock that were acquired from
the Company in June 1999 for an aggregate purchase price of at least $1,000,000
shall have the right to receive the following:
1. Monthly unaudited financial statements for the Corporation within
21 days after the end of the month to which such financial statements
relate, which financial statements will have a comparison to the financial
statements for the same month in the prior year and a comparison to the
amount contained in the Approved Annual Budget for such month.
2. Annual audited financial statements for the Corporation within
105 days after the end of the year to which such financial statements
relate.
3. Monthly and annual management projections and budgets at least 30
days prior to the start of the period to which such projections and
budgets relate and revisions thereto as soon as they are available.
4. Management reports describing the current status of the
Corporation and its operations and prospects by the 15th day of each odd
month during the year.
5. Notice of any litigation, adverse claims, disputes, and other
developments that are material to the Corporation promptly upon the
Corporation learning thereof.
-31-
<PAGE>
6. Access to all books and records of the Corporation, including
those of the Corporation's accountants and attorneys (to the extent the
Corporation may provide access to books and records held by accountants
and attorneys).
7. Such other information as may be reasonably requested by such
holder.
THIRD: The amendment of the Certificate of Incorporation of the
Corporation herein certified has been duly adopted in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
FOURTH: The effective time of the amendment herein certified shall be the
date of filing this Certificate of Amendment with the Delaware Secretary of
State.
[THIS SPACE LEFT BLANK INTENTIONALLY.]
-32-
<PAGE>
IN WITNESS WHEREOF, Netstakes, Inc. has caused these presents to be signed
in its name and on its behalf by its CEO on this 11th day of
June, 1999.
NETSTAKES, INC.
A Delaware corporation
By: /s/ Steven Krein
Name: Steven Krein
Its: CEO
<PAGE>
[REED SMITH SHAW & MCCLAY LLP LETTERHEAD]
Webstakes.com, Inc.
11 West 19th Street
10th Floor
New York, NY 10011
Re: Webstakes.com, Inc. -- Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for Webstakes.com, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
registration statement (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission (Registration No. 333-80593) pursuant to
the Securities Act of 1933, as amended (the "Act"). The Registration Statement
relates to the public offering of up to ____________ shares (the "Shares") of
the Company's common stock, $.01 par value, including _______ shares
purchasable by the underwriters upon exercise of their over-allotment option.
All of the Shares are to be newly issued and sold by the Company. This opinion
is being furnished pursuant to Item 601(b)(5) of Regulation S-K under the Act.
In rendering the opinion set forth below, we have reviewed (a) the
Registration Statement and the exhibits thereto; (b) the Company's Articles of
Incorporation, including the Articles of Amendment filed with the Delaware
Secretary of State on June 11, 1999; (c) the Company's Amended and Restated
Bylaws; (d) certain records of the Company's corporate proceedings as reflected
in its minute books; and (e) such statutes, records and other documents as we
have deemed relevant. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity with the originals of all documents submitted to us as copies
thereof. In addition, we have made such other examinations of law and fact as we
have deemed relevant in order to form a basis for the opinion hereinafter
expressed. Our opinion set forth below is limited to the Delaware General
Corporation Law.
Based upon the foregoing, we are of the opinion that the Shares,
upon issuance by the Company in the manner and for the consideration
contemplated in the Registration Statement, will be validly issued, fully paid
and nonassessable.
<PAGE>
REED SMITH SHAW & McCLAY LLP
Webstakes.com, Inc.
Page 2
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the references to this Firm under the caption
"Legal Matters" in the Registration Statement. In giving such consent, we do not
thereby admit that we are acting within the category of persons whose consent is
required under Section 7 of the Act and the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
REED SMITH SHAW & McCLAY LLP
MBP/mw
<PAGE>
Frontier GlobalCenter
Master Service Agreement No. 1.0
This Master Services Agreement (this "Agreement") is entered into as the
_____ day of _______, 1999 ("Effective Date") by and between the entity
indicated on the Services Order Form attached hereto, with an office at the
address listed on the Services Order Form, ("Webstakes"), and Frontier
GlobalCenter, Inc., a corporation with offices at 88 Pine Street, 7th floor, New
York, NY. ("GlobalCenter"), and describes the terms and conditions pursuant to
which GlobalCenter shall license to Client certain Software and provide certain
Services (as defined below).
In consideration of the mutual promises and upon the terms and conditions
set forth below, the parties agree as follows:
1. NATURE OF AGREEMENT This is an Agreement for the provision by GlobalCenter of
Internet connectivity services (the "Bandwidth"), the lease of equipment to
provide such services (the "Hardware"), the availability of space to store and
operate such Hardware ("Space") and the licensing of software to provide such
Services (the "Software"), together comprising an Internet connectivity and
collocation package to be provided by GlobalCenter under this Agreement
(together, the "Services").
2. SERVICE ORDERS
2.1. Orders. Client may issue one or more service orders describing the
Bandwidth, Space, Hardware, and Software that Client desires ("Service Order").
Each Service Order will set forth the prices, initial term of Services and other
information in the form set forth in the Service Order Form. No Service Order
shall be effective until accepted by GlobalCenter. All Service Orders will be
subject to the terms and conditions of this Agreement, and the terms of this
Agreement shall supercede any terms and conditions which may appear on Client's
order form, or purchase order.
2.2. Cancellation. Cancellation requires at least 60 day notice. In the event
that Client cancels or terminates a Service Order at any time for any reason
whatsoever other than expiration of a Service Order or a Service Interruption
(as defined below).
2.3. IP Addresses. GlobalCenter may assign on a temporary basis a reasonable
number of Internet Protocol Addresses ("IP Addresses") from the address space
assigned to the GlobalCenter by InterNIC. Client acknowledges that the IP
Addresses are the sole property of GlobalCenter, are assigned to Client as part
of the Service, and are not "portable," as such term is used by InterNIC.
GlobalCenter reserves the right to change the IP Address assignments at any
time; however, GlobalCenter shall use reasonable efforts to avoid any disruption
to Client resulting from such renumbering requirement. GlobalCenter will give
Client reasonable notice of any such renumbering. Client agrees that it will
have no right to IP Addresses upon termination of this Agreement, and that any
renumbering required of Client after termination shall be the sole
responsibility of Client.
2.4. Proprietary Rights. This Agreement transfers to Client neither title nor
any proprietary or intellectual property rights to the Software, Hardware,
documentation, or any copyrights, patents, or trademarks, embodied or used in
connection therewith, except for the rights expressly granted herein.
2.5. License Restrictions. Client agrees that it will not itself, or through any
parent, subsidiary, affiliate, agent or other third party:
2.6.1. copy the Software except as expressly allowed under this Agreement. In
the event Client makes any copies of the Software, Client shall reproduce all
proprietary notices of GlobalCenter on any such copies;
2.6.2. reverse engineer, decompile, disassemble, or otherwise attempt to derive
source code from the Software;
2.6.3. sell, lease, license or sublicense the Software or the documentation;
2.6.4. write or develop any derivative software or any other software program
based upon the Software or any Confidential Information (as defined below); or
2.6.5. use the Software to provide processing services to third parties, or
otherwise use the Software on a service bureau basis.
3. HARDWARE TERMS AND CONDITIONS
3.1. Installation. GlobalCenter will use commercially reasonable efforts to
install the Hardware as the Hardware is shipped to GlobalCenter. At Client's
request, GlobalCenter will work with the Client on an installation plan to
define installation time frame and requirements.
3.2. Lease of Hardware. If so indicated on the Service Order, Client shall lease
the Hardware, and GlobalCenter shall obtain and deliver to the Space the
Harware. In the event Client leases the Hardware, the following terms and
conditions shall apply: The Hardware is and shall remain the property of
GlobalCenter. Client shall not have taken, or attempt to take, any right, title
or interest therein or permit any third party to take any interest therein.
Client will not transfer, sell, assign, sublicense, pledge, or otherwise dispose
of, encumber or suffer a lien or encumbrance upon or against the Hardware or any
interest in the Hardware. Client will use the Hardware only at the Space. Client
will not move the Hardware from the facility without GlobalCenter's prior
written permission. Client shall be responsible for any damage to the Hardware.
Client will
1
<PAGE>
use the Hardware only for the purpose of exercising its rights under
this Agreement.
3.3. Rent to Own. If so indicated on the Service Order, Client shall lease the
Hardware on a "rent to own" plan. In such event, all of the terms and conditions
in Section 4.3 shall apply, and the following terms and conditions shall also
apply. At the end of the term of the Services Order, providing Client is not in
breach of this Agreement, Client shall have the option to purchase the Hardware.
The purchase price shall be as indicated on the Service Order. Upon payment by
Client of the purchase price, title in the Hardware shall pass to Client at the
Space. Unless the Service Order is extended by mutual agreement, Client shall
immediately delete, or shall allow GlobalCenter to delete, all copies of the
Software, associated documentation, or any other materials of GlobalCenter
resident on the Hardware.
4. SPACE
4.1. License to Occupy. GlobalCenter grants to Client a non-exclusive license to
occupy the Space. Client acknowledges that it has been granted only a license to
occupy the Space and that it has not been granted any real property interests in
the Space. In the event, however, that this arrangement shall be construed by
the owner of the building in which the Space is situated to be such a grant and
if the landlord of the building assesses such a grant to be a violation of the
lease under which GlobalCenter occupies its premises, GlobalCenter agrees to
cooperate with Client in obtaining the approvals Client may need to obtain from
the landlord.
4.2. Material and Changes. Client shall not make any construction changes or
material alterations to the interior or exterior portions of the Space,
including any cabling or power supplies for the Hardware, without obtaining
GlobalCenter's prior written approval for Client to have the work performed.
Alternatively, Client may request GlobalCenter to perform the work. GlobalCenter
reserves the right to perform and manage any construction or alterations within
the Space areas it rates to be negotiated between the Parties herein. Client
agrees not to erect any signs or devices to the exterior portion of the Space
without submitting the request to GlobalCenter and obtaining GlobalCenter's
advance written approval.
4.3. Damage. Client agrees to reimburse GlobalCenter for all reaonable repair or
restoration costs associated with damage or destruction caused by Client's
personnel, Client's agents, Client's suppliers/contractors, or Client's visitors
during the term or as a consequence of Client's removal of the Hardware or
property installed in the Space.
4.4. Insurance. Unless otherwise agreed, Client agrees to maintain, at Client's
expense, (i) Comprehensive General Liability Insurance in an amount not less
than One Million Dollars ($1,000,000) per occurrence for bodily injury or
property damage, (ii) Employer's Liability in an amount not less then Five
Hundred Thousand Dollars ($500,000) per occurrence, and (iii) Worker's
Compensation in an amount not less than that prescribed by statutory limits.
Prior to taking occupancy of the Collocation Space, Client shall furnish
GlobalCenter with certificates of insurance which evidence the minimum levels of
insurance set forth herein. Client shall also maintain insurance covering
Hardware or property owned or leased by Client against loss or physical damage.
4.5. Regulations. Client shall comply with and not violate all of GlobalCenter's
safety, health and operational rules and regulations, which may be amended by
GlobalCenter from time to time. Client's failure to comply with GlobalCenter's
rules and regulations shall constitute a material default under this Agreement.
GlobalCenter may, in its sole discretion, limit Cient's access to a reasonable
number of authorized Client employees or designees. Client shall not interfere
with any other clients of GlobalCenter, or such other clients' use of the Space.
4.6. Disclaimer. GlobalCenter does not make any representation or warranty
whatsoever as to the fitness of the Space for Client's use. Client hereby
assumes any and all risks associated with Client, its agents or employees' use
of the Space and shall indemnify, defend and hold harmless GlobalCenter from any
and all claims, liabilities, judgments, causes of action, damages, costs, and
expenses (including reasonable attorneys' and experts' fees), caused by or
arising in connection with such use.
5. SERVICE INTERRUPTIONS
5.1. 99.9% Uptime Guarantee. In the event of Downtime (as defined below), the
monthly fee payable for the Services shall be reduced as follows:
5.1.1. if the total Downtime in the calendar month is more than seven and
two tenths (7.2) hours, but does not exceed fourteen and four-tenths (14.4)
hours, the monthly fee for that month shall be reduced by one-third
(33.3%);
5.1.2. if the total Downtime in the calendar month is more than fourteen
and four-tenths (14.4) hours, but does not exceed twenty-one and six-tenths
(21.6) hours, the monthly fee for that month shall be reduced by two-thirds
(66.6%); and
5.1.3. If the total Downtime in the calendar month is more than twenty-one
and six-tenths (21.6) hours, the monthly fee for that month shall be
waived.
For the purpose of this Section, Downtime shall mean any interruption of one (1)
minute or more in the availability to users of any Web site residing on the
Hardware and made available through the Services, only if such interruption is
due to either (i) failure by GlobalCenter to manage a server anomaly so as to
avoid interruption in Web availability, or (ii) a disruption in the connection
between any such server
2
<PAGE>
and the Internet. For purposes of this Section, the Internet is deemed to
consist of services that commence where GlobalCenter transmits a Client's
consent to GlobalCenter's carrier(s) at the GlobalCenter border router port(s).
Such carriers provide GlobalCenter with private and dedicated bandwidth.
GlobalCenter undertakes no obligation for the circuit or link between
GlobalCenter's facilities and such carrier's services. If router packet loss is
excess of seventy percent (70%) and is sustained for sixty (60) seconds or more,
GlobalCenter will classify this an "outage." If an "outage" continues for a
time period of more than two (2) minutes, then such outage will be deemed
Downtime.
5.2. Investigation of Service Interruptions. At Client's request, GlobalCenter
will investigate any report of Downtime, and attempt to remedy any Downtime
expeditiously. GlobalCenter reasonably determines that all facilities, systems
and equipment, furnished by GlobalCenter are functioning properly, and that
Downtime arose from some other cause. GlobalCenter reserves the right to recover
labor and materials cost for services actually performed at the usual and
customary rates for similar services provided by GlobalCenter to clients in the
same locality.
5.3. Termination. Client may terminate a Service Order in the event of Downtime
of either twenty-four (24) hours of cumulative time during any continuous twelve
(12) month period, or any continuous Downtime of eight (8) hours or more.
5.4. Sole Remedy. The terms and conditions of this Section 6 shall be Client's
sole remedy and GlobalCenter's sole obligation for any Downtime.
6. USER CONTENT. Client is solely responsible for the content of any postings,
data, or transmissions using the Services ("Content"), or any other use of the
Services by Client or by any person or entity Client permits to access the
Services (a "User"). Client represents and warrants that it and any User will
not use the services for unlawful purposes (including without limitation
infringement of copyright or trademark, misappropriation of trade secrets, wire
fraud, invasion of privacy, pornography, obscenity and libel), or to interfere
with or disrupt other network users, network services of network equipment.
Disruptions include without limitaton distribution of unsolicited advertising or
chain letters, repeated harassment of other network users, wrongly impersonating
another such user, falsifying one's network identity for improper or illegal
purposes, sending unsolicited mass e-mailings, propagation of computer worms and
viruses, and using the network to make unauthorized entry to any other machine
accessible via the network. If GlobalCenter has reasonable grounds to believe
that Client or a User is utilizing the Services for any such illegal or
disruptive purpose, GlobalCenter may suspend or terminate services immediately
upon notice to Client. Client shall defend, indemnify, hold harmless
GlobalCenter from and against all liabilities and cost (including reasonable
attorney's fees) arising from any and all claims by any person arising out of
Client's use of the Services, including without limitation any content.
7. PRICING AND PAYMENT TERMS
7.1. Payment Terms. Client shall pay the fees set forth in the Services Order
Form according to the terms set forth therein. Terms are net thirty (30) from
date of invoice.
7.2. Late Payments. In the event of non-payment by Client of sums over-due
hereunder for more than sixty (60) days, GlobalCenter may upon written notice to
Client either retain any equipment or other assets of Client then in
GlobalCenter's possession and sell them in partial satisfaction of such unpaid
sums, or request Client to remove equipment from GlobalCenter's premises within
ten (10) days. If Client fails to so remove, GlobalCenter may deliver the
equipment to Client at the latter's address for notices at Client's expense for
shipment and insurance, and Client shall be obligated to accept such delivery.
7.3. Price Increases. GlobalCenter shall not increase the prices for services
during the initial term of any Service Order, but may thereafter change prices
upon sixty (60) days written notice.
8. MAINTENANCE AND SUPPORT. GlobalCenter shall provide Client with maintenance
and support of the Software and Hardware, if any ("Maintenance and Support") as
specified in the Service Specification.
8.1. Exclusions. Maintenance and Support shall not include services for problems
arising out of (a) modification, alteration or addition or attempted
modification, alteration or addition of the Hardware or Software undertaken by
persons other than GlobalCenter or GlobalCenter's authorized representatives; or
(b) programs or hardware supplied by Client.
8.2. Client Duties. Client shall document and promptly report all errors or
malfunctions of the Hardware or Software to GlobalCenter. Client shall take all
steps necessary to carry out procedures for the rectification of errors or
malfunctions within a reasonable time after such procedures have been received
from GlobalCenter. Client shall maintain a current backup copy of all programs
and data. Client shall properly train its personnel in the use and application
of the Hardware and Software.
9. TERM AND TERMINATION
9.1. Term. The term of this Agreement shall commence on the Effective Date and
continue indefinitely until terminated in accordance with this Section 9. The
term of each Service Order shall be as indicated therein. The term of any
Service Order may be extended upon mutual agreement.
9.2. Termination Upon Default. Either party may terminate this Agreement in the
event that the other party materially defaults in performing any obligation
under this Agreement and such default continues unremedied for a
3
<PAGE>
[LOGO] FRONTIER GLOBALCENTER
Master Service Agreement No. 1.0
- --------------------------------------------------------------------------------
period of thirty (30) days following written notice of default. In the event
this Agreement is terminated due to GlobalCenter's breach, GlobalCenter shall
refund to Client any Services fees on a straight line prorated basis.
9.3. Termination Upon Insolvency. This Agreement shall terminate, effective upon
delivery of written notice by a party, (i) upon the institution of insolvency,
receivership or bankruptcy proceedings or any other proceedings for the
settlement of debts of the other party; (ii) upon the making of an assignment
for the benefit of creditors by the other party; or (iii) upon the dissolution
of the other party.
9.4. Effect of Termination. The provisions of Sections 1, 2.3, 3.2, 3.3, 7,
10.4, 11, 12, 13 and 14 shall survive termination of this Agreement. All other
rights and obligations of the parties shall cease upon termination of this
Agreement. The term of any license granted hereunder shall expire upon
expiration or termination of this Agreement.
10. CONFIDENTIAL INFORMATION. All information disclosed by either party
("Disclosing Party") to the other party ("Receiving Party"), if disclosed in
writing, labeled as proprietary or confidential, or if disclosed orally, reduced
to writing within thirty (30) days and labeled as proprietary or confidential
("Confidential Information") shall remain the sole property of Disclosing Party.
Except for the specific rights granted by this Agreement, Receiving Party shall
not use any Confidential Information of Disclosing Party for its own account.
Receiving Party shall use the highest commercially reasonable degree of care to
protect Disclosing Party's Confidential Information. Receiving Party shall not
disclose Confidential Information to any third party without the express written
consent of Disclosing Party (except solely for Receiving Party's internal
business needs, to employees or consultants who are bound by a written agreement
with Receiving Party to maintain the confidentiality of such Confidential
Information in a manner consistent with this Agreement). Confidential
Information shall exclude information (i) available to the public other than by
a breach of this Agreement; (ii) rightfully received from a third party not in
breach of an obligation of confidentiality; (iii) independently developed by
Receiving Party without access to Confidential Information; (iv) known to
Receiving Party at the time of disclosure; or (v) produced in compliance with
applicable law or a court order, provided Disclosing Party is given reasonable
notice of such law or order and an opportunity to attempt to preclude or limit
such production. Subject to the above, Receiving Party agrees to cease using any
and all materials embodying Confidential Information, and to promptly return
such materials to Disclosing Party upon request.
11. LIMITATION OF LIABILITY. GLOBALCENTER'S LIABILITY FOR ALL CLAIMS ARISING OUT
OF THIS AGREEMENT SHALL BE LIMITED TO THE AMOUNT OF FEES PAID BY CLIENT TO
GLOBALCENTER UNDER THIS AGREEMENT. IN NO EVENT SHALL GLOBALCENTER BE LIABLE FOR
ANY LOSS OF DATA, LOSS OF PROFITS, COST OF COVER OR OTHER SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR INDIRECT DAMAGES ARISING FROM OR IN RELATION TO THIS AGREEMENT
OR THE USE OF THE SERVICES, HOWEVER CAUSED AND REGARDLESS OF THEORY OF
LIABILITY, THIS LIMITATION WILL APPLY EVEN IF GLOBALCENTER HAS BEEN ADVISED OR
IS AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
12. DISCLAIMER OF WARRANTIES. GLOBALCENTER SPECIFICALLY DISCLAIMS ALL WARRANTIES
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OR
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT OF THE
SYSTEM OR SERVICES PROVIDED BY GLOBALCENTER HEREUNDER.
13. MISCELLANEOUS
13.1 Independent Contractor. The relationship of GlobalCenter and Client
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other; (ii)
constitute the parties as partners, joint ventures, co-owners or otherwise as
participants in a joint undertaking; or (iii) allow either party to create or
assume any obligation on behalf of the other party for any purpose whatsoever.
13.2. Notices. Any notice required or permitted hereunder shall be in writing
and shall be given by registered or certified mail addressed to the addresses
first written above. Such notice shall be deemed to be given upon the earlier of
actual receipt or three (3) days after it has been sent, properly addressed and
with postage prepaid. Either party may change its address for notice by means of
notice to the other party given in accordance with this Section.
13.3. Assignment. Client may not assign this Agreement, in whole or in part,
either voluntarily or by operation of law, and any attempt to do so shall be a
material default of this Agreement and shall be void.
13.4. Governing Law. This Agreement shall be interpreted according to the laws
of the State of New York without regard to or application of choice-of-law rules
or principles. The parties hereby agree to the exclusive jurisdiction of the
state and federal courts located in New York, New York.
13.5. Entire Agreement and Waiver. This Agreement shall constitute the entire
agreement between GlobalCenter and Client with respect to the subject matter
hereof and all prior agreements, representations, and statement with respect to
such subject matter are superseded hereby, including without limitation any
non-disclosure agreement previously executed between the parties. This Agreement
may be changed only by written agreement signed by both GlobalCenter and Client.
No failure of either party to exercise or enforce any of its rights under this
Agreement shall act as a waiver of subsequent breaches; and the waiver
4
<PAGE>
of any breach shall not act as a waiver of subsequent breaches.
13.6 Severability. In the event any provision of this Agreement is held by a
court of other tribunal of competent jurisdiction to be unenforceable, that
provision will be enforced to the maximum extent permissible under applicable
law, and the other provisions of this Agreement will remain in full force and
effect.
13.7 Non-Solicitation. During the term of this agreement and for a period of one
(1) year thereafter, neither party shall solicit, or attempt to solicit the
services, of any employee or subcontractor of the other party without the prior
written consent of that party.
13.8 Substitution. GlobalCentor may substitute, change or modify the Software or
Hardware at any time, but shall not thereby alter the technical parameters of
the Services.
* Addendum 1.1: This addendum states that Frontier Global Center guarantees
Webstakes installation in our Data Center located at 111 8th Avenue, New York,
NY within 5 business days of signing by Webstakes.
Frontier GlobalCenter Webstakes
/s/ Tom Alvery /s/ Daniel J. Feldman
- --------------------- -------------------------
By: Tom Alvery By: Daniel J. Feldman
----------------- ---------------------
Title: VP Sales Title: President
-------------- ------------------
5
<PAGE>
[LOGO] FRONTIER GLOBALCENTER
Master Service Agreement No. __ 1.0__
================================================================================
SERVICE SPECIFICATION
Collocation Service
GlobalCenter will provide a level of service which includes the following
features and options:
General Features:
Maintenance of the Space (including
Janitorial Services):
In connection with the Space made available hereunder, GlobalCenter or its
landlord shall perform services that support the overall operation of each Space
at no additional charge to Client. Those services include the following;
* Janitorial Services
* 24 x 7 Access to the Space
* Authorized Security System Access to Raised Floor Collocation Space
* Primary A/C 110 volt Power to the Space
* Backup Power- UPS Systems and Battery Plant (30 - 60 minute survivability
objective)
* Generator Back-up (Sustained backup power)
* HVAC Systems for facility air conditioning
* Fire Control Systems
* Network Monitoring Systems
* Redundant Network Connectivity and Hardware
* 19" Rack Spaces for installation of Hardware
o 10-base-T or 100-base-T switched port with direct high speed Internet backbone
connection.
24 x 7 NOC support: Will provide proactive site monitoring with ExpressLane(TM)
statistics on Client information base usage; including bandwidth usage,
statistics and network availability reporting, host monitoring and management
interface, access to GlobalCenter incident tracking system to expedite fault
resolution and remote server reboot.
24 x 7 console access: GlobalCenter facilities in Sunnyvale and Herndon will
provide systems which allow Clients access to a terminal with a connection to
servers inside the Data Centers.
GlobalCenter Escalation Plan and Procedures. To be provided in the GlobalCenter
Welcome Package 5-10 days after contract signing.
Right-of-Way and Access:
GlobalCenter will allow 24 x 7 access and right-of-way to Client Hardware
located in GlobalCenter facility at no charge. Clients will be escorted at all
times while in the facility. Access to the facilities will not be unreasonably
be withheld by GlobalCenter to Clients for performing appropriate procedures
and maintenance of Hardware, facilities, and systems.
6
<PAGE>
WEBSTAKES.COM, INC.
11 West 19th Street
New York, NY 10011
Mr. Steven H. Krein
Chairman and Chief Executive Officer
Webstakes.com, Inc.
450 Park Avenue South
Suite 403
New York, NY 10016
Dear Steven:
This Letter Agreement sets forth the terms and provisions pursuant to
which Webstakes.com, Inc. ("Webstakes" or the "Company") continues to employ you
as Chief Executive Officer. The parties acknowledge that this agreement
supercedes any previous agreements regarding your employment. The terms of your
employment are as follows:
1. SALARY. $175,000 annually effective as of January 1, 1999. Webstakes
acknowledges that you have not received your full salary through the date hereof
and may continue to defer your salary in your sole discretion, provided that
Webstakes acknowledges that it will immediately upon demand pay to you all
accrued salary in a lump sum.
2. BONUS. Target bonus of $100,000 subject to standards to be
determined which shall be payable no later than 105 days after the end of the
Company's fiscal year. You will be paid a bonus of $175,000 upon completion of
an initial public offering.
3. BENEFITS. You shall be entitled to Webstakes' standard benefit
program.
4. OPTION GRANTS. Upon execution of this Letter Agreement, you shall be
granted options to purchase 62,000 shares of Webstakes stock at an exercise
price equal to $6.00.
5. LOCATION. Your location shall be at the Company's headquarters in
the New York metropolitan area.
6. TERM.
(a) The initial term shall be three (3) years commencing as of
January 1, 1999. In the event of a termination by Webstakes of your employment
without Cause (as hereinafter defined) you shall be entitled to severance equal
to one years' salary plus an amount equal to any and all bonuses paid in the
fiscal year prior to your termination (without mitigation or offset).
(b) "Cause" shall mean only the following: (i) the willful failure by
you to follow the reasonable directions of the Board not inconsistent with this
Agreement (other than such failure resulting from your incapacity due to
physical or mental illness) after written notice that such failure shall be
deemed to be Cause and a 30 day period from such notice during which
<PAGE>
you may cure such nonperformance, (ii) willful misconduct by you that materially
adversely affects the Company, (iii) commission of a felony or guilty plea or
plea of nolo contendre to a crime other than minor traffic infractions, (iv)
willful theft from the Company, (v) a willful violation of any law, rule or
regulation, or the imposition of a final order issued by any regulatory
authority against the Company, which, in any event, prohibits you from holding
an executive position with the Company, (vi) habitual drunkenness or habitual
use by you of illegal substances; or (vii) you fail to substantially perform any
material term or provision of this Agreement.
7. CONFIDENTIALITY AND NON-COMPETITION.
(a) Secrecy. You agree to keep secret and retain in the strictest
confidence all confidential matters of the Company, including, without
limitation, trade secrets, customer lists, pricing policies, marketing plans,
technical processes, inventions and research projects, and other business
affairs of the Company, learned by you heretofore or hereafter ("Confidential
Information"), and not to disclose them to anyone inside or outside of the
Company, except in the course of providing services or with the express written
consent of the Board of Directors for the Company and except to the extent such
information is already known to the general public through no action or inaction
on your part.
(b) Return Memoranda, etc. You agree to deliver promptly to the Company
on termination of your employment or as otherwise requested by the Company,
Confidential Information and all memoranda, files, all correspondence (including
e-mails, digital documents and hard copies), computer files, disks, notes,
records, reports, manuals, drawings, blueprints and other documents (and all
copies thereof) relating to the Company's business and all property associated
therewith which may then be possessed or under the control of you (hereinafter
"Company Property"). You further agree that all Company Property belongs in its
entirety to the Company. As such, you shall raise no claim of ownership or right
to possession of Company Property, either during or subsequent to the term of
employment.
(c) Non-competition. You agree that at all times while employed by the
Company and, regardless of the reason for termination of employment (except for
termination without Cause or termination in connection with dissolution of the
business or liquidation of the assets of the business (such dissolution or
liquidation not to include any merger or sale of all or substantially all of the
assets of the business), for a period of one (1) year thereafter, you will not,
as a principal, agent, employee, employer, consultant, stockholder, investor,
director or co-partner of any person, firm, corporation or business entity other
than the Company, or in any individual or representative capacity whatsoever,
directly or indirectly, without the express prior written consent of the
Company: (i) engage or participate in any business whose products or services
are competitive with that of or those contemplated by the Company; (ii) aid or
counsel any other person, firm, corporation or business entity to do any of the
above; (iii) become employed by a firm, corporation, partnership or joint
venture which competes with the business of or those contemplated by the
Company; or (iv) approach, solicit business from, or otherwise do business or
deal with any customer of the Company, if such approaching, solicitation,
business or dealing is in connection with any product or service that is
competitive to any product or service provided by or contemplated by the
Company.
-2-
<PAGE>
(d) During the initial term of this agreement and any renewal term and
any additional period during which you may be employed by the Company (whether
or not such employment shall be pursuant to written agreement) and for a one
year period thereafter, you shall not without the express prior written approval
of the Board of Directors of the Company (a) directly or indirectly, in one or a
series of transactions, recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, customer, consultant, agent,
representative or any other person which has a business relationship with the
Company to discontinue, reduce or modify such employment, agency or business
relationship with the Company, or (b) induce or solicit to employ or cause any
competitive business or any other person or entity to induce or solicit to
employ any person or agent who is then (or was at any time within six months
prior to the date you or the competitive business employs or seeks to employ
such person) engaged or retained by the Company.
8. DISPUTE RESOLUTION. If the parties should have a material dispute
arising out of or relating to this Letter Agreement or the parties' respective
rights and duties hereunder, then the parties will resolve such dispute in the
following manner: (i) any party may at any time deliver to the other a written
dispute notice setting forth a brief description of the issue for which such
notice initiates the dispute resolution mechanism contemplated by this Paragraph
8; (ii) during the forty-five (45) day period following the delivery of the
notice described in (i) above, appropriate representatives of the various
parties will meet and seek to resolve the disputed issue through negotiation,
(iii) if representatives of the parties are unable to resolve the disputed issue
through negotiation, then within thirty (30) days after the period described in
(ii) above, the parties will refer the issue (to the exclusion of a court of
law) to final and binding arbitration in New York, New York in accordance with
the then existing rules (the "Rules") of the American Arbitration Association
("AAA"), and judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof; provided, however, that the law
applicable to any controversy shall be the law of the State of New York,
regardless of principles of conflicts of laws. In any arbitration pursuant to
this Agreement, (i) discovery shall be allowed and governed by the New York Code
of Civil Procedure and (ii) the award or decision shall be rendered by a
majority of the members of a Board of Arbitration consisting of three (3)
members, one of whom shall be appointed by each of the respective parties and
the third of whom shall be the chairman of the panel and be appointed by the AAA
in accordance with the Rules. In the event that either party shall fail to
appoint an arbitrator within thirty (30) days after the commencement of the
arbitration proceedings, such arbitrator and the third arbitrator shall be
appointed by the AAA in accordance with the Rules. Nothing set forth above shall
be interpreted to prevent the parties from agreeing in writing to submit any
dispute to a single arbitrator in lieu of a three (3) member Board of
Arbitration. Upon the completion of the selection of the Board of Arbitration
(or if the parties agree otherwise in writing, a single arbitrator), an award or
decision shall be rendered within no more than forty-five (45) days.
Notwithstanding the foregoing, the request by either party for preliminary or
permanent injunctive relief, whether prohibitive or mandatory, shall not be
subject to arbitration and may be adjudicated only by the courts of the State of
New York or the U.S. District Court in New York.
-3-
<PAGE>
9. MISCELLANEOUS. This Letter Agreement represents the parties' entire
agreement and understanding of the parties and may only be amended in writing.
This Letter Agreement shall be governed by the laws of the State of New York.
Please sign below to acknowledge your understanding and agreement with
the terms and provisions of this agreement.
Webstakes.com, Inc.
By: /s/ Daniel J. Feldman
----------------------------------
Agreed to and Accepted By:
/s/ Steven H. Krein
- -----------------------------------
Steven H. Krein
-4-
<PAGE>
WEBSTAKES.COM, INC.
11 West 19th Street
New York, NY 10011
Mr. Daniel Feldman
President
Webstakes.com, Inc.
450 Park Avenue South
Suite 403
New York, NY 10016
Dear Dan:
This Letter Agreement sets forth the terms and provisions pursuant to
which Webstakes.com, Inc. ("Webstakes" or the "Company") continues to employ you
as President. The parties acknowledge that this agreement supercedes any
previous agreements regarding your employment. The terms of your employment are
as follows:
1. SALARY. $150,000 annually effective as of January 1, 1999. Webstakes
acknowledges that you have not received your full salary through the date hereof
and may continue to defer your salary in your sole discretion, provided that
Webstakes acknowledges that it will immediately upon demand pay to you all
accrued salary in a lump sum.
2. BONUS. Target bonus of $100,000 subject to standards to be
determined which shall be payable no later than 105 days after the end of the
Company's fiscal year. You will be paid a bonus of $175,000 upon completion of
an initial public offering.
3. BENEFITS. You shall be entitled to Webstakes' standard benefit
program.
4. OPTION GRANTS. Upon execution of this Letter Agreement, you shall be
granted options to purchase 62,000 shares of Webstakes stock at an exercise
price equal to $6.00.
5. LOCATION. Your location shall be at the Company's headquarters in
the New York metropolitan area.
6. TERM.
(a) The initial term shall be three (3) years commencing as of
January 1, 1999. In the event of a termination by Webstakes of your employment
without Cause (as hereinafter defined) you shall be entitled to severance equal
to one years' salary plus an amount equal to any and all bonuses paid in the
fiscal year prior to your termination (without mitigation or offset).
(b) "Cause" shall mean only the following: (i) the willful failure by
you to follow the reasonable directions of the Board not inconsistent with this
Agreement (other than such failure resulting from your incapacity due to
physical or mental illness) after written notice that such failure shall be
deemed to be Cause and a 30 day period from such notice during which
<PAGE>
you may cure such nonperformance, (ii) willful misconduct by you that materially
adversely affects the Company, (iii) commission of a felony or guilty plea or
plea of nolo contendre to a crime other than minor traffic infractions, (iv)
willful theft from the Company, (v) a willful violation of any law, rule or
regulation, or the imposition of a final order issued by any regulatory
authority against the Company, which, in any event, prohibits you from holding
an executive position with the Company, (vi) habitual drunkenness or habitual
use by you of illegal substances; or (vii) you fail to substantially perform any
material term or provision of this Agreement.
7. CONFIDENTIALITY AND NON-COMPETITION.
(a) Secrecy. You agree to keep secret and retain in the strictest
confidence all confidential matters of the Company, including, without
limitation, trade secrets, customer lists, pricing policies, marketing plans,
technical processes, inventions and research projects, and other business
affairs of the Company, learned by you heretofore or hereafter ("Confidential
Information"), and not to disclose them to anyone inside or outside of the
Company, except in the course of providing services or with the express written
consent of the Board of Directors for the Company and except to the extent such
information is already known to the general public through no action or inaction
on your part.
(b) Return Memoranda, etc. You agree to deliver promptly to the Company
on termination of your employment or as otherwise requested by the Company,
Confidential Information and all memoranda, files, all correspondence (including
e-mails, digital documents and hard copies), computer files, disks, notes,
records, reports, manuals, drawings, blueprints and other documents (and all
copies thereof) relating to the Company's business and all property associated
therewith which may then be possessed or under the control of you (hereinafter
"Company Property"). You further agree that all Company Property belongs in its
entirety to the Company. As such, you shall raise no claim of ownership or right
to possession of Company Property, either during or subsequent to the term of
employment.
(c) Non-competition. You agree that at all times while employed by the
Company and, regardless of the reason for termination of employment (except for
termination without Cause or termination in connection with dissolution of the
business or liquidation of the assets of the business (such dissolution or
liquidation not to include any merger or sale of all or substantially all of the
assets of the business), for a period of one (1) year thereafter, you will not,
as a principal, agent, employee, employer, consultant, stockholder, investor,
director or co-partner of any person, firm, corporation or business entity other
than the Company, or in any individual or representative capacity whatsoever,
directly or indirectly, without the express prior written consent of the
Company: (i) engage or participate in any business whose products or services
are competitive with that of or those contemplated by the Company; (ii) aid or
counsel any other person, firm, corporation or business entity to do any of the
above; (iii) become employed by a firm, corporation, partnership or joint
venture which competes with the business of or those contemplated by the
Company; or (iv) approach, solicit business from, or otherwise do business or
deal with any customer of the Company, if such approaching, solicitation,
business or dealing is in connection with any product or service that is
competitive to any product or service provided by or contemplated by the
Company.
-3-
<PAGE>
(d) During the initial term of this agreement and any renewal term and
any additional period during which you may be employed by the Company (whether
or not such employment shall be pursuant to written agreement) and for a one
year period thereafter, you shall not without the express prior written approval
of the Board of Directors of the Company (a) directly or indirectly, in one or a
series of transactions, recruit, solicit or otherwise induce or influence any
proprietor, partner, stockholder, lender, director, officer, employee, sales
agent, joint venturer, investor, lessor, supplier, customer, consultant, agent,
representative or any other person which has a business relationship with the
Company to discontinue, reduce or modify such employment, agency or business
relationship with the Company, or (b) induce or solicit to employ or cause any
competitive business or any other person or entity to induce or solicit to
employ any person or agent who is then (or was at any time within six months
prior to the date you or the competitive business employs or seeks to employ
such person) engaged or retained by the Company.
8. DISPUTE RESOLUTION. If the parties should have a material dispute
arising out of or relating to this Letter Agreement or the parties' respective
rights and duties hereunder, then the parties will resolve such dispute in the
following manner: (i) any party may at any time deliver to the other a written
dispute notice setting forth a brief description of the issue for which such
notice initiates the dispute resolution mechanism contemplated by this Paragraph
8; (ii) during the forty-five (45) day period following the delivery of the
notice described in (i) above, appropriate representatives of the various
parties will meet and seek to resolve the disputed issue through negotiation,
(iii) if representatives of the parties are unable to resolve the disputed issue
through negotiation, then within thirty (30) days after the period described in
(ii) above, the parties will refer the issue (to the exclusion of a court of
law) to final and binding arbitration in New York, New York in accordance with
the then existing rules (the "Rules") of the American Arbitration Association
("AAA"), and judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof; provided, however, that the law
applicable to any controversy shall be the law of the State of New York,
regardless of principles of conflicts of laws. In any arbitration pursuant to
this Agreement, (i) discovery shall be allowed and governed by the New York Code
of Civil Procedure and (ii) the award or decision shall be rendered by a
majority of the members of a Board of Arbitration consisting of three (3)
members, one of whom shall be appointed by each of the respective parties and
the third of whom shall be the chairman of the panel and be appointed by the AAA
in accordance with the Rules. In the event that either party shall fail to
appoint an arbitrator within thirty (30) days after the commencement of the
arbitration proceedings, such arbitrator and the third arbitrator shall be
appointed by the AAA in accordance with the Rules. Nothing set forth above shall
be interpreted to prevent the parties from agreeing in writing to submit any
dispute to a single arbitrator in lieu of a three (3) member Board of
Arbitration. Upon the completion of the selection of the Board of Arbitration
(or if the parties agree otherwise in writing, a single arbitrator), an award or
decision shall be rendered within no more than forty-five (45) days.
Notwithstanding the foregoing, the request by either party for preliminary or
permanent injunctive relief, whether prohibitive or mandatory, shall not be
subject to arbitration and may be adjudicated only by the courts of the State of
New York or the U.S. District Court in New York.
<PAGE>
9. MISCELLANEOUS. This Letter Agreement represents the parties' entire
agreement and understanding of the parties and may only be amended in writing.
This Letter Agreement shall be governed by the laws of the State of New York.
Please sign below to acknowledge your understanding and agreement with
the terms and provisions of this agreement.
Webstakes.com, Inc.
By: /s/ Steven H. Krein
---------------------------------
Agreed to and Accepted By:
/s/ Daniel J. Feldman
- -------------------------------------
Daniel Feldman
-4-
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is executed as of the
11th day of June, 1999, by and among Webstakes.com, Inc., a Delaware corporation
("Webstakes," the "Company" or the "Seller"), and the parties listed on Exhibit
A (each, a "Purchaser" and collectively, the "Purchasers").
BACKGROUND:
WHEREAS, Webstakes has amended its Certificate of Incorporation pursuant
to the Certificate of Amendment attached hereto as Exhibit B (the "Certificate
of Amendment"), which amendment created a new series of preferred stock, Class B
Convertible Redeemable Preferred Stock (the "Class B Preferred Stock");
WHEREAS, the Purchasers desire to purchase from the Company 6,666,667
shares of Class B Preferred Stock with the rights, preferences and powers as set
forth in the Certificate of Amendment;
WHEREAS, the Purchasers and the Seller will enter into a registration
rights agreement (the "Registration Rights Agreement") and a shareholders'
agreement (the "Shareholders' Agreement") in connection with this transaction
(together with all other documents and instruments to be executed or delivered
in connection with this Agreement, including but not limited to the Exhibits
attached hereto and the transactions contemplated hereby and thereby, the
"Transaction Documents").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, the parties agree as
follows:
AGREEMENTS:
1. Agreement to Sell and Buy.
1.1 Purchase and Sale of Shares. The Company agrees to sell to the
Purchasers and the Purchasers agree to buy from the Company the number of shares
of Class B Preferred Stock indicated opposite each Purchaser's name on Exhibit A
(collectively, the "Shares").
1.2 Purchase Price. The consideration to be paid for each of the Shares is
$6.00 per share or a total of $40,000,002 in immediately available funds at the
closing of the purchase and sale (the "Transaction"). Of this amount,
$24,000,000 shall be wired at the direction of, and on behalf of, the Company,
directly to the account of Stone Investments, Inc. ("Stone") to satisfy the
obligation of the Company to repurchase shares owned by Stone pursuant to the
Purchase Agreement attached hereto as Exhibit E.
2. The Closing. The completion of the purchase and sale (the "Closing") will be
held at 10:00 a.m. on June 11, 1999; provided, however, that if any of the
conditions specified in Sections 5 and 6 are not met by such date, the Closing
will be held at 10:00 a.m. on the second Business Day following satisfaction of
the last of such conditions to be met. The date on which the Closing is actually
held is called the "Closing Date". A "Business Day" is a day other than a
Saturday, Sunday, or other day on which national banks in the State of New York
are permitted to be closed.
<PAGE>
3. Representations and Warranties
The Company hereby represents and warrants to the Purchasers as follows:
3.1 Organization, Standing and Qualification. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of its incorporation and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted. The Company is duly qualified or licensed and in good standing
to do business in each jurisdiction in which its property is owned, leased or
operated or the nature of its business makes such qualification necessary. A
true and correct copy of the Certificate of Amendment is attached hereto as
Exhibit B, and a true and correct copy of the Company's bylaws (the "Bylaws") is
attached hereto as Exhibit C, which in each case shall be in full force and
effect as of the Closing Date. Such copies contain all amendments through the
Closing Date.
3.2 Authority. The Company has the capacity, authority and power to
execute, deliver and perform this Agreement and the Transaction Documents and to
consummate the transactions contemplated hereby and thereby. The Company and its
Board of Directors has duly authorized the execution, delivery and performance
of this Agreement, including, without limitation, the sale of the Shares in
accordance with the terms and conditions set forth herein. This Agreement has
been duly and validly executed and delivered by the Company and constitutes the
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with its terms.
3.3 Capitalization. All of the shares of capital stock of the Company are
owned of record and beneficially by the persons and in the amounts set forth on
Schedule 3.3 attached hereto, and to the best knowledge of the Company, are free
and clear of all mortgages, pledges, security interests, assignments, claims,
liens or other encumbrances (collectively, a "Lien" or the "Liens"). Immediately
prior to the Closing, the authorized and issued capital of the Company consisted
of 50,000,000 shares of common stock ("Common Stock") authorized, of which
5,714,184 shares are issued and outstanding and 661,735 shares are reserved for
issuance upon exercise of outstanding options and warrants; 50,000 shares of
Class A Convertible Redeemable Preferred Stock, par value $100 per share (the
"Class A Preferred Stock"), of which 50,000 shares were issued and outstanding
and all of which have been repurchased by the Company and cancelled simultaneous
with the sale of the Class B shares hereunder; 6,700,000 shares of Class B
Preferred Stock, of which no shares are issued and outstanding (other than as
offered to the Purchasers pursuant to this Agreement); and 1,000,000 shares of
Class C Preferred Stock, $.01 par value, of which no shares are issued and
outstanding. Except as set forth in the immediately preceding sentence and on
Schedule 3.3, the Company does not have any (i) issued or outstanding (A) shares
of capital stock or issued share capital of the Company, or (B) securities
convertible into or exchangeable or exercisable for, or any options, warrants,
calls, puts, subscriptions or other rights (preemptive or otherwise) to acquire,
directly or indirectly, any shares of capital stock of the Company, (ii)
agreements or contractual commitments, whether written or oral, relating to the
Company's capital stock or obligating the Company to issue, sell, repurchase,
redeem or otherwise acquire any shares of the Company's capital stock or any
such securities, options, warrants, calls, puts, subscriptions or other rights,
(iii) Liens relating to any of the Company's capital stock, (iv) rights or
contractual commitments (whether written or oral) that give any person or entity
other than the Company any right to reserve or exercise any benefits or rights
similar to any rights enjoyed
-2-
<PAGE>
by or accruing to the holder of shares of capital stock of the Company or (v)
rights or contractual commitments (whether written or oral) to provide funds to
or make any investment in any other person or entity. All of the issued and
outstanding shares of the Company's Common Stock and Class A Preferred Stock are
duly authorized, validly issued, fully paid and nonassessable.
3.4 Subsidiaries. Except as described on Schedule 3.4, the Company does
not presently own, have any investment or interest in, or control, directly or
indirectly, any subsidiaries, associations, or other business entities. The
Company is not a participant in any joint venture, partnership, limited
liability company or similar enterprise.
3.5 Validity of Class B Preferred Stock and Common Stock. The Class B
Preferred Stock when issued, sold and delivered in accordance with the terms and
for the consideration set forth in this Agreement, shall be duly and validly
issued (including, without limitation, compliance with applicable federal and
state securities laws), fully-paid and non-assessable, free and clear of all
Liens. The shares of Common Stock issuable upon conversion of the Class B
Preferred Stock (the "Conversion Shares") upon issuance in accordance with the
Certificate of Amendment shall be duly and validly issued (including, without
limitation, issued in compliance with all applicable federal and state
securities laws), fully paid and non-assessable, free and clear of all Liens.
3.6 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement or the Transaction Documents, the consummation of the
transactions contemplated hereby or thereby nor compliance by the Company with
any of the provisions hereof or thereof will (i) conflict with or result in a
breach of the charter, bylaws or other constitutive documents of the Company,
(ii) conflict with or result (with or without notice or lapse of time or both)
in a default (or give rise to any right of reimbursement, termination,
cancellation, modification or acceleration) under any of the provisions of any
note, bond, lease, mortgage, indenture, license, franchise, permit, agreement or
other instrument or obligation to which the Company is a party, or by which the
Company or the properties or assets of the Company may be bound or affected,
except for such conflict, breach or default as to which requisite waivers or
consents are described in Schedule 3.6 and are required to be obtained prior to
Closing, (iii) violate any law, statute, rule or regulation or order, writ,
injunction, judgment or decree (each, an "order") applicable to the Company or
the properties or assets of the Company, (iv) result in the creation or
imposition of any Lien upon any property or assets used or held in connection
with the business of the Company or (v) result in a change of control,
assignment or similar event which would conflict with or result in termination,
acceleration of obligations, imposition of additional obligations or loss of
rights or the breach of the Company's charter, bylaws or other constitutive
documents, any contract, license, lease, note, bond, mortgage, indenture,
agreement, investment or arrangement of any kind. Except as set forth in
Schedule 3.6, no consent or approval by, or any notification of or filing with,
or other action of any person or entity (governmental or private) is required in
connection with the execution, delivery and performance by the Company of this
Agreement or any Transaction Document. There is no proceeding (as defined in
Section 3.16) pending or, to the knowledge of the Company, threatened against
the Company or any of its respective assets or properties that seeks to prevent
the consummation of the transactions contemplated herein or in any Transaction
Document.
3.7 Books and Records. The minute books and other similar records of the
Company made available to the Purchasers prior to the execution of this
Agreement contain a true, correct and complete record of all actions taken at
all meetings and by all written consents
-3-
<PAGE>
in lieu of meetings of the stockholders, the board of directors and committees
of the board of directors of the Company. The stock transfer ledger and other
similar records of the Company made available to the Purchasers prior to the
execution of this Agreement accurately reflect all record transfers prior to the
execution of this Agreement in the capital stock of the Company. "Books and
Records" means, collectively, all files, documents, instruments, papers, books
and records relating to the business or the condition of the Company, including
financial statements, tax returns and related work papers and letters from
accountants, budgets, pricing guidelines, ledgers, journals, deeds, title
policies, minute books, stock certificates and books, corporate seals, stock
transfer ledgers, contracts, licenses, customer lists, computer files and
programs, retrieval programs, operating data and plans and environmental studies
and plans.
3.8 Financial Statements; Certain Financial Information.
(a) The Company has previously delivered to the Purchasers true and
complete copies of the following financial statements: (i) the unaudited balance
sheet of the Company as of March 31, 1999 and the related statement of income of
the Company for the three-month period then ended (such balance sheet as of
March 31, 1999 is referred to herein as the "March 31, 1999 Balance Sheet") and
(ii) the audited balance sheets of the Company as of December 31, 1998 and the
related statements of income, stockholders' equity and cash flows of the Company
for the 12 months ended December 31, 1998, reviewed by PricewaterhouseCoopers
LLC (such financial statements described in clauses (i) and (ii) collectively,
the "Financial Statements"). Each balance sheet included in the Financial
Statements is true, complete and correct and presents fairly the financial
position of the Company as of the respective date of such balance sheets and
each of the statements of income, retained earnings, and cash flows included in
the Financial Statements is true, complete and correct and presents fairly the
results of operations and cash flows of the Company for the periods set forth
therein, in each case in accordance with generally accepted accounting
principles ("GAAP"), except as otherwise noted therein, and in each case were
compiled from the Books and Records regularly maintained by management and used
to prepare financial statements of the Company in accordance with the principles
stated therein. The Company has maintained the Books and Records in a manner
sufficient to permit the preparation of financial statements in accordance with
GAAP. The Books and Records fairly reflect the income, expenses, assets and
liabilities of the Company and provide a fair and accurate basis for the
preparation of the Financial Statements.
(b) There were no liabilities or obligations of any nature (whether
known or unknown, absolute, accrued, fixed, contingent, liquidated, unliquidated
or otherwise, and whether due or to become due) which were required to be, in
accordance with GAAP, and were not shown or provided for on the balance sheets
of the Company included in the Financial Statements to which such liabilities or
obligations related. All reserves established by the Company are reflected on
the March 31, 1999 Balance Sheet and are adequate and are stated in accordance
with GAAP. There are no loss contingencies that are required to be accrued by
Statement of Financial Accounting Standard No. 5 of the Financial Accounting
Standards Board which are not provided for on such balance sheets.
3.9 Absence of Undisclosed Liabilities. Except as disclosed on Schedule
3.9, the Company does not, and as a result of the transactions contemplated
herein will not, have any indebtedness, liabilities or obligations of any nature
(whether known or unknown, absolute, accrued, fixed, contingent liquidated,
unliquidated or otherwise, and whether due or to become due), except for the
indebtedness, liabilities and obligations (i) reflected on the March 31, 1999
-4-
<PAGE>
Balance Sheet (including the notes thereto); (ii) incurred in the ordinary
course of business consistent with past practice since the date of the March 31,
1999 Balance Sheet and which do not exceed, in the aggregate, $200,000; and
(iii) pursuant to any contract set forth in Schedule 3.9 and not required to be
set forth on the March 31, 1999 Balance Sheet (including the notes thereto) in
accordance with GAAP.
3.10 Changes. Except as set forth in the schedules corresponding to the
subparts of this Section 3.10 or the draft registration statement attached
hereto as Exhibit D (the "Registration Statement"), since the date of the
Financial Statements, the Company has not:
(a) made any material change in its business or operations or in the
manner of conducting its business;
(b) suffered any event, violation or other matter that would have a
material adverse effect on the business, condition, assets, liabilities,
operations, financial condition, properties or prospects of the Company (a
"Material Adverse Effect"), and no fact or condition exists or is contemplated
or threatened that to the knowledge of the Company, might reasonably be expected
to cause a Material Adverse Effect in the future;
(c) suffered any material casualty loss (whether or not insured) or
condemnation or other taking;
(d) entered into any employment or consulting contract or commitment
(whether oral or written) or compensation arrangement or employee benefit plan,
or changed or committed to change (including any change pursuant to any bonus,
pension, profit-sharing or other plan, commitment, policy or arrangement) the
compensation payable or to become payable to any of its officers, directors,
employees, agents or consultants, or made any pension, retirement,
profit-sharing, bonus or other employee welfare or benefit payment or
contribution with a total value with respect to any one employee in excess of
$100,000;
(e) declared, paid or made, or set aside for payment or making, any
dividend or other distribution in respect of its common stock or other capital
stock or securities, or directly or indirectly redeemed, purchased or otherwise
acquired any of its common stock or other capital stock or securities or
subdivided or in any way, or changed any of the terms or provisions of its
common stock or other capital stock or securities (other than as contemplated by
this Agreement);
(f) paid (except for business payables incurred and paid in the
ordinary course of business consistent with past practice), loaned or advanced
any amount to or in respect of, or sold, transferred or leased any property or
assets (real, personal or mixed, tangible or intangible) to, or entered into,
amended or waived any rights under any transactions, agreements or arrangements
with or for the benefit of, any shareholder or any of their respective
affiliates, associates or family members of any shareholder or any of the
Company's officers or directors or any affiliate or associate of its officers or
directors;
(g) made or proposed any change in any accounting or tax principles,
practices or methods, including its accounts payable or accounts receivable
practices and terms (including reserves), except for such changes which are both
required by GAAP or by law and set forth in Schedule 3.10;
-5-
<PAGE>
(h) incurred any liability (whether known or unknown, absolute,
accrued, fixed, contingent, liquidated, unliquidated or otherwise, and whether
due or to become due), except for current liabilities reflected on the March 31,
1999 Balance Sheet or incurred after the date of the March 31, 1999 Balance
Sheet in the ordinary course of business consistent with past practice and not
exceeding $100,000 in the aggregate;
(i) canceled or waived rights with respect to any debts or other
obligations owed to or claims held by the Company (including the settlement of
any claims or litigation or other proceeding);
(j) accelerated or delayed collection of notes or accounts
receivable generated by the business in advance of or beyond their regular due
dates or the dates when the same otherwise would have been collected ;
(k) terminated or amended or suffered the termination or amendment
of any contract pursuant to which the Company would receive from any Person or
pay to any Person more than $100,000 in any calendar year or disposed of or
permitted to lapse any item of Company Intellectual Property Rights (as
hereinafter defined);
(l) made any capital expenditures or commitments for additions to
property, plant or equipment constituting capital assets, except as reflected on
the March 31, 1999 Balance Sheet;
(m) incurred any indebtedness, other than in the ordinary course of
business consistent with the past practices; or
(n) agreed, whether in writing or otherwise, to take any action
described in this Section 3.10 or any action which, if taken after the date of
this Agreement, would constitute a breach under this Agreement.
3.11 Real Property. The Company has never owned, nor will own as of the
Closing Date, any real property or any option to acquire any real property.
3.12 Leases. All leases of real property as to which the Company is the
lessee or sublessee (the "Leased Real Property"), or personal property as to
which the Company is the lessee or sublessee, have been provided to the
Purchasers and all such leases are in full force and effect, are enforceable
against the Company and the other parties thereto and have not been modified or
amended. There exists no default by the Company under any of such leases or, to
the knowledge of the Company, by any other party thereto, nor any event which,
with the giving of notice or the passage of time or both, would constitute an
event of default by the Company or any other party thereunder.
3.13 Title to Assets. The Company has good, valid and marketable title to
all of the assets shown on the March 31, 1999 Balance Sheet or acquired since
the date of the March 31, 1999 Balance Sheet except for assets sold in the
ordinary course of business consistent with past practice since the date of the
March 31, 1999 Balance Sheet not exceeding in the aggregate $100,000. Except as
set forth in Schedule 3.13, such assets are free and clear of any Lien.
3.14 Intellectual Property Rights
-6-
<PAGE>
(a) To the knowledge of the Company after due inquiry: (i) the
Company owns or has sufficient legal rights to all patents, trademarks, service
marks, trade names, copyrights, trade secrets, information, proprietary rights
and processes necessary for its business as now conducted and as proposed to be
conducted ("Company Intellectual Property Rights"), and (ii) the operation of
its business does not, and would not, conflict with or constitute an
infringement of any intellectual property or proprietary rights of any third
party.
(b) There are no outstanding options, licenses or agreements of any
kind relating to the matters listed in subsection 3.14(a), nor is the Company
bound by or a party to any options, licenses or agreements of any kind with
respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity.
(c) The Company has not received any notice or other communications
alleging and has no reason to believe that the Company has violated or infringed
upon or, by conducting its business as proposed, would violate or infringe upon
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or any proprietary rights of any other person or entity.
(d) The Company is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of the Company or that would conflict with the
Company's business as proposed to be conducted.
(e) Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business by the employees of the Company, nor the
conduct of the Company's business as proposed, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated.
(f) The Company does not believe it is or will be necessary to
utilize any inventions of any of its employees (or people it currently intends
to hire) made prior to their employment by the Company.
3.15 Contracts. The Company is not in default under any agreement (whether
written or oral) or instrument to which it is a party (a "Contract") and there
has been no event that with the giving of notice or the passage of time, or
both, would constitute such a default or, to the knowledge of the Company, any
default, or event that with the giving of notice, the passage of time or both,
would constitute such a default, by any other party thereto, existing with
respect to any such Contract except for such defaults which, in the aggregate,
would result in loss or liability to the Company of no more than $5,000, and the
Company has not received notice that any party to any such Contract intends to
terminate, amend, not renew or cancel any such Contract. Each of the Contracts
is in full force and effect and constitutes a legal, valid and binding
obligation of the Company and the other parties thereto, enforceable in
accordance with its terms. All material Contracts have been previously furnished
to the Purchasers and are adequately described in, and will be filed as exhibits
to, the Registration Statement.
-7-
<PAGE>
3.16 Litigation. There are no, nor have there been for the five years
prior to the date of this Agreement any, (i) investigations pending or, to the
knowledge of the Company, threatened, affecting or potentially affecting the
Company or the business of the Company, (ii) actions, causes of action, claims,
suits, proceedings, arbitrations, mediations or other alternative dispute
resolution procedures, orders, writs, injunctions or decrees (each, a
"proceeding") entered against, involving, pending or, to the knowledge of the
Company, threatened against the Company or any stockholder, in each case
affecting or potentially affecting the operations of the Company, the business,
assets, properties or prospects of the Company at law or in equity, or before or
by any governmental entity, and (iii) existing or prior facts, circumstances or
conditions that could form the basis for a proceeding against the Company or any
stockholder that would affect or potentially affect the operations of the
Company, or the business, assets, properties or prospects of the Company.
Neither the Company nor any stockholder of the Company is in default with
respect to any order of any governmental entity.
3.17 Insurance. All insurance policies are in full force and effect and no
notice of cancellation or termination has been received by the Company with
respect to any such policy. All such policies are sufficient for compliance with
all requirements of law and of all Contracts to which the Company is a party or
otherwise bound and are valid, outstanding, enforceable and, to the knowledge of
the Company, collectible policies. The Company believes that its insurance
coverage is adequate in relation to its current and anticipated business. The
Company is not aware of any pending or threatened claims against the Company for
personal injury, product liability or property damage.
3.18 Employee Benefit Plan. With respect to any employee benefit plan and
any collective bargaining agreement or any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, stock appreciation right, retirement, vacation,
severance, disability, death benefit hospitalization, medical, worker's
compensation, disability, supplementary unemployment benefits, or other plan,
arrangement or understanding (whether or not legally binding) or any employment
agreement providing compensation or benefits to any employee, of the Company or
any ERISA Affiliate who provides or provided services in respect of the business
of the Company or any beneficiary thereof and entered into, maintained or
contributed to, as the case may be, by the Company or any ERISA Affiliate (each,
a "Plan" or collectively, the "Plans"), there are no proceedings (other than
routine claims for benefits) pending, or, to the knowledge of the Company,
threatened, with respect to any Plan or the assets of any Plan, and the Company
does not have any knowledge of any facts which could give rise to any such
actions, claims, lawsuits or arbitrations (other than routine claims for
benefits). The Company has satisfied all funding, compliance and reporting
requirements for all Plans. With respect to each Plan, the Company has paid all
contributions (including employee salary reduction contributions) and all
insurance premiums that have become due and any such expense accrued but not yet
due has been properly reflected in the Financial Statements. Each Plan has been
operated in accordance with its terms and complies with all applicable laws.
"ERISA Affiliate" means (i) any corporation which at any time on or before the
date hereof is or was a member of the same controlled group of corporations
(within the meaning of section 414(b) of the Internal Revenue Code of 1986 as
amended (the "Code")) as the Company; (ii) any partnership, trade or business
(whether or not incorporated) which at any time on or before the date hereof is
or was under common control (within the meaning of section 414(c) of the Code
with the Company; and (iii) any entity which at any time on or before the date
hereof is or was a member of the same affiliated service group (within the
meaning of section 414(m) of the Code) as either the
-8-
<PAGE>
Company, any corporation described in clause (i) or any partnership, trade or
business described in clause (ii).
3.19 Tax Matters. (a) All Federal, state, local and foreign tax returns
and tax reports required to be filed on or prior to the date hereof by the
Company have been or will be filed or a valid request for extension has been or
will be filed with respect thereto, on a timely basis (including any extensions)
with the appropriate governmental agencies in all jurisdictions in which such
returns and reports are required to be filed. All such returns and reports are
and will be true, correct and complete in all material respects and disclose all
taxes required to be paid by the Company. All Federal, state, local and foreign
income, profits, franchise, sales, use, occupation, property, excise, employment
and other taxes (including interest, penalties and withholdings of tax) due from
and payable by the Company on or prior to the date hereof have been or will be
fully paid on a timely basis or have been adequately reserved for on the March
31, 1999 Balance Sheet. The Company is not currently the beneficiary of any
extension of time within which to file any tax return. There are no Liens for
taxes upon the assets of the Company except for statutory liens for current
taxes not yet due.
(b) No issues have been raised with the Company or, to the best of
the Company's knowledge, any stockholder by the IRS or any other taxing
authority in connection with any tax return or report filed by the Company or
any stockholder relating to the Company and there are no issues which, either
individually or in the aggregate, could result in any liability for tax
obligations of the Company or any stockholder relating to periods ending on or
before December 31, 1998 in excess of the accrued liability for taxes shown on
the March 31, 1999 Balance Sheet. No waivers of statutes of limitations have
been given or requested with respect to the Company. The Company has not
received notice that it may be subject to an audit by any Federal, State, local
or foreign tax authority.
3.20 Environmental Matters. (a) The operations of the Company comply with
all applicable federal, state, local, and foreign laws, codes, regulations,
requirements, directives, orders and common law, and all administrative or
judicial interpretations thereof that may be enforced by any governmental
entity, other Person or court, relating to pollution, the protection of human
health, the protection of the environment or the emission, discharge, disposal,
transportation, Release or threatened Release of materials in or into the
environment, including the Occupational Safety and Health Act ("Environmental
Laws"). "Release" means release, spill, emission, leaking, pumping, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
environment or into or out of any property, including the movement of
Contaminants through or in the air, soil, surface water, groundwater or Leased
Real Property or other property. "Contaminant" means any pollutant contaminant,
chemical or industrial, hazardous or toxic material or waste for which liability
or standards of conduct are imposed under Environmental Laws, and includes
asbestos or asbestos-containing materials, PCBs, and petroleum, oil or petroleum
or oil products or derivatives.
(b) The Company has obtained all environmental, health and safety
governmental permits necessary for the operation of the business of the Company,
and all such governmental permits are in full force and effect and will not be
revoked, suspended or otherwise adversely affected by the consummation of the
transactions contemplated hereby. The Company is in compliance with all terms
and conditions of such governmental permits.
3.21 Labor Relations; Employees. There is no labor strike, dispute,
slowdown, stoppage or lockout pending, affecting, or, to the knowledge of the
Company, threatened
-9-
<PAGE>
against the Company and during the last five years there has not been any such
action and there are no existing or prior facts, circumstances or conditions
that may lead to such an action. There are no union claims to represent the
employees of the Company nor have there been any such claims within the last
five years. There is no written or oral contract, commitment, agreement
understanding or other arrangement with any labor organization or multi-employer
or union benefit or pension fund, nor work rules or practices agreed to with any
labor organization or employee association, applicable to employees of the
Company, nor is the Company a party to or bound by any collective bargaining or
similar agreement. The Company has not engaged in any unfair labor practices as
defined in the National Labor Relations Act or other applicable law, ordinance
or regulation and the Company is, and has for the past three years been, in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment, wages,
hours of work and occupational safety and health. There is no unfair labor
practice charge or complaint against the Company pending or, to the knowledge of
the Company, threatened before the National Labor Relations Board or any similar
state or foreign agency and there are no existing or prior facts, circumstances
or conditions that could reasonably be expected to form the basis therefor.
There is no grievance pending or, to the knowledge of the Company, threatened
against the Company arising out of any collective bargaining agreement or other
grievance procedure and there are no existing or prior facts, circumstances or
conditions that could reasonably be expected to form the basis therefor. There
are no charges with respect to or relating to the Company pending or, to the
knowledge of the Company, threatened before the Equal Employment Opportunity
Commission or any other governmental entity responsible for the prevention of
unlawful employment practices and there are no existing or prior facts,
circumstances or conditions that could reasonably be expected to form the basis
therefor. The Company has not received notice of the intent of any governmental
entity responsible for the enforcement of labor or employment laws to conduct an
investigation with respect to or relating to the Company and, to the knowledge
of the Company, no such investigation is in progress. No complaints, lawsuits or
other proceedings are pending or, to the knowledge of the Company, threatened in
any forum by or on behalf of any present or former employee of the Company, any
applicant for employment or class of the foregoing alleging breach of any
express or implied contract for employment, any law governing employment or the
termination thereof or other discriminatory, wrongful or tortious conduct in
connection with any employment relationship.
3.22 Compliance with Law. The Company has complied for the past five years
and is presently complying with all applicable laws (whether statutory or
otherwise), rules, regulations, orders, ordinances, judgments, decrees or other
pronouncements having the effect of any of the foregoing, of all governmental
entities having jurisdiction (collectively, "Laws"), including the Federal
Occupational Safety and Health Act and all laws relating to the safe conduct of
business and environmental protection and conservation, the Civil Rights Act of
1964 and any applicable health, sanitation, fire, safety, labor, zoning and
building laws. The Company has not received written notification of any asserted
present or past failure by the Company to so comply with the Laws and, to the
knowledge of the Company, there are no existing or prior facts, circumstances or
conditions that could form the basis for such notification or assertion. The
representations of this Section 3.22 are intended to be in addition to and not
as a qualification of any other Section in this Article III.
3.23 Government Permits. The Company owns, holds or possesses all
licenses, franchises, permits, privileges, immunities, approvals and other
authorizations from all governmental entities which are necessary to entitle it
to own or lease, operate and use its
-10-
<PAGE>
assets and to carry on and conduct the business of the Company substantially as
currently conducted (herein collectively called "governmental permits"). Such
governmental permits are in full force and effect, no violations are or have
been recorded in respect thereof, no proceeding is pending or, to the knowledge
of the Company, threatened, to revoke or limit any thereof or to affect the
rights of the Company under any thereof, the Company is not aware of any such
proceeding, and none of such governmental permits will be revoked, suspended or
otherwise adversely affected by the consummation of the transactions
contemplated hereby.
3.24 Brokers or Finders. The Company will not have any obligation to pay
any broker's, finder's, investment banker's, intermediary's, financial advisor's
or similar fees in connection with this Agreement or the transactions
contemplated herein.
3.25 Disclosure. The representations and warranties by the Company in this
Agreement and the Transaction Documents and the statements contained in any
other schedules, certificates, documents, exhibits and agreements referred to
herein or otherwise furnished or to be furnished by the Company to the
Purchasers pursuant to this Agreement and the transactions contemplated hereby,
including the Registration Statement, do not and will not contain any untrue
statement of a material fact and do not and will not omit to state any material
fact necessary to make the statements herein or therein, in light of the
circumstances under which such statements were made, not misleading.
3.26 Year 2000 Compliance. The computer systems of the Company (including
without limitation all software, hardware, workstations and related components,
automated devices, embedded chips and other date sensitive equipment) are Year
2000 Compliant or will be Year 2000 Compliant by June 30, 1999. The term "Year
2000 Compliant" (and derivative forms thereof) as used herein means that the
computer systems (1) are capable of recognizing, processing, managing,
representing, interpreting and manipulating correctly date related data for
dates earlier and later than January 1, 2000, including, but not limited to,
calculating, comparing, sorting, storing, tagging and sequencing, without
resulting in or causing logical or mathematical errors or inconsistencies in any
user-interface functionalities or otherwise, including data input and retrieval,
data storage, data fields, calculations, reports, processing, or any other input
or output, (2) have the ability to provide date recognition for any data element
without limitation (including, but not limited to, date-related data represented
without a century designation, date-related data whose year is represented by
only two digits and date fields assigned special values), (3) have the ability
to automatically function into and beyond the year 2000 without human
intervention and without any change in operations associated with the advent of
the year 2000, (4) have the ability to correctly interpret data, dates and time
into and beyond the year 2000, (5) have the ability not to produce noncompliance
in existing information, nor otherwise corrupt such data into and beyond the
year 2000, (6) have the ability to correctly process after January 1, 2000 data
containing dates before that date, and (7) have the ability to recognize all
"leap years," including February 29, 2000. The computer systems have the ability
to properly interface and will continue to properly interface with internal and
external applications and systems of third parties with whom the Company
exchanges data electronically (including without limitation, customers, clients,
suppliers, service providers, subcontractors, processors, converters, shippers,
warehousemen, outsourcers, data processors, regulatory agencies and banks)
whether or not they have achieved Year 2000 Compliance. The Company has inquired
of all such third parties whose lack of Year 2000 Compliance could reasonably
expect to have a material impact on the Company or its operations and all such
third parties have represented that they are Year 2000 Compliant or will be Year
2000 Compliant by June 30, 1999.
-11-
<PAGE>
3.27 Registration Statement. The Registration Statement and any
preliminary prospectus contained therein, at the time of filing thereof, will
conform in all material respects to the requirements of the Securities Act of
1933 (the "Securities Act") and the rules and regulations promulgated thereunder
(the "Rules and Regulations"). When the Registration Statement becomes effective
(the "Effective Date") and at all times subsequent thereto and when any
post-effective amendment to the Registration Statement becomes effective or any
amendment or supplement to the prospectus is filed with the Commission, (i) the
Registration Statement and prospectus, and any amendments or supplements
thereto, will contain all statements which are required to be stated therein by,
and will comply in all material respects with the requirements of, the
Securities Act and the Rules and Regulations and (ii) neither the Registration
Statement nor the prospectus, nor any amendment or supplement thereto, will
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading.
3.28 Foreign Corrupt Practices Act. The Company has not at any time during
the last five years (i) made any unlawful contribution to any candidate for
foreign office, or failed to disclose fully any contribution in violation of law
or (ii) made any payment to any foreign, United States or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States.
3.29 No Failure to Fund. There have been no Failure to Fund or Events of
Default as such terms are defined in the January 20, 1999 Stock Purchase
Agreement between Webstakes and Stone.
3.30 Stone Agreements. Except as set forth in Schedule 3.30 and as
referenced in Sections 5(f), (h), (l) and (m), there are no contracts,
agreements, understandings or arrangements, whether written or oral, of any kind
or nature whatsoever, between the Company and Stone or any of Stone's
principals, officers, directors, stockholders, employees or affiliates. With
respect to those arrangements set forth on Schedule 3.30, such arrangements were
negotiated at arms-length, are at least as favorable to the Company as could be
obtained from unaffiliated parties and are terminable by the Company at will
without resulting in a breach, default or violation of such arrangements.
3.31 No Unpaid Dividends. With respect to the Class A Preferred Stock,
there are no dividends owed or accrued thereunder.
4. Representations of the Purchasers. Each Purchaser hereby represents and
warrants with respect to such Purchaser, the following:
(a) The Purchaser is an entity validly existing and in good standing
under the laws of its state of formation.
(b) This Agreement has been duly authorized, executed, and delivered
by the Purchaser and is a valid and binding obligation of the Purchaser,
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, fraudulent transfer,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally and by general equitable principles (regardless of
whether enforcement is sought in equity or at law), including, without
limitation, principles
-12-
<PAGE>
regarding good faith and fair dealing and rules of law governing the
availability of equitable remedies.
(c) The Purchaser is acquiring the Shares for its own account for
investment and not with a view to, or for resale in connection with, any
distribution thereof within the meaning of the Securities Act.
(d) The Purchaser understands that the Shares are "restricted" and
have not been registered under the Securities Act or any blue sky or other state
securities law or regulation (hereinafter collectively referred to as "blue sky
laws") in reliance, in part, upon the representations, warranties, and covenants
of the Purchaser contained herein. The Purchaser also understands that it cannot
offer for sale, sell or transfer the Shares unless such offer, sale, or transfer
of the Shares has been registered under the Securities Act and under any
applicable blue sky laws or unless an exemption from such registration is
available with respect to any such proposed offer, sale, or transfer. The
Purchaser further understands that Webstakes is not under any obligation to
register the Shares in the future (other than as provided in the Transaction
Documents). The Purchaser understands that a restrictive legend may be placed on
certificates representing any or all of the Shares and that transfer of any or
all of the Shares may be refused by Webstakes or its transfer agent, if any,
unless the Shares for which transfer is sought are registered under the
Securities Act and all other applicable federal securities or blue sky laws and
all rules and regulations under the Securities Act and such laws are satisfied
or unless the Purchaser provides information satisfactory to Webstakes that such
registration is not required.
(e) The Purchaser understands that a significant portion of the
proceeds received by the Company from the sale of the Shares hereunder will be
used to repurchase shares of Common Stock and shares of Class A Preferred Stock
from another shareholder and hereby consents to such use of proceeds.
(f) The Purchaser is an "accredited investor" as such term is
defined in Rule 501 promulgated under the Securities Act.
5. Purchasers' Conditions to Closing. The agreement of the Purchasers to proceed
with the Transaction and the Closing are conditioned on the following:
(a) Certificates representing the Shares are delivered to the
Purchasers, free and clear of all liens, claims, and encumbrances other than
those created by the Purchasers, imposed by applicable federal or state
securities laws, or arising under the Shareholders' Agreement.
(b) The representations and warranties of the Company made in this
Agreement and in the Transaction Documents are true and correct in all material
respects as of the Closing Date and the Company has performed all covenants and
agreements and satisfied all conditions to be performed or satisfied at or prior
to Closing.
(c) All necessary approvals of the Board of Directors and
stockholders of the Company and covenants and approvals of third parties have
been obtained.
(d) Steven Krein, Dan Feldman, Joe Lamport and Steve Sacks have
executed the Shareholders' Agreement.
-13-
<PAGE>
(e) The Purchasers shall have received the opinion, in form and
substance satisfactory to the Purchasers and counsel for the Purchasers, dated
as of the Closing Date, of Reed Smith Shaw & McClay LLP, counsel to Webstakes.
(f) The Stock Purchase Agreement between the Company and Stone in
the form attached hereto as Exhibit E, shall have been executed and delivered by
both parties and the agreements referenced therein to be terminated have, in
fact, been terminated.
(g) The filing of the Certificate of Amendment, in the form attached
hereto as Exhibit B, in Delaware shall have occurred and proof of such filing
shall have been delivered to the Purchasers.
(h) The Release and Standstill Agreement, in the form attached
hereto as Exhibit F, shall have been executed by Stone and its principals and
affiliates thereof, and any Trust, including the trustees thereof, created to
vote, dispose of or act as custodian or fiduciary for any securities of the
Company beneficially owned by Stone and/or its principals and/or affiliates
thereof, and certified copies thereof shall have been delivered to the
Purchasers.
(i) The Sponsorship Agreement between Excite, Inc. and the Company
and the Services Agreement between MatchLogic, Inc. and the Company shall have
been executed by the respective parties thereto.
(j) The Registration Rights Agreement, in the form attached hereto
as Exhibit G, shall have been executed by the Company and shall have been
delivered to the Purchasers.
(k) On or before the Closing Date, the Purchasers and counsel to the
Purchasers, shall have received such further documents, certificates and
schedules or instruments relating to the business, corporate, legal and
financial affairs of Webstakes and any of its stockholders as they shall have
heretofore reasonably requested.
(l) Stone shall have consented to (i) the filing of the Certificate
of Amendment attached as Exhibit B; and (ii) the issuance of the Class B
Preferred Stock and the other transactions as contemplated by this Agreement and
the Transaction Documents.
(m) The resignation of Harry Carneal from the Board of Directors
shall have been delivered.
6. Webstakes' Conditions to Closing. The agreement of Webstakes to proceed with
the Transaction and the Closing are conditioned on the following:
(a) The consideration specified in Section 1.2 has been (i) received
by Reed Smith Shaw & McClay LLP, counsel to Webstakes, as escrow agent (the
"Escrow Agent") pursuant to that certain escrow agreement by and among
Webstakes, the Escrow Agent and the Purchasers named therein attached hereto as
Exhibit H; such consideration has been (ii) disbursed to Webstakes and the other
parties thereto in accordance with Section 2 of the Escrow Agreement; and (iii)
those Purchasers who are not parties to the Escrow Agreement have generated wire
transfers in the amount set forth opposite such Purchaser's name on Exhibit A
hereto, except that Primus Capital Fund IV Limited Partnership and Primus
Executive Fund Limited Partnership (together, "Primus") shall fund their
respective portions of the
-14-
<PAGE>
consideration set forth on Exhibit A within 10 days of the date hereof. The
obligation of Primus to fund hereunder shall be irrevocable upon the Closing.
(b) The representations and warranties of the Purchasers made in
this Agreement are true and correct in all material respects as of the Closing
Date.
7. Agreements to Cause Conditions to be Met. Each of the parties agrees to use
commercially reasonable best efforts to cause the conditions to the Closing to
be met.
8. Covenants of the Company
8.1 The proceeds from the issuance and sale of the Shares received by the
Company will be used by the Company for the purchase of all outstanding shares
of Common Stock and Class A Preferred Stock held by Stone with payment therefor
as directed by the Company pursuant to Section 1.2 of this Agreement, working
capital and other general corporate purposes, which may include, without
limitation, one or more of the following as determined by the Company in its
sole discretion: administration, marketing, obtaining capital and other
equipment, and sales in accordance with the budgets and/or projections
previously submitted to Purchasers.
8.2 For a period of one (1) year following the Closing, the Company will
not change the nature of its business activity if such change would render the
Company "ineligible" as provided in Section 107.720 of Title 13 of the Federal
Regulations.
8.3 So long as Prospect Street Ventures, Inc. or any of its affiliates
("PSV") holds any Shares, the Company will at all times comply with the
non-discrimination requirements of Sections 112, 113 and 117 of Title 13 of the
Federal Regulations.
8.4 So long as PSV holds any Shares, within sixty (60) days after the end
of each fiscal year of the Company, and at such other times as PSV may
reasonably request in writing to the Company, the Company will deliver to PSV
such economic impact information as needed by PSV, in PSV's good faith judgment
and as is consistent with the customary nature of similar reports required by
law to be filed by PSV regarding the economic impact of PSV's financing of the
Company in order to comply with Section 107.630(e) of Title 13 of the Federal
Regulations, specifying the full-time equivalent jobs created or retained in
connection with such investment, and the impact of such financing on the
Company's business in terms of profits and with respect to taxes paid by the
Company and its employees. The Company will promptly provide PSV upon a request
in writing to the Company, specifying in such written request the nature of such
required information in reasonable detail, such information as PSV reasonably
requests, in order to permit PSV to comply with PSV's obligations under the
Small Business Act and the regulations promulgated thereunder and related
thereto. Any submission of financial information pursuant to this Section 8.4
shall be under cover of a certificate executed by the Company's President, Chief
Executive Officer, Chief Financial Officer or Treasurer, certifying that such
information (i) relates to the Company and (ii) to the Company's knowledge is
accurate.
8.5 The Company shall file the Registration Statement with the Securities
and Exchange Commission, no later than 5:00 p.m. (EST) on the Closing Date and
shall make application to the National Association of Securities Dealers, Inc.
and any stock exchanges
-15-
<PAGE>
upon which the Company's securities will be listed or quoted promptly
thereafter. The Company covenants and agrees that it will use its best efforts
to cause the Registration Statement and any amendment thereof to become
effective as promptly as possible. The Company will promptly prepare and file
with the Commission any amendments or supplements to the Registration Statement
or prospectus which may be necessary to correct any statements or omissions, if,
at any time when a prospectus is required to be delivered under the Securities
Act, any event shall have occurred as a result of which the prospectus or any
other prospectus relating to any securities of the Company as then in effect
would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
8.6 Director Designees; Observers. (a) The Company will, at the request of
Purchasers holding a majority in interest of either the Class B Preferred Stock
or the Common Stock into which it is converted, during the shorter of (i) the
period that is five years from the date hereof or (ii) the period that is three
years from the date of the consummation of an initial public offering of any
securities of the Company (an "IPO"), appoint two designees of such Purchasers
to the Board of Directors of the Company, and use its best efforts to nominate
and cause to be elected and reelected to the Board of Directors of the Company
such designees or any other designees of the Purchasers as they may direct from
time to time during such three or five year period, as the case may be,
including upon the existence of any vacancy created with respect to any such
Purchaser designees or, at the request of Purchasers holding a majority in
interest of either the Series A Preferred Stock or the Common Stock into which
it is converted, to withdraw and substitute any Purchaser designee. The Company
will give such designees notice of all meetings of the Board of Directors of the
Company at the same time and in the same manner that directors are notified and
will provide compensation to such designees as set forth for members of the
Board of Directors of the Company generally or, if applicable, as set forth for
independent members of the Board of Directors of the Company, and will reimburse
such designee for all expenses incurred in attending such meetings, including,
but not limited to, food, transportation and lodging.
(b) The Company will, at the request of any Purchaser that has
purchased $5 million or more of the Class B Preferred Stock hereunder, whether
or not converted, for the shorter of (i) the period that is five years from the
date hereof or (ii) the period that is three years from the date of the
consummation of an IPO, permit an agent of any such Purchaser to attend all
meetings of the Board of Directors of the Company as a non-voting observer
(unless an employee of such Purchaser or such Purchasers' affiliate has been
designated to the Board of Directors of the Company pursuant to Section 8.6
hereof). The Company will give such agent notice of all meetings of the Board of
Directors of the Company at the same time and in the same manner that directors
are notified and will reimburse such agent for all expenses incurred in
attending such meetings, including, but not limited to, food, transportation and
lodging.
8.7 Election of Directors. The Company shall cause the election of
Kristopher Wood and Jack Rivkin as members of the board of directors of the
Company with terms ending in 2002 (each a "Class III Director") immediately upon
consummation of an IPO or as a otherwise directed by XL Ventures, LLC and The
Travelers Insurance Company, respectively.
8.8 Amendment to Certificate of Incorporation. As soon as practicable
following the Closing, the Company will cause to be filed an amendment to its
Certificate of Incorporation which eliminates the Class A Preferred Stock.
-16-
<PAGE>
8.9 Payments to Excite, Inc. and MatchLogic, Inc. Simultaneously with the
Closing, the Company shall pay Excite, Inc. and MatchLogic, Inc., the aggregate
sum of $3,185,129.48 pursuant to the terms of two agreements entered into by the
Company with each of Excite, Inc. and MatchLogic, Inc.
9. No Public Announcement; Confidentiality. The parties agree to use reasonable
efforts to circulate drafts of proposed press releases or other announcements
regarding this Agreement or the Transaction in advance of publication and to
provide all parties the opportunity to comment on such proposed announcements or
releases. No party shall use the name of any other party in any announcement
without the prior written consent of such party unless, in the opinion of such
party's counsel, it is required to do so to comply with applicable laws or
regulations. The Purchasers understand that the materials furnished to the
Purchasers in connection with the negotiation of the Transaction contain
confidential and proprietary information concerning Webstakes. The Purchasers
agree to maintain the confidential nature of all such information (except as
required by law or governmental regulation or in connection with enforcement of
purchasers rights or claims under this Agreement or the Transaction Documents),
agree not to use any such confidential information for any reason other than in
connection with the Transaction, and agree to return all copies of the
disclosure materials and any other materials that contain confidential
information of the Company that was obtained in connection with the negotiation
of the Transaction if this Agreement is terminated for any reason, unless, in
the opinion of counsel for the Purchasers, retention of such confidential
information is required by law or necessary in connection with any claim or
proceeding, including any proceeding against the Company. The obligations with
respect to confidentiality shall cease with respect to any information that
ceases to be confidential other than as a result of a breach of the Purchasers'
obligations hereunder. The obligations with respect to confidentiality shall
survive the termination of this Agreement.
10. Binding Obligation. The parties agree that this Agreement is a binding
agreement that shall govern the Transaction.
11. Indemnification.
11.1 Indemnification by the Company. From and after the Closing, the
Company shall indemnify and hold harmless each Purchaser, its affiliates, and
their respective directors, officers, employees, shareholders, partners, agents,
successors and assigns (collectively, "Purchaser Claimants" and individually, a
"Purchaser Claimant") from and defend each of them from and against any and all
demands, claims, actions, liabilities, losses, costs, damages or expenses
whatsoever (including without limitation reasonable attorneys' fees and
expenses) (collectively, "Claims") asserted against, imposed upon or incurred by
any of the Purchaser Claimants resulting from or arising out of (i) any
inaccuracy or breach of any representation or warranty of the Company contained
herein or in the Transaction Documents and/or (ii) any breach of any covenant or
obligation of the Company contained herein or in the Transaction Documents. A
Purchaser Claimant's right to indemnification shall not be limited or affected
in anyway by any pre-Closing investigation by the Purchasers or their
representatives.
11.2 Indemnification by the Purchaser. From and after the Closing, each
Purchaser shall, severally and not jointly, indemnify and hold the Company and
its affiliates, directors, officers, employees, shareholders, partners, agents,
successors and assigns (collectively, the "Issuer Claimants" and individually,
an "Issuer Claimant") harmless from and defend each of them from
-17-
<PAGE>
and against any and all claims asserted against, imposed upon or incurred by any
of the Issuer Claimants resulting from or arising out of any inaccuracy or
breach of any representation or warranty of such Purchaser in Section 4 hereof.
11.3 Terms and Conditions of Indemnification.
The respective obligations and liabilities of the Company and the
Purchasers (each, an "Indemnifying Party") to indemnify pursuant to this Section
11 shall be subject to the following terms and conditions:
(a) The party seeking to be indemnified (the "Indemnified Party")
shall give the Indemnifying Party prompt written notice of any such claim. The
Indemnified Party's failure to give prompt notice, however, shall not serve to
eliminate or limit the Indemnified Party's right to indemnification hereunder
except to the extent such failure materially prejudices the rights of the
Indemnifying Party.
(b) Promptly after receipt by an Indemnified Party of notice of the
commencement of such action, suit or proceeding for which such Indemnified Party
is entitled to indemnification under this Section 11, such Indemnified Party
will notify the Indemnifying Party of the commencement thereof in writing; but
the failure so to notify the Indemnifying Party (i) will not relieve it from any
liability under Sections 11.1 and 11.2 above except to the extent such
Indemnifying Party has been materially prejudiced by such failure (including,
without limitation, that such failure results in the forfeiture by the
Indemnifying Party of substantial rights and defenses) and (ii) will not, in any
event, relieve the Indemnifying Party from any obligations to any Indemnified
Party other than the indemnification obligation provided in Sections 11.1 and
11.2 above. In case any such action is brought against any Indemnified Party,
and it notifies the Indemnifying Party of the commencement thereof, the
Indemnifying Party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other Indemnifying Party similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
Indemnified Party; provided, however, that if (i) the Indemnifying Party has
failed to assume the defense thereof and employ such counsel or (ii) the named
parties to any such action (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and the Indemnifying Party and the
Indemnified Party shall have been advised by counsel that representation of such
Indemnifying Party and such Indemnified Party by the same counsel would be
inappropriate under applicable standards of professional conduct due to
differing interests between them, then, in each such case, the Indemnifying
Party shall not have the right to direct the defense of such action on behalf of
such Indemnified Party or parties and such Indemnified Party or parties shall
have the right to select separate counsel to defend such action on behalf of
such Indemnified Party of its election so to assume the defense thereof and the
reasonable approval by such Indemnified party of counsel appointed to defend
such action, the Indemnifying Party will not be liable to such Indemnified Party
under this Section 11 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such Indemnified Party in
connection with the defense thereof, unless (i) the Indemnified Party shall have
employed separate counsel in accordance with the proviso to the immediately
preceding sentence (it being understood, however, that in connection with such
action the Indemnifying Party shall not be liable for the expenses of more than
one separate counsel (in addition to local counsel) in any one action or
separate but substantially similar actions in the same jurisdiction arising out
of the same general allegations or circumstances, designated by the Indemnified
Parties, (ii) the Indemnifying Party has authorized in writing the employment of
counsel for the Indemnified Party at the expense of the Indemnifying Party or
(iii) the
-18-
<PAGE>
Indemnifying Party shall have failed to assume promptly after notice of the
institution of such action the defense of such action or retain counsel
reasonably satisfactory to the Indemnified Party. After such notice from the
Indemnifying Party to such Indemnified Party, the Indemnifying Party will not be
liable for the costs and expenses of any settlement of such action effected by
such Indemnified Party without the consent of the Indemnifying Party, which
consent shall not be unreasonably withheld or delayed.
(c) The Indemnified Party shall be kept fully informed by the
Indemnifying Party of such action, suit or proceeding at all stages thereof,
whether or not it is represented by counsel. The Indemnifying Party shall, at
the Indemnifying Party's expense, make available to the Indemnified Party and
its attorneys and accountants all books and records of the Indemnifying Party
relating to such proceedings or litigation, and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such action,
suit or proceeding.
(d) The Indemnifying Party shall make no settlement of any claims
which such Indemnifying Party has undertaken to defend, without the Indemnified
Party's consent unless the Indemnifying Party fully indemnifies the Indemnified
Party for all losses, there is no finding or admission of violation of law by,
or effect on any other claims that may be made against the Indemnified Party and
the relief granted in connection therewith requires no action on the part of and
has no effect on the Indemnified Party. However, in the event the Indemnifying
party shall not offer reasonable assurances as to its financial capacity to
satisfy any final judgment or settlement, the Indemnified Party may assume the
defense and dispose of the claim, after 30 days prior written notice to the
Indemnifying party.
11.4 Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company or its officers and
of the Purchasers set forth in this Agreement or the Transaction Documents, or
made by or on behalf of them, respectively, pursuant to this Agreement or the
Transaction Documents shall remain in full force and effect, regardless of any
investigation made by or on behalf of the Company, any of its officers or
directors or any of its affiliates, the Purchasers or any of their respective
affiliates and shall survive the closing hereof or thereof.
12. Notices. All notices, requests, demands, and other communications hereunder
will be in writing and will be personally delivered, delivered by facsimile or
courier service, or mailed, certified with first class postage prepaid, to the
address set forth below the signature of the party to this Agreement. Each such
notice, request, demand, or other communication will be deemed to have been
given (whether actually received or not) on the date of actual delivery thereof,
if personally delivered or delivered by facsimile transmission (if receipt is
confirmed at the time of such transmission by telephone or
facsimile-machine-generated confirmation), or on the third Business Day
following the date of mailing, if mailed in accordance with this Section 12, or
on the day specified for delivery to the courier service (if such day is one on
which the courier service will give normal assurances that such specified
delivery will be made). Any notice, request, demand, or other communication
given otherwise than in accordance with this Section 12 will be deemed to have
been given on the date actually received. Any party may change its address for
purposes of this Section 12 by giving written notice of such change to all other
parties in the manner hereinabove provided. Whenever any notice is required to
be given by law or by this Agreement, a written waiver thereof, signed by the
Person entitled to notice, whether before or after the time stated therein, will
be deemed equivalent to the giving of that notice.
-19-
<PAGE>
13. Severability. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws effective during the term
hereof, such provision will be fully severable and this Agreement will be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of this Agreement; the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there will be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
14. Entirety; Amendments and Waivers. This Agreement (including any Exhibits and
Schedules hereto and the documents delivered pursuant hereto, including any
ancillary agreements) constitutes the entire understanding between the parties
with respect to the subject matter hereof and supersedes all prior agreements or
understandings relating to the subject matter hereof (but excluding any
confidentiality agreement executed in connection with the transaction) and may
be modified or amended only by an instrument in writing executed by each of the
parties hereto sought to be bound by such modification or amendment. Any party
may waive any of the conditions contained herein or any of the obligations of
any other party hereunder, but any such waiver will be effective only if in
writing and signed by the party waiving such conditions or obligations.
15. Section Headings. The Section headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
16. Governing Law and Venue. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY
CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF DELAWARE OR
ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF DELAWARE. EACH PARTY HEREBY IRREVOCABLY
SUBMITS TO THE PERSONAL JURISDICTION OF THE STATE COURTS LOCATED IN DELAWARE AND
AGREES THAT ANY LITIGATION BETWEEN THE PARTIES WILL BE FILED IN STATE COURTS
LOCATED IN DELAWARE.
17. Expenses. Each party hereto will bear its own legal and other expenses
incurred in connection with the preparation, execution and performance of this
Agreement.
18. Attorney's Fees. If any action is brought to enforce or interpret the terms
of this Agreement (including through arbitration), the prevailing party will be
entitled to reasonable legal fees, costs, and necessary disbursements in
addition to any other relief to which such party may be entitled.
-20-
<PAGE>
19. Counterparts. This Agreement may be executed in any number of counterparts
and will be effective when each party hereto has executed at least one
counterpart, with the same effect as if all signing parties had signed the same
document. All counterparts will be construed together and evidence only one
agreement, which, notwithstanding the actual date of execution of any
counterpart, will be deemed to be dated the day and year first written above. In
making proof of this Agreement, it will not be necessary to account for a
counterpart executed by any party other than the party against whom enforcement
is sought or to account for more than one counterpart executed by the party
against whom enforcement is sought.
20. Execution by Facsimile. The manual signature of any party hereto that is
transmitted to any other party by facsimile will be deemed for all purposes to
be an original signature.
21. Non-Waiver; Rights are Cumulative. Neither a failure of a party to this
Agreement to exercise any power reserved to it in this Agreement or to insist
upon compliance by any other party hereto with any obligation or condition in
this Agreement nor any custom or practice of the parties at variance with the
terms hereof will constitute a waiver of such first party's rights to demand
exact compliance with the terms of this Agreement. Waiver by a party to this
Agreement of any particular default will not affect or impair such party's right
with respect to any subsequent default of the same or of a different nature; nor
will any delay, forbearance, or omission of such party to exercise any power or
right arising out of any breach or default by any other party hereto of any of
the terms, provisions, or covenants of this Agreement affect or impair such
first party's rights; nor will such constitute a waiver by such first party of
any rights hereunder or rights to declare any subsequent breach or default.
Subsequent acceptance by a party to this Agreement of any performance or
payments due to it hereunder will not be deemed to be a waiver by such first
party of any preceding breach by any other party of any terms, provisions,
covenants, or conditions of this Agreement. Except as otherwise expressly set
forth in this Agreement, each party's rights under this Agreement are cumulative
and neither the existence of, nor the exercise or enforcement by a party of, any
right or remedy under this Agreement will preclude the exercise or enforcement
by such party of any other right or remedy under this Agreement or law.
22. No Strict Construction. This Agreement is the result of substantial
negotiations among the parties and their counsel and has been prepared by their
joint efforts. Accordingly, the fact that counsel to one party or another may
have drafted this Agreement or any portion hereof is immaterial and this
Agreement will not be strictly construed against any party.
23. Construction. Whenever the context requires, the gender of all words used in
this Agreement includes the masculine, feminine and neuter.
[THIS SPACE LEFT BLANK INTENTIONALLY.]
-21-
<PAGE>
Executed on the date or dates indicated below, to be effective as of the
date first written above.
WEBSTAKES.COM, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
XL VENTURES, LLC
By: XL Ventures (Delaware), Inc.
Its Managing Member
________________________________________
By: Mark A. Angelson
Deputy Chairman
Date:_____________________________, 1999
<PAGE>
AT HOME CORPORATION, a Delaware
corporation
By:_____________________________________
Name: Mark C. Stevens
Title: Executive Vice President,
Business Affairs
Date: June , 1999
<PAGE>
PROSPECT STREET NYC DISCOVERY FUND,
L.P.
By: PROSPECT STREET DISCOVERY
FUND, INC., its general partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL
PARTNERS III, L.P.
BY: CPCP Associates, L.P., its General
Partner
BY: INVESCO Private Capital, Inc., its
General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS II, L.P.
By: CPCO Associates, L.P., its
Investment General Partner
By: INVESCO Private Capital, Inc., its
General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS I, C.V.
By: Chancellor KME IV Partner, L.P., its
Investment General Partner
By: INVESCO Private Capital, Inc., its
General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
CITIVENTURE 96 PARTNERSHIP, L..P.
By: INVESCO Private Capital, Inc., its
Investment Advisor
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
GREENBERG FAMILY FUND, LLC
________________________________________
Name: Arnold Greenberg, Manager
Date: June , 1999
<PAGE>
ALLEN CAPITAL ARCHON PARTNERS L.P.
By: Allen Capital Inc.
By:_____________________________________
Brad Roberts, President
<PAGE>
ALPINE SPECTRUM INVESTORS, LLC
By:_____________________________________
By:_____________________________________
<PAGE>
PRIMUS CAPITAL FUND IV LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc.,
its General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
PRIMUS EXECUTIVE FUND LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc.,
its General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
NATIONAL BROADCASTING COMPANY, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
MS CUBED, LLC
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:_____________________________, 1999
<PAGE>
DRAKE & CO. FOR THE ACCOUNT OF
CITIVENTURE III
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:___________________________________
<PAGE>
MAMARONECK CAPITAL LLC
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:___________________________________
<PAGE>
WINSTON PARTNERS, L.P. RAJ SANDHU
By: Chatterjee Fund Management, L.P., ________________________________________
its general partner
Date:___________________________________
Address for notices:
By:______________________________
101 W. 67th Street Apt. #47D
Date:____________________________ New York, NY 10023
Address for notices:
PETER HURWITZ
c/o The Chatterjee Group
888 Seventh Avenue Suite 3000 ________________________________________
New York, NY 10106
Date:___________________________________
Address for notices:
40 Half Moon Lane
WINSTON PARTNERS II LLC Irvington, NY 10533
By: Chatterjee Advisors LLC, its
Manager
ADAM GRAEV
By:______________________________ ________________________________________
Date:____________________________ Date:___________________________________
Address for notices:
Address for notices:
525 East 72nd Street Apt. #7B
c/o The Chatterjee Group New York, NY 10021
888 Seventh Avenue Suite 3000
New York, NY 10106
DILIP ADVANI
WINSTON PARTNERS II LDC
________________________________________
By:______________________________
Date:___________________________________
Date:____________________________
Address for notices:
Address for notices:
167 East 61st Street
c/o Citco Apt. 17D
Kaya Flamboyan 9 New York, NY 10021
Willemstad, Curacao
Netherlands Antilles
<PAGE>
CATTERTON-SIMON PARTNERS III, L.P.
By: Catterton-Simon Managing
Partner III, L.L.C., Its general
partner
By:_____________________________________
Name: Craig H. Sakin
Title: Authorized Person
Date:___________________________________
CHANNEL-WEBSTAKES, LLC
By: Catterton Partners Management
Company LLC, Its Managing Member
By:_____________________________________
Name: Craig H. Sakin
Title: Authorized Person
Date:___________________________________
<PAGE>
I WIN INVESTORS, LLC
By:_____________________________________
Name: Robert Russell
Title:
<PAGE>
WPG SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________________
Name:
Title
WPG INSTITUTIONAL SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________________
Name:
Title
WPG NETWORKING FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________________
Name:
Title
CA CAPITAL MANAGEMENT LTD.
By:_____________________________________
Name:
Title: Its Attorney in Fact
<PAGE>
EXHIBIT A
Investor List
<TABLE>
<CAPTION>
Dollar Investment Number of Shares
----------------- ----------------
<S> <C> <C>
XL Ventures, LLC $ 7,000,000 1,166,667
At Home Corporation 7,000,000 1,166,667
Chancellor Private Capital Partners III, L.P. 496,962 82,827
Chancellor Private Capital Offshore Partners II, L.P. 818,586 136,431
Chancellor Private Capital Offshore Partners I, C.V. 75,738 12,623
Citiventure 96 Partnership, L.P. 1,945,314 324,219
MS Cubed LLC 750,000 125,000
Mamaroneck Capital LLC 99,996 16,666
Drake & Co. for the Account of Citiventure III 813,402 135,567
Prospect Street NYC Discovery Fund L.P. 5,000,000 833,333
Catterton-Simon Partners III, L.P. 1,000,000 333,333
Channel-Webstakes, LLC 1,200,000
Winston Partners, L.P. 700,000 116,667
Winston Partners II LLC 700,000 116,667
Winston Partners II LDC 500,000 83,333
Raj Sandhu 58,000 9,667
Peter Hurwitz 15,000 2,500
Adam Graev 12,000 2,000
Dilip Advani 15,000 2,500
The Travelers Insurance Company 5,000,000 833,333
Primus Capital Fund IV Limited Partnership 2,880,000 480,000
Primus Executive Fund Limited Partnership 120,000 20,000
Allen Capital Archon Partners L.P. 1,000,000 166,667
I Win Investors, LLC 500,000 83,333
Alpine Spectrum Investors LLC 500,000 83,333
Arnold Greenberg 1,000,000 166,667
National Broadcasting Company, Inc. 1,000,000 166,667
WPG Software Fund, L.P. 114,000
WPG Institutional Software Fund L.P. 248,800
WPG Networking Fund L.P. 27,200
CA Capital Management Ltd. 10,000
TOTAL 39,999,998 6,666,667
=========== =========
</TABLE>
<PAGE>
EXHIBIT B
AMENDED CERTIFICATE OF INCORPORATION
<PAGE>
State of Delaware
Office of the Secretary of State PAGE 1
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "NETSTAKES, INC.", CHANGING ITS NAME FROM "NETSTAKES, INC." TO
"WEBSTAKES.COM, INC.", FILED IN THIS OFFICE ON THE ELEVENTH DAY OF JUNE, A.D.
1999, AT 4:49 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ Edward J. Freel
--------------------------------------
Edward J. Freel, Secretary of State
2630943 8100 AUTHENTICATION: 9801109
991236369 DATE: 06-14-99
<PAGE>
EXHIBIT C
BYLAWS OF WEBSTAKES.COM, INC.
<PAGE>
BY-LAWS
of
NETSTAKES, INC.
(a Delaware corporation)
(the "Corporation")
Amended and Restated as of June 2, 1999
<PAGE>
TABLE OF CONTENTS
By-Laws
Page
----
ARTICLE I STOCKHOLDERS
1.01 Annual Meetings....................................... 1
1.02 Special Meetings...................................... 1
1.03 Notice of Annual and Special Meetings................. 1
1.04 Quorum................................................ 1
1.05 Voting................................................ 2
1.06 Procedure at Stockholders' Meetings................... 2
1.07 Action Without Meeting................................ 2
ARTICLE II DIRECTORS
2.01 Number, Election and Term of Office................... 3
2.02 Annual Meetings....................................... 3
2.03 Regular Meetings...................................... 3
2.04 Special Meetings...................................... 3
2.05 Notice of Annual and Special Meetings................. 3
2.06 Quorum and Manner of Acting........................... 3
2.07 Action Without Meeting................................ 4
2.08 Participation by Conference Telephone................. 4
2.09 Resignations.......................................... 4
2.10 Removal of Directors.................................. 4
2.11 Vacancies............................................. 4
2.12 Compensation of Directors............................. 5
2.13 Committees............................................ 5
2.14 Personal Liability of Directors....................... 5
ARTICLE III OFFICERS AND EMPLOYEES
3.01 Executive Officers.................................... 6
3.02 Additional Officers; Other Agents and Employees....... 6
3.03 The Chairman.......................................... 6
3.04 The Chief Executive Officer........................... 6
3.05 The President......................................... 6
3.06 The Vice Presidents................................... 7
3.07 The Secretary and Assistant Secretaries............... 7
3.08 Treasurer and Assistant Treasurers.................... 7
3.09 Vacancies............................................. 8
3.10 Delegation of Duties.................................. 8
<PAGE>
ARTICLE IV SHARES OF CAPITAL STOCK
4.01 Share Certificates.................................... 8
4.02 Transfer of Shares.................................... 8
4.03 Transfer Agents and Registrars........................ 9
4.04 Lost, Stolen, Destroyed or Mutilated Certificates..... 9
4.05 Regulations Relating to Shares........................ 9
4.06 Holders of Record..................................... 9
4.07 Fixing of Record Date................................. 9
ARTICLE V LOANS, NOTES, CHECKS, CONTRACTS AND OTHER INSTRUMENTS
5.01 Notes, Checks, etc.................................... 10
5.02 Execution of Instruments Generally.................... 10
5.03 Proxies in Respect of Stock or Other Securities
of Other Corporations............................... 10
ARTICLE VI GENERAL PROVISIONS
6.01 Offices............................................... 10
6.02 Corporate Seal........................................ 10
6.03 Fiscal Year........................................... 11
ARTICLE VII VALIDATION OF CERTAIN CONTRACTS....................... 11
ARTICLE VIII AMENDMENTS............................................ 11
-ii-
<PAGE>
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1.01. Annual Meetings. Annual meetings of the stockholders shall
be held on such date and at such time and place as may be fixed by the Board of
Directors and as set forth in the notice of the meeting.
Section 1.02. Special Meetings. Special meetings of the stockholders may
be called at any time, for the purpose or purposes set forth in the call, by the
President, the Board of Directors or the holders of at least one-fifth of all
the shares of any class outstanding and entitled to vote thereat, by delivering
a written request to the Secretary. At any time, upon the written request of any
person or persons who have duly called a special meeting, it shall be the duty
of the Secretary to fix the date of the meeting, to be held not more than 75
days after receipt of the request, and to give due notice thereof. Special
meetings shall be held at such place and at such time and date as the Board of
Directors shall determine and as set forth in the notice of the meeting.
Section 1.03. Notice of Annual and Special Meetings. Except as otherwise
expressly required by law, notice of each meeting of stockholders, whether
annual or special, shall be given at least 10 and not more than 60 days prior to
the date on which the meeting is to be held to each stockholder of record
entitled to vote thereat by delivery of a notice thereof to him personally or by
sending a copy thereof through the U.S. mail or by overnight delivery service or
telegram, charges prepaid, to his address appearing on the records of the
Corporation. Each such notice shall specify the place, day and hour of the
meeting and, in the case of a special meeting, shall briefly state the purpose
or purposes for which the meeting is called. A written waiver of notice, signed
by the person or persons entitled to such notice, whether before or after the
date and time fixed for the meeting shall be deemed the equivalent of such
notice. Neither the business to be transacted at nor the purpose of the meeting
need be specified in a waiver of notice of such meeting.
Section 1.04. Quorum. A stockholders' meeting duly called shall not be
organized for the transaction of business unless a quorum is present. At any
meeting the presence in person or by proxy of stockholders entitled to cast at
least a majority of the votes which all stockholders are entitled to cast on the
particular matter shall constitute a quorum for the purpose of considering such
matter, except as otherwise expressly provided by law or by the Certificate of
Incorporation or By-Laws of the Corporation. The stockholders present at a duly
organized meeting can continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. If a meeting
cannot be organized because a quorum has not attended, those present may adjourn
the meeting from time to time to such time (not more than 30 days after the next
previously adjourned meeting) and place as they may determine, without notice
other than by announcement at the meeting of the time and place of the adjourned
meeting; and in the case of any meeting called for the election of directors,
those who attend the second of such adjourned meetings, provided they are
entitled to
<PAGE>
cast at least one-third of the votes entitled to be cast on any matter to be
considered at the meeting, shall nevertheless constitute a quorum for the
purpose of electing directors.
Section 1.05. Voting. At every meeting of stockholders, each holder of
record of issued and outstanding stock of the Corporation entitled to vote at
such meeting shall be entitled to vote in person or by proxy and, except where a
date has been fixed as the record date for the determination of stockholders
entitled to notice of or to vote at such meeting, no holder of record of a share
of stock which has been transferred on the books of the Corporation within 10
days next preceding the date of such meeting shall be entitled to notice of or
to vote at such meeting in respect of such share so transferred. Resolutions of
the stockholders shall be adopted, and any action of the stockholders at a
meeting upon any matter shall be taken and be valid, only if at least a
plurality of the votes cast with respect to such resolutions or matter are cast
in favor thereof, except as otherwise expressly provided by law or by the
Certificate of Incorporation or By-Laws of the Corporation. The Chairman of the
Board (if one has been elected and is present) shall be chairman, and the
Secretary (if present) shall act as secretary, at all meetings of the
stockholders. In the absence of the Chairman of the Board, the President shall
be chairman; and in the absence of both of them, the chairman shall be
designated by the Board of Directors or if not so designated shall be elected by
the stockholders present; and in the absence of the Secretary, an Assistant
Secretary shall act as secretary of the meeting.
Section 1.06. Procedure at Stockholders' Meetings. The organization of
each meeting of the stockholders, the order of business thereat and all matters
relating to the manner of conducting the meetings shall be determined by the
chairman of the meeting or, in the chairman's absence, by a person designated by
the chairman or, if no person is so designated, by a person designated by a
majority of the directors present, whose decisions may be overruled only by
majority vote (which shall not be by ballot) of the stockholders present and
entitled to vote at the meeting in person or by proxy. Meetings shall be
conducted in a manner designed to accomplish the business of the meeting in a
prompt and orderly fashion and to be fair and equitable to all stockholders, but
it shall not be necessary to follow Roberts' Rules of Order or any other manual
of parliamentary procedure.
Section 1.07. Action Without Meeting. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted, and such written consent is delivered to the Corporation by delivery
to its registered office in Delaware, its principal place of business or an
officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing,
but failure to do so shall not void the action.
-2-
<PAGE>
ARTICLE II
DIRECTORS
Section 2.01. Number, Election and Term of Office. The number of directors
which shall constitute the full Board of Directors shall be determined by
resolution of the board of directors or by the stockholders at the annual
meeting. Each director shall hold office for the term for which he is elected
and thereafter until his successor is duly elected or until his prior death,
resignation or removal. Directors need not be stockholders.
Section 2.02. Annual Meetings. Annual meetings of the Board of Directors
shall be held each year at the same place as and immediately after the annual
meeting of stockholders or at such other place and time as shall theretofore
have been determined by the Board. At its regular annual meeting, the Board of
Directors shall organize itself and elect the officers of the Corporation for
the ensuing year, and may transact any other business.
Section 2.03. Regular Meetings. Regular meetings of the Board of Directors
may be held at such intervals and at such time and place as shall from time to
time be determined by the Board. After there has been such determination and
notice thereof has been once given to each person then a member of the Board of
Directors, regular meetings may be held at such intervals and time and place
without further notice being given to directors who have been given at least one
such notice.
Section 2.04. Special Meetings. Special meetings of the Board of Directors
may be called at any time by the Board, by the Chairman of the Board, by the
President or by any two directors to be held on such day and at such time and
place as shall be specified by the person or persons calling the meeting.
Section 2.05. Notice of Annual and Special Meetings. Except as otherwise
expressly required by law, notice of the annual meeting of the Board of
Directors need not be given. Except as otherwise expressly required by law,
notice of every special meeting of the Board of Directors specifying the place,
date and time thereof shall be given to each director by being mailed on at
least the third day prior to the date of the meeting, by being sent by telegraph
or overnight delivery service or given personally or by telephone at least 24
hours prior to the time of the meeting. A written waiver of notice of a meeting,
signed by the person or persons entitled to such notice, whether before or after
the date and time stated therein fixed for the meeting, shall be deemed the
equivalent of such notice, and attendance of a director at a meeting shall
constitute a waiver of notice of such meeting except when the director attends
the meeting for the express purpose of objecting, when he enters the meeting, to
the transaction of any business because the meeting is not lawfully called or
convened.
Section 2.06. Quorum and Manner of Acting. At all meetings of the Board of
Directors, except as otherwise expressly provided by law or by the Certificate
of Incorporation or By-Laws of the Corporation, the presence of a majority of
the full Board shall be necessary and sufficient to constitute a quorum for the
transaction of business. If a quorum is not present at any meeting, the meeting
may be adjourned from time to time by a majority of the directors present
-3-
<PAGE>
until a quorum as aforesaid shall be present, but notice of the time and place
to which such a meeting is adjourned shall be given to any directors not present
either by being sent by telegraph or given personally or by telephone at least
eight hours prior to the time of reconvening. Resolutions of the Board of
Directors shall be adopted, and any action of the Board at a meeting upon any
matter shall be taken and be valid, only with the affirmative vote of at least a
majority of the directors present at the meeting, except as otherwise provided
herein. The Chairman of the Board (if one has been elected and is present) shall
be chairman, and the Secretary (if present) shall act as secretary, at all
meetings of the Board. In the absence of the Chairman of the Board, the
President shall be chairman, and in the absence of both of them the directors
present shall select a member of the Board of Directors to be chairman; and in
the absence of the Secretary, the chairman of the meeting shall designate any
person to act as secretary of the meeting.
Section 2.07. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting if a consent in writing, setting forth the
actions so taken, shall be signed by all members of the Board or such committee,
as the case may be, and such written consent is filed with the minutes of
proceedings of the Board or committee.
Section 2.08. Participation by Conference Telephone. Members of the Board
of Directors of the Corporation, or any committee designated by the Board, may
participate in a meeting of the Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
Section 2.09. Resignations. A director may resign by submitting his
written resignation to the Chairman of the Board (if one has been elected) or
the Secretary. Unless otherwise specified therein, the resignation of a director
need not be accepted to make it effective and shall be effective immediately
upon its receipt by such officer or as otherwise specified therein. If the
resignation of a director specifies that it shall be effective at some time
later than receipt, until that time the resigning director shall be competent to
act on all matters before the Board of Directors, including filling the vacancy
caused by such resignation.
Section 2.10. Removal of Directors. The entire Board of Directors or any
individual director may be removed at any time with or without cause by the
holders of a majority of the shares then entitled to vote at an election of
directors. The vacancy or vacancies caused in the Board of Directors by such
removal may, but need not, be filled by such stockholders at the same meeting or
at a special meeting of the stockholders called for that purpose.
Section 2.11. Vacancies. Any vacancy that shall occur in the Board of
Directors by reason of death, resignation, removal, increase in the number of
directors or any other cause whatever shall, unless filled as provided in
Section 2.10 of this Article II, be filled by a majority of the then members of
the Board, whether or not a quorum, and each person so elected shall be a
director until he or his successor is elected by the stockholders at a meeting
called for the purpose of electing directors, or until his prior death,
resignation or removal.
-4-
<PAGE>
Section 2.12. Compensation of Directors. The Corporation may allow
compensation to its directors for their services, as determined from time to
time by resolution adopted by the Board of Directors.
Section 2.13. Committees. The Board of Directors may, by resolution
adopted by a majority of the full Board, designate one or more committees
consisting of directors to have and exercise such authority of the Board in the
management of the business and affairs of the Corporation as the resolution of
the Board creating such committee may specify and as is otherwise permitted by
law. The Board of Directors may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of any member
of such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another director to act at the meeting in the
place of such absent or disqualified member.
Section 2.14. Personal Liability of Directors.
(a) To the fullest extent that the laws of the State of Delaware, as the
same exist or may hereafter be amended, permit elimination of the personal
liability of directors, no director of this Corporation shall be personally
liable to this Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.
(b) The provisions of this Section 2.14 shall be deemed to be a contract
with each director of this Corporation who serves as such at any time while this
Section 2.14 is in effect, and each such director shall be deemed to be serving
as such in reliance on the provisions of this Section 2.14. Any amendment or
repeal of this Section 2.14 or adoption of any By-Law of this Corporation or
other provision of the Certificate of Incorporation of this Corporation which
has the effect of increasing director liability shall operate prospectively only
and shall not affect any action taken, or any failure to act, by a director of
this Corporation prior to such amendment, repeal, By-Law or other provision
becoming effective.
ARTICLE III
OFFICERS AND EMPLOYEES
Section 3.01. Executive Officers. The Executive Officers of the
Corporation shall be the President and a Secretary and may include a Chairman of
the Board, a Chief Executive Officer, one or more Vice Presidents as the Board
of Directors may from time to time determine, and a Treasurer all of whom shall
be elected by the Board of Directors. Any two or more offices may be held by the
same person. Each Executive Officer shall serve at the pleasure of the Board,
and shall hold office until the next succeeding annual meeting of the Board of
Directors and thereafter until his successor is duly elected and qualifies, or
until his earlier death, resignation or removal.
-5-
<PAGE>
Section 3.02. Additional Officers; Other Agents and Employees. The Board
of Directors may from time to time appoint or hire such additional officers,
assistant officers, agents, employees and independent contractors as the Board
deems advisable; and the Board or the President shall prescribe their duties,
conditions of employment and compensation. Subject to the power of the Board of
Directors, the President may employ from time to time such other agents,
employees, and independent contractors as he may deem advisable for the prompt
and orderly transaction of the business of the Corporation, and he may prescribe
their duties and the conditions of their employment, fix their compensation and
dismiss them, without prejudice to their contract rights, if any.
Section 3.03. The Chairman. If there shall be a Chairman of the Board, he
shall be elected from among the directors, shall preside at all meetings of the
stockholders and of the Board. He shall have authority to sign all checks, all
certificates of stock, conveyances of real estate, and any other instruments in
writing requiring a signature, and shall have such other powers and duties as
from time to time may be prescribed by the Board.
Section 3.04. The Chief Executive Officer. The Chief Executive Officer
shall be the head of the Corporation and in the recess of the Board of Directors
shall have the general control and management of all the business and affairs of
the Corporation. He shall also exercise such further powers and perform such
other duties as may from time to time be conferred upon or assigned by the
By-laws or the Board of Directors. He shall make annual reports and submit the
same to the Board of Directors and also to the stockholders at their annual
meeting, showing the condition and the affairs of the Corporation. He shall from
time to time make such recommendations to the Board of Directors and any other
committee as he thinks proper and shall bring before the Board of Directors and
any other committee such information as may be required, relating to the
business and property of the Corporation. In case of the absence or disability
of the Chief Executive Officer and as and to the extent directed by the Chief
Executive Officer, the President shall fulfill the duties of the Chief Executive
Officer.
Section 3.05. The President. The President shall exercise such powers and
duties as from time to time may prescribed in these By-Laws or by the Chief
Executive Officer or the Board of Directors. He shall have authority to sign all
checks, all certificates of stock, conveyances of real estate, and any other
instruments in writing requiring a signature. In case of the absence or
disability of the Chief Executive Officer and as and to the extent directed by
the Chief Executive Officer, the President shall fulfill the duties of the Chief
Executive Officer.
Section 3.06. The Vice Presidents. The Vice Presidents may be given, by
the Chairman of the Board or by resolution of the Board of Directors, general
executive powers, subject to the control of the President, concerning one or
more or all segments of the operations of the Corporation. The Vice Presidents
shall exercise such further powers and duties as from time to time may be
prescribed in these By-Laws or by the Board of Directors, the Chief Executive
Officer or the President. At the request of the President or in his absence or
disability, the senior Vice President shall exercise all the powers and duties
of the President.
-6-
<PAGE>
Section 3.07. The Secretary and Assistant Secretaries. It shall be the
duty of the Secretary (a) to keep or cause to be kept an original or duplicate
record of the proceedings of the stockholders and the Board of Directors, and a
copy of the Certificate of Incorporation and of the By-Laws; (b) to attend to
the giving of notices of the Corporation as may be required by law or these
By-Laws; (c) to be custodian of the corporate records and of the seal of the
Corporation and see that the seal is affixed to such documents as may be
necessary or advisable; (d) to have charge of the stock books of the
Corporation, and a share register, giving the names of the stockholders in
alphabetical order, and showing their respective addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the shares, and the date of cancellation of every certificate surrendered for
cancellation; and (e) to exercise all powers and duties incident to the office
of Secretary, and such other powers and duties as may be prescribed by the Board
of Directors, the President or the Chief Executive Officer from time to time.
The Secretary by virtue of his office shall be an Assistant Treasurer. The
Assistant Secretaries shall assist the Secretary in the performance of his
duties and shall also exercise such further powers and duties as from time to
time may be assigned to them by the Board of Directors, the President or the
Secretary. At the direction of the Secretary or in his absence or disability,
the President, the Chief Executive Officer, the Treasurer or an Assistant
Secretary shall perform the duties of the Secretary.
Section 3.08. The Treasurer and Assistant Treasurers. The Treasurer shall
have custody of all the funds and securities of the Corporation. He shall
collect all moneys due the Corporation and deposit such moneys to the credit of
the Corporation in such banks, trust companies, or other depositories as may
have been duly designated by the Board of Directors. He shall endorse for
collection on behalf of the Corporation, checks, notes, drafts and other
documents, and may sign and deliver receipts, vouchers and releases of liens
evidencing payments made to the Corporation. Subject to Section 5.01 of these
By-Laws, he shall cause to be disbursed the funds of the Corporation by payment
in cash or by checks or drafts upon the authorized depositories of the
Corporation. He shall have charge of the books and accounts of the Corporation.
He shall perform all acts incident to the office of the Treasurer and such other
duties as may be prescribed by the Board of Directors, the President or the
Chief Executive Officer. The Treasurer by virtue of his office shall be an
Assistant Secretary. The Assistant Treasurers shall assist the Treasurer in the
performance of his duties and shall also exercise such further powers and duties
as from time to time may be assigned to them by the Board of Directors, the
President or the Treasurer. At the direction of the Treasurer or in his absence
or disability, the President, the Chief Executive Officer, the Secretary or an
Assistant Treasurer shall perform the duties of Treasurer.
Section 3.09. Vacancies. Vacancy in any office or position by reason of
death, resignation, removal, disqualification, disability or other cause, shall
be filled in the manner provided in this Article III for regular election or
appointment to such office.
Section 3.10. Delegation of Duties. The Board of Directors may in its
discretion delegate the powers and duties, or any of them, of any officer to any
other person whom it may select.
-7-
<PAGE>
ARTICLE IV
SHARES OF CAPITAL STOCK
Section 4.01. Share Certificates. Every holder of stock in the Corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors may from time to time prescribe, signed by the Chairman of
the Board, the President or any Vice President and by the Treasurer or any
Assistant Treasurer or the Secretary or any Assistant Secretary. The signatures
of such officers may be facsimiles. Each such certificate shall set forth the
name of the registered holder thereof, the number and class of shares and the
designation of the series, if any, which the certificate represents. The Board
of Directors may, if it so determines, direct that certificates for shares of
stock of the Corporation be signed by a transfer agent or registered by a
registrar or both, in which case such certificates shall not be valid until so
signed or registered.
In case any officer of the Corporation who shall have signed, or whose
facsimile signature shall have been used on, any certificate for shares of stock
of the Corporation shall cease to be such officer, whether because of death,
resignation, removal or otherwise, before such certificate shall have been
delivered by the Corporation, such certificate shall nevertheless be deemed to
have been adopted by the Corporation and may be issued and delivered as though
the person who signed such certificate or whose facsimile signature shall have
been used thereon had not ceased to be such officer.
Section 4.02. Transfer of Shares. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof or by his attorney thereunto authorized by an instrument duly
executed and filed with the Corporation, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by properly
executed stock powers and evidence of the payment of all taxes imposed upon such
transfer. Except as provided in Section 4.04 of this Article IV, every
certificate surrendered for transfer shall be cancelled and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled.
Section 4.03. Transfer Agents and Registrars. The Board of Directors may
appoint any one or more qualified banks, trust companies or other corporations
organized under any law of any state of the United States or under the laws of
the United States as agent or agents for the Corporation in the transfer of the
stock of the Corporation and likewise may appoint any one or more such qualified
banks, trust companies or other corporations as registrar or registrars of the
stock of the Corporation.
Section 4.04. Lost, Stolen, Destroyed or Mutilated Certificates. New
certificates for shares of stock may be issued to replace certificates lost,
stolen, destroyed or mutilated upon such terms and conditions, which may but
need not include the giving of a satisfactory bond or other indemnity, as the
Board of Directors may from time to time determine.
Section 4.05. Regulations Relating to Shares. The Board of Directors shall
have power and authority to make such rules and regulations not inconsistent
with these By-Laws or
-8-
<PAGE>
with law as it may deem expedient concerning the issue, transfer and
registration of certificates representing shares of stock of the Corporation.
Section 4.06. Holders of Record. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder and
owner in fact thereof and shall not be bound to recognize any equitable or other
claim to or interest in such shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise expressly
provided by the laws of the State of Delaware.
Section 4.07. Fixing of Record Date. The Board of Directors may fix a
record date which does not precede the date on which the resolution fixing such
record date is adopted,
(a) in order to determine the stockholders entitled to notice of or to
vote at any meeting of stockholders provided such record date is not less than
ten or more than sixty days prior to the date of any such meeting;
(b) in order to determine the stockholders entitled to consent to
corporate action in writing without a meeting provided such record date is not
more than ten days after the date on which the resolution fixing such record
date is adopted; and
(c) in order to determine the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
provided such record date is not more than sixty days prior to such action.
In such case, only such stockholders as shall be stockholders of record on
the date so fixed shall be entitled to notice of, or to vote at, such meeting or
to receive payment of such dividend, or to receive such allotment of rights, or
to exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after any record date fixed as aforesaid.
ARTICLE V
LOANS, NOTES, CHECKS,
CONTRACTS AND OTHER INSTRUMENTS
Section 5.01. Notes, Checks, etc. All notes, drafts, acceptances, checks,
endorsements (other than for deposit) and all evidences of indebtedness of the
Corporation whatsoever shall be signed by such officers or agents and shall be
subject to such requirements as to countersignature or other conditions as the
Board of Directors from time to time may designate. Facsimile signatures on
checks may be used unless prohibited by the Board of Directors.
Section 5.02. Execution of Instruments Generally. Except as provided in
Section 5.01 of this Article V, all contracts and other instruments requiring
execution by the Corporation
-9-
<PAGE>
may be executed and delivered by the Chief Executive Officer, the President, any
Vice President or the Treasurer, and authority to sign any such contracts or
instruments, which may be general or confined to specific instances, may be
conferred by the Board of Directors upon any other person or persons. Any person
having authority to sign on behalf of the Corporation may delegate, from time to
time, by instrument in writing, all or any part of such authority to any person
or persons if authorized so to do by the Board of Directors.
Section 5.03. Proxies in Respect of Stock or Other Securities of Other
Corporations. Unless otherwise provided by the Board of Directors, the Chairman
of the Board, the Chief Executive Officer or the President may from time to time
appoint an attorney or attorneys or an agent or agents of the Corporation to
exercise in the name and on behalf of the Corporation the powers and rights
which the Corporation may have as the holder of stock or other securities in any
other corporation to vote or consent in respect of such stock or other
securities, may instruct the person or persons so appointed as to the manner of
exercising such powers and rights and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal or otherwise
all such written proxies or other instruments as he may deem necessary or proper
in order that the Corporation may exercise its said powers and rights.
ARTICLE VI
GENERAL PROVISIONS
Section 6.01. Offices. The registered office of the Corporation shall be
at 1013 Centre Road, Wilmington, Delaware 19805. The Corporation may have other
offices, within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
Section 6.02. Corporate Seal. The Board of Directors shall prescribe the
form of a suitable corporate seal, which shall contain the full name of the
Corporation and the year and state of incorporation. Such seal may be used by
causing it or a facsimile or reproduction thereof to be affixed to or placed
upon the document to be sealed.
Section 6.03. Fiscal Year. Unless otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on December 31 of each
year.
ARTICLE VII
VALIDATION OF CERTAIN CONTRACTS
Section 7.01. No contract or other transaction between the Corporation and
another person shall be invalidated or otherwise adversely affected by the fact
that any one or more stockholders, directors or officers of the Corporation
(i) is pecuniarily or otherwise interested in, or is a stockholder,
director, officer, or member of, such other person, or
-10-
<PAGE>
(ii) is a party to, or is in any other way pecuniarily or otherwise
interested in, the contract or other transaction, or
(iii) is in any way connected with any person pecuniarily or otherwise
interested in such contract or other transaction, provided the fact of such
interest shall be disclosed or known to the Board of Directors or the
stockholders, as the case may be, and in any action of the stockholders or of
the Board authorizing or approving any such contract or other transaction, any
and every stockholder or director may be counted in determining the existence of
a quorum with like force and effect as though he were not so interested, or were
not such a stockholder, director, member or officer, or were not such a party,
or were not so connected. Such director, stockholder or officer shall not be
liable to account to the Corporation for any profit realized by him from or
through any such contract or transaction approved or authorized as aforesaid. As
used herein, the term "person" includes a corporation, partnership, firm,
association or other legal entity.
ARTICLE VIII
AMENDMENTS
Section 8.01. These By-Laws may be amended, altered and repealed, and new
by-laws may be adopted, by the stockholders or the Board of Directors of the
Corporation at any regular or special meeting. No provision of these By-Laws
shall vest any property or contract right in any stockholder.
-10-
<PAGE>
EXHIBIT D
DRAFT REGISTRATION STATEMENT
[INTENTIONALLY OMITTED]
<PAGE>
EXHIBIT E
PURCHASE AGREEMENT BETWEEN WEBSTAKES.COM, INC.
AND STONE INVESTMENTS, INC.
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is executed as of the 14th
day of June, 1999, by Webstakes.com, Inc., a Delaware corporation formerly known
as Netstakes, Inc. ("Webstakes" or the "Company"), and Stone Investments, Inc.,
a Delaware corporation ("Stone").
BACKGROUND:
A. Stone is the owner of 1,714,608 shares of common stock, par value $0.01
per share, of Webstakes (the "Common Stock") and 50,000 shares of Class A
Convertible Redeemable Preferred Stock, par value $100.00 per share, of
Webstakes that are convertible into Common Stock (the "Preferred Stock").
B. Webstakes desires to purchase from Stone, and Stone is wilting to sell
to Webstakes, all of the Common Stock and Preferred Stock that Stone owns.
Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confessed, the parties agree as
follows:
AGREEMENTS:
1. Agreement to Sell and Buy. Webstakes agrees to buy from Stone, and
Stone agrees to sell to Webstakes, 1,714,608 shares of Common Stock and 50,000
shares of Preferred Stock (collectively, the "Shares").
2. Purchase Price. The consideration to be paid for the Shares is $24
million in immediately available funds at the closing of the purchase and sale
(the "Transaction").
3. The Closing. The Closing will be held simultaneously with the execution
of this Agreement. The date on which the Closing is actually held is called the
"Closing Date".
4. Representations and Warranties of Webstakes. Webstakes hereby
represents and warrants to Stone as follows:
(a) Organization, Standing and Qualification. Webstakes is a
corporation duly incorporated, validly existing, and in good standing under the
laws of the State Delaware and has all requisite corporate power and authority
to own, lease, and operate its properties and to carry on its business as now
being conducted. Webstakes is duly qualified or licensed and in good standing to
do business in each jurisdiction in which its property is owned, leased, or
operated or the nature of its business makes such qualification necessary.
(b) Authority. Webstakes has the capacity, authority, and power to
execute, deliver, and perform this Agreement and all other agreements,
instruments, and documents contemplated hereby or executed in connection
herewith that are to be executed by it (collectively with this Agreement, the
"Company Transaction Documents") and to consummate the transactions contemplated
hereby and thereby. Webstakes and its Board of Directors have duly authorized
the execution, delivery, and performance of this Agreement, including, without
<PAGE>
limitation the purchase of the Shares in accordance with the terms and
conditions set forth herein. This Agreement has been duly and validly executed
and delivered by Webstakes and constitutes the legal, valid, and binding
obligations of Webstakes, enforceable against Webstakes in accordance with its
terms except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, fraudulent transfer, reorganization, moratorium, and
other similar laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether enforcement is sought in
equity or at law), including, without limitation, principles regarding good
faith and fair dealing and rules of law governing the availability of equitable
remedies.
(c) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement or any of the other Company Transaction Documents,
the consummation of the transactions contemplated hereby or thereby nor
compliance by the Company with any of the provisions hereof or thereof will (i)
conflict with or result in a breach of the charter, bylaws, or other
constitutive documents of the Company, (ii) conflict with or result (with or
without notice or lapse of time or both) in a default (or give rise to any right
of reimbursement, termination, cancellation, modification, or acceleration)
under any of the provisions of any note, bond, lease, mortgage, indenture,
license, franchise, permit, agreement, or other instrument or obligation to
which the Company is a party or by which the Company or the properties or assets
of the Company may be bound or affected, except for such conflict, breach, or
default as to which requisite waivers or consents are described in Schedule 4
and are required to be obtained prior to Closing, (iii) violate any law,
statute, rule or regulation or order, writ, injunction, judgment, or decree
(each, an "Order") applicable to the Company or the properties or assets of the
Company, (iv) result in the creation imposition of any mortgage, pledge,
security interest, assignment, claim, lien, or other encumbrance (each, a
"Lien") upon any property or assets used or held in connection with the business
of the Company, or (v) result in a change of control, assignment, or similar
event that would conflict with or result in termination of, acceleration of
obligations under, imposition of additional obligations under, or loss of rights
under, or the breach of, the Company's charter, bylaws or other constitutive
documents, any contract, license, lease, note, bond, mortgage, indenture,
agreement, investment, or arrangement of any kind. Except as set forth in
Schedule 4, no consent or approval by, or any notification of or filing with, or
other action of any person or entity (governmental or private) is required in
connection with the execution, delivery, and performance by the Company of this
Agreement or any other Company Transaction Document. There is no action, cause
of action, claim, suit, proceeding, arbitration, mediation, or other alternative
dispute resolution procedure, order, writ, injunction, or decree (each, a
"Proceeding") pending or, to the knowledge of the Company, threatened against
the Company or any of its respective assets or properties that seeks to prevent
the consummation of the transactions contemplated herein or in any other Company
Transaction Document.
2
<PAGE>
(d) Stated Capital; No Fraudulent Transfer. The Company has
sufficient stated capital to consummate the transactions contemplated by this
Agreement. The transactions contemplated by this Agreement will not impair the
capital of the Company. The Company is solvent and able to pay its debts as they
become due and does not intend to incur debts beyond their ability to pay them
as they become due. As a result of the transactions contemplated hereby, the
Company will not be rendered insolvent, will not be unable to pay its debts as
they become due, and will not have assets that are unreasonably small in light
of the business and transactions in which the Company is engaged or intends to
engage. In the transactions contemplated by this Agreement, the Company is
receiving a reasonably equivalent exchange of value.
5. Representations of Stone. Stone hereby represents and warrants to
Webstakes the following:
(a) Organization; Standing. Stone is a corporation validly existing
and in good standing under the laws of the state of Delaware.
(b) Authority. Stone has the capacity, authority, and power to
execute, deliver, and perform this Agreement and all other agreements,
instruments, and documents contemplated hereby or executed in connection
herewith that are to be executed by it (collectively with this Agreement, the
"Stone Transaction Documents" and, together with the Company Transaction
Documents, the "Transaction Documents") and to consummate the transactions
contemplated hereby and thereby. Stone and its Board of Directors has duly
authorized the execution, delivery, and performance of this Agreement,
including, without limitation, the sale of the Shares in accordance with the
terms and conditions set forth herein. This Agreement has been duly and validly
executed and delivered by Stone and constitutes the legal, valid, and binding
obligations of Stone, enforceable against Stone in accordance with its terms
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, fraudulent transfer, reorganization, moratorium, and
other similar laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether enforcement is sought in
equity or at law), including, without limitation, principles regarding good
faith and fair dealing and rules of law governing the availability of equitable
remedies.
(c) Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement or any of the other Stone Transaction Documents, the
consummation of the transactions contemplated hereby or thereby nor compliance
by Stone with any of the provisions hereof or thereof will (i) conflict with or
result in a breach of the charter, bylaws, or other constitutive documents of
Stone, (ii) conflict with or result (with or without notice or lapse of time or
both) in a default (or give rise to any right of reimbursement, termination,
cancellation, modification, or acceleration) under any of the provisions of any
note, bond, lease, mortgage, indenture, license, franchise, permit, agreement,
or other instrument or obligation to which Stone is party or by which Stone or
the properties or assets of Stone may be bound or affected, (iii) violate any
Order applicable to Stone or the properties or assets of Stone, or (iv) result
in the creation or imposition of any Lien upon any property or assets used or
held in connection with the business of Stone. No consent or approval by, or any
notification of or filing with, or other action of any person or entity
(governmental or private) is required in connection with the execution,
delivery, and performance by Stone of this Agreement or any other Stone
3
<PAGE>
Transaction Document. There is no Proceeding pending or, to the knowledge of
Stone, threatened against Stone or any of its respective assets or properties
that seeks to prevent the consummation of the transactions contemplated herein
or in any other Stone Transaction Document.
(d) Good Title. Stone has good title to the Shares, free and clear
of all Liens other than those arising under securities laws and that certain
Option Agreement dated as of January 20, 1999, executed by the Company and Stone
(the "Carneal Option Agreement").
6. Stone's Conditions to Closing. The agreement of Stone to proceed with
the transactions contemplated hereby and the Closing are conditioned on the
following:
(a) The consideration specified in Paragraph 2 has been delivered to
Stone. Generation of a wire transfer in the amount of the consideration to be
delivered to the account specified by Stone shall be deemed satisfaction of this
condition; provided, however, that if the consideration is not actually received
by Stone, Stone shall not be deemed to have waived any of its rights to receive
such consideration.
(b) The representations and warranties of the Company made in this
Agreement and in the other Company Transaction Documents are true and correct in
all material respects as of the Closing Date and the Company has performed all
covenants and agreements and satisfied all conditions to be performed or
satisfied by it at or prior to Closing.
(c) All necessary approvals of the Board of Directors and
stockholders of the Company and covenants and approvals of third parties of the
type described in Subparagraph 4(c) (including those listed on Schedule 4) have
been obtained.
(d) Stone has received the opinion, in form and substance
satisfactory to Stone and counsel for Stone, dated as of the Closing Date, of
Reed Smith Shaw & McClay LLP, counsel to Webstakes.
(e) The Company has executed and delivered a Release in the form
attached as Exhibit A and a Release in the form attached as Exhibit B.
(f) The Company has executed and delivered an agreement in form and
substance satisfactory to Stone pursuant to which (i) the Carneal Option
Agreement, (ii) that certain Registration Rights Agreement (the "Registration
Rights Agreement") dated as of January 20, 1999, executed by Webstakes and
Stone; (iii) that certain Shareholders' Agreement (the "Shareholders'
Agreement") dated as of January 20, 1999, executed by Webstakes, Stone, and
Steven Krein, Daniel Feldman, Joseph Lamport, and Steve Sacks, (iv) that certain
Preferred Stock Purchase Agreement (the "Preferred Stock Purchase Agreement")
dated as of January 20, 1999, executed by Webstakes and Stone, and (v) that
certain Loan and Security Agreement (the "Loan and Security Agreement") dated as
of September 20, 1997, executed by Webstakes and Stone are terminated and of no
further force or effect.
4
<PAGE>
7. Webstakes' Conditions to Closing. The agreement of Webstakes to proceed
with the transactions contemplated hereby and the Closing are conditioned on the
following:
(a) Certificates representing the Shares, free and clear of all
Liens other than those arising under securities laws, have been duly delivered
by Stone either duly endorsed or accompanied by stock powers sufficient to
transfer title to the Shares to Webstakes.
(b) The representations and warranties of Stone made in this
Agreement are true and correct in all material respects as of the Closing Date.
(c) All necessary approvals of the type described in Subparagraph
5(c) have been obtained.
(d) The Release and Standstill Agreement, in the form attached as
Exhibit C, has been executed by Stone and the specified principals and
affiliates of Stone and the principals of Stone.
(e) Stone has executed and delivered an agreement in form and
substance satisfactory to the Company pursuant to which (i) the Carneal Option
Agreement, (ii) the Registration Rights Agreement, (iii) the Shareholders'
Agreement, (iv) the Preferred Stock Purchase Agreement, and (v) the Loan and
Security Agreement are terminated and of no further force or effect.
8. Agreements to Cause Conditions to be Met. Each of the parties agrees to
use commercially reasonable best efforts to cause the conditions to the Closing
to be met.
9. No Public Announcement; Confidentiality. Unless and until the
transactions contemplated hereby are consummated, neither Stone nor Webstakes
will make any formal announcement of the transactions contemplated hereby to
third parties without the prior written consent of the other parties hereto
unless required by applicable law. Each party agrees that any proposed public
announcement pertaining to the transactions contemplated hereby will be
coordinated with the approval of the other parties prior to the publication of
such announcement; provided, however, that nothing contained herein shall impair
Stone or the Company from complying with applicable law.
10. Binding Obligation. The parties agree that this Agreement is a binding
agreement that shall govern the transactions contemplated hereby.
5
<PAGE>
11. Indemnification.
(a) Indemnification by the Company. From and after the Closing, the
Company shall indemnify and hold harmless Stone, its affiliates, and their
respective directors, officers, employees shareholders, partners, agents,
successors and assigns (collectively, "Stone Claimants" and individually, a
"Stone Claimant") from and defend each of them from and against any and all
demands, claims, actions, liabilities, losses, costs, damages or expenses
whatsoever (including without limitation reasonable attorneys' fees and
expenses) (collectively, "Claims") asserted against, imposed upon or incurred by
any of the Stone Claimants resulting from or arising out of (i) any inaccuracy
or breach of any representation or warranty of the company contained herein or
in the other Company Transaction Documents and/or (ii) any breach of any
covenant or obligation of the Company contained herein or in the other Company
Transaction Documents. A Stone Claimant's right to indemnification shall not be
limited or affected in anyway by any pre-Closing investigation by Stone or its
representatives.
(b) Indemnification by Stone. From and after the Closing, Stone shall
indemnify and hold the Company and its affiliates, directors, officers,
employees, shareholders, partners, agents, successors and assigns (collectively,
the "Issuer Claimants" and individually, an "Issuer Claimant") harmless from and
defend each of them from and against any and all claims asserted against,
imposed upon or incurred by any of the Issuer Claimants resulting from or
arising out of (i) any inaccuracy or breach of any representation or warranty of
Stone contained herein or in the other Stone Transaction Documents and/or (ii)
any breach of any covenant or obligation of Stone contained herein or in the
other Stone Transaction Documents. An Issuer Claimant's right to indemnification
shall not be limited or affected in anyway by any pre-Closing investigation by
the Company or its representatives.
(c) Terms and Conditions of Indemnification.
The respective obligations and liabilities of the Company and Stone
(each, an "indemnifying party") to indemnify pursuant to this Paragraph 11 shall
be subject to the following terms and conditions:
(i) The party seeking to be indemnified (the "Indemnified Party")
shall give the indemnifying party prompt written notice of any such claim. The
Indemnified Party's failure to give prompt notice, however, shall not serve to
eliminate or limit the Indemnified Party's right to indemnification hereunder
except to the extent such failure materially prejudices the rights of the
indemnifying party.
(ii) Promptly after receipt by an Indemnified Party of notice of the
commencement of such action, suit, or proceeding for which such Indemnified
Party is entitled to indemnification under this Paragraph 11, such Indemnified
Party will notify the indemnifying party of the commencement thereof in writing;
but the failure to so notify the indemnifying party (i) will not relieve it from
any liability under paragraphs (a) or (b) above except to the extent such
indemnifying party has been materially prejudiced by such failure (including,
without limitation, that such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses) and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any Indemnified
Party other than the indemnification obligation provided in Subparagraphs 11(a)
6
<PAGE>
and (b) above. In case any such action is brought against any Indemnified Party
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
Indemnified Party; provided, however, that if (A) the indemnifying party has
failed to assume the defense thereof and employ such counsel or (B) the named
parties to any such action (including any impleaded parties) include both the
indemnifying party and the Indemnified Party and the indemnifying party and the
Indemnified Party shall have been advised by counsel that representation of such
indemnifying party and such Indemnified Party by the same counsel would be
inappropriate under applicable standards of professional conduct due to
differing interests between them, then, in each such case, the indemnifying
party shall not have the right to direct the defense of such action on behalf of
such Indemnified Party or parties and such Indemnified Party or parties shall
have the right to select separate counsel to defend such action on behalf of
such Indemnified Party of its election so to assume the defense thereof and the
reasonable approval by such Indemnified party of counsel appointed to defend
such action, the indemnifying party will not be liable to such Indemnified Party
under this Paragraph 11 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such Indemnified Party in
connection with the defense thereof, unless (A) the Indemnified Party shall have
employed separate counsel in accordance with the proviso to the immediately
preceding sentence (it being understood, however, that in connection with such
action the indemnifying party shall not be liable for the expenses of more than
one separate counsel (in addition to local counsel) in any one action or
separate but substantially similar actions in the same jurisdiction arising out
of the same general allegations or circumstances, designated by the Indemnified
Parties, (B) the indemnifying party has authorized in writing the employment of
counsel for the Indemnified Party at the expense of the indemnifying party or
(C) the indemnifying party shall have failed to assume promptly after notice of
the institution of such action the defense of such action or retain counsel
reasonably satisfactory to the Indemnified Party. After such notice from the
indemnifying party to such Indemnified Party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such Indemnified Party without the consent of the indemnifying party, which
consent shall not be unreasonably withheld or delayed.
(iii) The Indemnified Party shall be kept fully informed by the
indemnifying party of such action, suit, or proceeding at all stages thereof,
whether or not it is represented by counsel. The indemnifying party shall, at
the indemnifying party's expense, make available to the Indemnified Party and
its attorneys and accountants all books and records of the indemnifying party
relating to such proceedings or litigation, and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such action,
suit, or proceeding.
(iv) The indemnifying party shall, without Indemnified Party's
consent, make no settlement of any claims that the indemnifying party has
undertaken to defend unless the indemnifying party fully indemnifies the
Indemnified Party for all Losses, there is no finding or admission of violation
of law by, or effect on any other claims that may be made against the
Indemnified Party and the relief granted in connection therewith requires no
action on the part of and has no effect on the Indemnified Party. However, in
the event the indemnifying party shall not offer reasonable assurances as to
its financial capacity to satisfy any final judgment or
7
<PAGE>
[ILLEGIBLE] and dispose of the claim after 30 days prior written notice to the
indemnifying party.
(d) Survival. The respective representations, warranties, agreements,
covenants and indemnities of the Company and Stone set forth in this Agreement
or any of the other Transaction Documents, respectively, pursuant to this
Agreement or the other Transaction Documents shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company, any
of its officers or directors, or any of its affiliates, Stone, any of its
officers or directors, or any of its affiliates and shall survive the Closing.
The covenants contained in Paragraph 9 shall survive any termination or
cancellation of this Agreement.
12. Notices. All notices, requests, demands, and other communications
hereunder will be in writing and will be personally delivered, delivered by
facsimile or courier service, or mailed, certified with first class postage
prepaid, to the address set forth below the signature of the party to this
Agreement. Each such notice, request, demand, or other communication will be
deemed to have been given (whether actually received or not) on the date of
actual delivery thereof, if personally delivered or delivered by facsimile
transmission (if receipt is confirmed at the time of such transmission by
telephone or facsimile-machine-generated confirmation), or on the third Business
Day following the date of mailing, if mailed in accordance with this Paragraph,
or on the day specified for delivery to the courier service (if such day is one
on which the courier service will give normal assurances that such specified
delivery will be made). Any notice, request, demand, or other communication
given otherwise than in accordance with this Paragraph will be deemed to have
been given on the date actually received. Any party may change its address for
purposes of this Paragraph by giving written notice of such change to all other
parties in the manner hereinabove provided. Whenever any notice is required to
be given by law or by this Agreement, a written waiver thereof, signed by the
person or entity entitled to notice, whether before or after the time stated
therein, will be deemed equivalent to the giving of that notice. A "Business
Day" is a day other than a Saturday, Sunday, or other day on which national
banks in the State of New York are permitted to be closed.
13. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision will be fully severable and this Agreement will
be construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part of this Agreement; the remaining provisions of this
Agreement will remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there will be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
14. Entirety; Amendments and Waivers. This Agreement (including any
Exhibits hereto and the documents delivered pursuant hereto, including any
ancillary agreements) constitutes the entire understanding between the parties
with respect to the subject matter hereof and supersedes all prior agreements or
understandings relating to the subject matter hereof (but excluding any
confidentiality agreement executed in connection with the transactions
contemplated hereby) and may be modified or amended only by an instrument in
writing executed by each of the parties hereto sought to be bound by such
modification or amendment.
8
<PAGE>
Any party may waive any of the conditions contained herein or any of the
obligations of any other party hereunder, but any such waiver will be effective
only if in writing and signed by the party waiving such conditions or
obligations.
15. Paragraph Headings. The Paragraph headings contained in this Agreement
are for reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement.
16. Governing Law and Venue. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE
OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. EACH PARTY HEREBY
IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF THE STATE COURTS LOCATED IN
DELAWARE AND AGREES THAT ANY LITIGATION BETWEEN THE PARTIES WILL BE FILED IN
STATE COURTS LOCATED IN DELAWARE.
17. Expenses. Each party hereto will bear its own legal and other expenses
incurred in connection with the preparation, execution and performance of this
Agreement.
18. Attorney's Fees. If any action is brought to enforce or interpret the
terms of this Agreement (including through arbitration), the prevailing party
will be entitled to reasonable legal fees, costs, and necessary disbursements in
addition to any other relief to which such party may be entitled.
19. Limits on Damages. In no event will any party have any liability to
any other party with respect to the transactions contemplated hereby other than
liability for actual direct damages. Therefore, no party to this Agreement shall
be entitled, as a result of the transactions contemplated hereby or any breach
or default of any other party, to consequential, punitive, exemplary, special,
indirect, extraordinary, or other damages that are not actual direct damages.
20. Counterparts. This Agreement may be executed in any number of
counterparts and will be effective when each party hereto has executed at least
one counterpart, with the same effect as if all signing parties had signed the
same document. All counterparts will be construed together and evidence only one
agreement, which, notwithstanding the actual date of execution of any
counterpart, will be deemed to be dated the day and year first written above. In
making proof of this Agreement, it will not be necessary to account for a
counterpart executed by any party other than the party against whom enforcement
is sought or to account for more than one counterpart executed by the party
against whom enforcement is sought.
21. Execution by Facsimile. The manual signature of any party hereto that
is transmitted to any other party by facsimile will be deemed for all purposes
to be an original signature.
9
<PAGE>
22. Non-Waiver; Rights are Cumulative. Neither a failure of a party to
this Agreement to exercise any power reserved to it in this Agreement or to
insist upon compliance by any other party hereto with any obligation or
condition in this Agreement nor any custom or practice of the parties at
variance with the terms hereof will constitute a waiver of such first party's
rights to demand exact compliance with the terms of this Agreement. Waiver by a
party to this Agreement of any particular default will not affect or impair such
party's right with respect to any subsequent default of the same or of a
different nature; nor will any delay, forbearance, or omission of such party to
exercise any power or right arising out of any breach or default by any other
party hereto of any of the terms, provisions, or covenants of this Agreement
affect or impair such first party's rights; nor will such constitute a waiver by
such first party of any rights hereunder or rights to declare any subsequent
breach or default. Subsequent acceptance by a party to this Agreement of any
performance or payments due to it hereunder will not be deemed to be a waiver by
such first party of any preceding breach by any other party of any terms,
provisions, covenants, or conditions of this Agreement. Except as otherwise
expressly set forth in this Agreement, each party's rights under this Agreement
are cumulative and neither the existence of, nor the exercise or enforcement by
a party of, any right or remedy under this Agreement will preclude the exercise
or enforcement by such party of any other right or remedy under this Agreement
or law.
23. No Strict Construction. This Agreement is the result of substantial
negotiations among the parties and their counsel and has been prepared by their
joint efforts. Accordingly, the fact that counsel to one party or another may
have drafted this Agreement or any portion hereof is immaterial and this
Agreement will not be strictly construed against any party.
24. Construction. Whenever the context requires, the gender of all words
used in this Agreement includes the masculine, feminine and neuter.
[THIS SPACE LEFT BLANK INTENTIONALLY.
10
<PAGE>
Executed on the date or dates indicated below, to be effective as of the
date first written above.
WEBSTAKES.COM, INC.
By: /s/ Steven Krein
---------------------------------------
Name: Steven Krein
-------------------------------------
Title: CEO
------------------------------------
Date: June 14 , 1999
-------------------------------
STONE INVESTMENTS, INC.
By: /s/ [ILLEGIBLE]
---------------------------------------
Name: [ILLEGIBLE]
-------------------------------------
Title: Vice President
------------------------------------
Date: June 14 , 1999
-------------------------------
11
<PAGE>
EXHIBIT F
RELEASE AND STANDSTILL AGREEMENT FROM STONE INVESTMENTS, INC.
<PAGE>
EXECUTION COPY
RELEASE AND STANDSTILL AGREEMENT
AGREEMENT made as of the 14th day of June 1999, by and among
Webstakes.com, Inc. (formerly Netstakes, Inc.), a Delaware corporation with
offices at 11 West l9th Street, New York, New York 10011 (the "Company"), the
investors listed on Schedule A attached hereto (the "Institutional Investors"),
Stone Investments, Inc., a Delaware corporation, with offices at 8150 North
Central Expressway, Suite 1901, Dallas, Texas 75206 ("Stone") and Harry T.
Carneal, an individual, whose address is c/o Stone ("Carneal") and James M.
Fail, an individual, whose address is c/o Stone ("Fail") (Carneal and Fail
collectively referred to herein as the "Stone Principals").
WITNESSETH
WHEREAS, the Company and Stone are parties to that certain Stock
Purchase Agreement, dated as of the date of this Agreement (the "Stone
Repurchase Agreement"), whereby the Company has agreed to purchase 50,000 shares
of Class A Convertible Redeemable Preferred Stock of the Company held by Stone
and 1,714,608 shares of Common Stock of the Company held by Stone (collectively,
the "Stone Shares").
WHEREAS, the Company and the Institutional Investors are parties to
that certain Stock Purchase Agreement, dated as of the date of this Agreement
(the "Purchase Agreement"), whereby the Institutional Investors have agreed to
purchase 6,666,667 shares of Class B Convertible Redeemable Preferred Stock of
the Company (the "Preferred Shares").
WHEREAS, as an inducement to the Institutional Investors to enter
into the Purchase Agreement, and as a condition to the consummation of the
transactions contemplated by the Purchase Agreement, the Company and Stone have
entered into this Agreement intending to be bound by the terms and conditions
hereinafter set forth and intending that the Institutional Investors become
third party beneficiaries of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. Indemnification and Release (a) Each of Stone, the Stone
Principals and their Affiliates, and their respective officers, directors,
stockholders, partners, agents, representatives successors, assigns and
transferees (collectively, the "Stone Parties") hereby forever releases,
forgives and discharges any claim, cause of action or potential claim that it or
they may have or have had or might have in the future against (i) the Company
and/or the Institutional Investors arising out of or in connection with the
transactions contemplated by the Purchase Agreement or (ii) the Institutional
Investors arising out of or in connection with the
<PAGE>
transactions contemplated by the Stone Repurchase Agreement or (iii) the Company
arising out of or in connection with the Stone Repurchase Agreement as it
relates to the value of the Stone Shares being repurchased, and any actual or
alleged act, omission, transaction, practice, conduct, occurrence or other
matter relating to any of the foregoing, including, but not limited to any
subsequent increase in value of, or other event affecting, the Preferred Shares
or the other equity securities of the Company. Without limiting the generality
of the foregoing, the claims, causes of action and potential claims released
include (A) any claim of fraud, fraudulent inducement, coercion, duress, breach
of contract (express or implied), intentional or negligent misrepresentation,
intentional interference with contract, detrimental reliance, and similar
actions whether codified or under common law; (B) any claim for compensatory or
punitive damages; (C) any claim for attorneys' fees, costs, disbursements and
the like; and (D) any and all claims for pay for past service, compensation or
other remuneration of any type. Further, for purposes of this Paragraph 1(a)
references to the Company and the Institutional investors shall include their
respective directors, officers, employees, stockholders, agents, successors,
assigns and Affiliates; provided, however, that the Company shall not be deemed
an Affiliate of any Institutional Investor or of Stone or any Stone Principal.
For purposes of this Agreement, the term "Affiliate" means, with respect to any
person or entity, any other person or entity that directly or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such person or entity (but does not include the Company) and the
term "control" means the possession, direct or indirect, of the power to direct
or cause the direction of management and policies of a person, whether through
the ownership of voting securities, by contract or otherwise.
(b) Each of the Institutional Investors and their respective
officers, directors, stockholders, partners, employees, agents, representatives,
Affiliates (which shall not include the Company), successors, assigns and
transferees (collectively, the "Institutional Parties") hereby forever releases,
forgives and discharges any claim, cause of action or potential claim that it or
they may have or have had or might have in the future against Stone arising
solely with respect to the value of the Preferred Shares being or becoming less
than that paid under the Purchase Agreement, other than as a result of fraud,
breach of contract (express or implied), or intentional or negligent
misrepresentation by Stone or its Affiliates that occurred on or before the date
of this Agreement.
2. Covenant Not to Sue. (a) Each of the Stone Parties further agrees
that, to the extent permitted by law, each will not, at any time hereafter,
commence, maintain, prosecute, participate in as a party, permit to be filed by
any other person on such party's behalf (to the extent it is within such party's
control), or assist in the commencement or prosecution of, as an advisor,
witness (unless compelled by legal process or court order, provided, in each
case, such party must give prompt notice to the other that such demand has been
made of such party) or otherwise, any action or proceeding of any kind, judicial
or administrative (on such party's own behalf, on behalf of any other person
and/or on behalf of or as a member of any alleged class of persons), in any
court, agency, investigative or administrative body against the other party or
any released person with respect to any actual or alleged act, omission,
transaction, practice, conduct, occurrence or any other matter which
2
<PAGE>
such party released pursuant to Paragraph 1(a) of this Agreement. Each of the
Stone Parties further represent that, as of the date of execution of this
Agreement, none of such persons has taken any action encompassed by this
Paragraph 2(a) or, if commenced prior to said date, such action has been
terminated. If, notwithstanding the foregoing promises, any of the Stone Parties
violates this Paragraph 2(a), the Stone Parties shall jointly and severally
indemnify and hold harmless each of the Company and the Institutional Investors
or any released person from and against any and all demands, assessments,
judgments, costs, damages, losses and liabilities and attorneys' fees and other
expenses which result from, or are incidents to, such violation.
(b) Each of the Institutional Parties further agrees that, to
the extent permitted by law, each will not, at any time hereafter, commence,
maintain, prosecute, participate in as a party, permit to be filed by any other
person on such party's behalf (to the extent it is within such party's control),
or assist in the commencement or prosecution of, as an advisor, witness (unless
compelled by legal process or court order, provided, in each case, such party
must give prompt notice to the other that such demand has been made of such
party) or otherwise, any action or proceeding of any kind, judicial or
administrative (on such party's own behalf, on behalf of any other person and/or
on behalf of or as a member of any alleged class of persons), in any court,
agency, investigative or administrative body against the other party or any
released person with respect to any actual or alleged act, omission,
transaction, practice, conduct, occurrence or any other matter which such party
released pursuant to Paragraph 1(b) of this Agreement. Each of the Institutional
Parties further represent that, as of the date of execution of this Agreement,
none of such persons has taken any action encompassed by this Paragraph 2(b),
or, if commenced prior to said date, such action has been terminated. If,
notwithstanding the foregoing promises, any of the Institutional Parties
violates this Paragraph 2(b), the Institutional Parties shall jointly and
severally indemnify and hold harmless Stone from and against any and all
demands, assessments, judgments, costs, damages, losses and liabilities and
attorneys' fees and other expenses which result from, or are incidents to, such
violation.
3. Standstill Provisions.
For a period commencing on the date hereof and ending on the date
which is three years from the date of this Agreement:
(a) Each of Stone and any Stone Principal or any entity
controlled by any of them (it being understood that entities in which Stone or a
Stone Principal may serve on the board of directors and/or maintain an ownership
interest are not necessarily controlled by Stone or such Stone Principal)
(collectively, the "Stone Control Group") agrees, as a current or future record
or beneficial stockholder, to vote or cause to be voted all voting equity of the
Company beneficially owned by any of them in the manner recommended to
stockholders by the Board of Directors of the Company.
(b) Unless the prior written consent of the Board of Directors
of the Company has been obtained, each member of the Stone Control Group agrees
that such
3
<PAGE>
member shall not, and shall cause any other entity deemed a member of the Stone
Control Group over which it exerts control not to:
(i) solicit proxies or become a "participant" in a
"solicitation" (as such terms are defined in Regulation 14A under the
Securities Exchange Act of 1934 (the "Exchange Act")) in opposition to the
recommendation of the Board of Directors of the Company with respect to
any matter; or
(ii) deposit any Common Stock or other voting securities
of the Company in a voting trust or subject them to a voting agreement or
other instrument of similar effect, except as set forth in this Agreement;
or
(iii) acquire or permit any entity under its control to
acquire or offer to acquire or agree to acquire, directly or indirectly,
by purchase or otherwise, any voting securities of the Company; or
(iv) join a partnership, limited partnership, syndicate,
or other group for the purpose of acquiring, holding or disposing of
voting securities of the Company within the meaning of Section 13(d) of
the Securities Exchange Act of 1934 (the "Exchange Act"); or
(v) initiate, propose or otherwise solicit stockholders
for any matter at any time, or induce or attempt to induce any other
person to initiate any stockholder proposal or a tender offer for shares
of the Company's securities or any change of control of the Company, or
for the purpose of convening a stockholder's meeting of the Company; or
(vi) take any action by written consent in lieu of a
meeting of stockholders.
(c) Each member of the Stone Control Group acknowledges and
agrees that an appropriate legend shall be placed on any shares of the Company
held by him or it or hereafter acquired and instructions shall be given to the
transfer agent of the Company's securities reflecting the provisions of this
Paragraph 3.
4. Representation by Counsel; Interpretation.
(a) Each of the parties hereto have consulted with independent
legal counsel of their choice before signing this Agreement, as well as the
Purchase Agreement or Stone Repurchase Agreement, as appropriate. Each of the
parties hereto further acknowledges that they have carefully read this Agreement
and such other agreements in their entirety; that they have had an adequate
opportunity to consider this Agreement and such other agreements and to consult
with any advisors of their choice about them; that they have consulted
independent counsel of their choice who has answered to their satisfaction all
questions
4
<PAGE>
regarding this Agreement and such other agreements; that they understand all the
terms of this Agreement and their significance; that they knowingly and
voluntarily assent to all the terms and conditions contained herein; and that
they are signing this Agreement voluntarily and of their own free will.
(b) In the interpretation of this Agreement, whether by a
court or otherwise, no weight or presumption shall be given or ascribed by
virtue of the drafting of this Agreement by one party or the other; both parties
shall be deemed to have contributed to the drafting of this Agreement equally.
5. Governing Law. This Agreement shall be deemed to have been made
and fully performed in the State of New York and shall be governed by and
construed in accordance with the laws of the State of New York without regard to
conflict of law rules thereof. Any action, suit or proceeding arising out of, or
in connection with, this Agreement shall be adjudicated in a court of competent
jurisdiction located in the State of New York. The parties hereto
unconditionally waive any right to a trial by jury and any objection which
either of them may now or hereafter have to the establishment of venue as
aforementioned or that any action, suit or proceeding has been brought in an
inconvenient forum.
6. Notices. All notices required or permitted to be given by either
party hereunder, including notice of change of address, shall be in writing and
delivered by hand, or mailed, postage prepaid, certified or registered mail,
return receipt requested, to the other party at such party's address as set
forth above.
7. Survival. The provisions of Paragraphs 1, 2, 3, 4 and 5 of this
Agreement shall survive the expiration, termination or cancellation of this
Agreement.
8. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
Agreement among the parties with respect to the subject matter hereof and
supersedes any and all prior oral or written agreements and understandings.
There are no oral promises, conditions, representations, understandings,
interpretations or terms of any kind as conditions or inducements to the
execution hereof or in effect among the parties. This Agreement may not be
amended, and no provision hereof shall be waived, except by a writing signed by
all of the parties hereto, or in the case of a waiver, by the party waiving
compliance therewith, which states that it is intended to amend or waive a
provision of this Agreement. Any waiver of any rights or failure to act in a
specific instance shall relate only to such instance and shall not be construed
as an agreement to waive any rights or failure to act in any other instance,
whether or not similar.
(b) Severability. Should any provision of this Agreement be
held by a court of competent jurisdiction to be unenforceable or prohibited by
an applicable law, this Agreement shall be considered divisible as to such
provision, which shall be inoperative, and
5
<PAGE>
the remainder of this Agreement shall be valid and binding as though such
provision were not included herein.
(c) Successors and Assigns. This Agreement shall inure to the
benefit of, and be binding upon, the parties hereto, including the Institutional
Investors, and their respective successors and assigns (other than, for purposes
of Paragraph 3 only, those persons or entities not deemed a member of the Stone
Control Group).
(d) Headings. All headings in this Agreement are for
convenience only and are not intended to affect the meaning of any provision
hereof.
(e) Counterparts. This Agreement may be executed in two or
more counterparts with the same effect as if the signatures to all such
counterparts were upon the same instrument, and all such counterparts shall
constitute but one instrument.
6
<PAGE>
IN WITNESS WHEREOF, each of the undersigned have caused the
execution of this Agreement by is duly authorized officers as of the day and
year first written above.
WEBSTAKES.COM, INC.
By: /s/ [ILLEGIBLE]
----------------------------------------------
Name: [ILLEGIBLE]
Title: President
STONE INVESTMENTS, INC., on behalf of itself and
its directors and officers
By: /s/ Harry T. Carneal
----------------------------------------------
Name: Harry T. Carneal
Title: President
/s/ Harry T. Carneal
------------------------------------------------
HARRY T. CARNEAL
------------------------------------------------
JAMES M. FAIL
7
<PAGE>
IN WITNESS WHEREOF, each of the undersigned have caused the
execution of this Agreement by its duly authorized officers as of the day and
year first written above.
WEBSTAKES.COM, INC.
By:
----------------------------------------------
Name:
Title:
STONE INVESTMENTS, INC., on behalf of itself and
its directors and officers
By:
----------------------------------------------
Name:
Title:
------------------------------------------------
HARRY T. CARNEAL
/s/ James M. Fail
------------------------------------------------
JAMES M. FAIL
7
<PAGE>
EXHIBIT G
REGISTRATION RIGHTS AGREEMENT AMONG WEBSTAKES.COM, INC. AND
THE PURCHASERS
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and
entered into as of June 14, 1999, by Webstakes.com, Inc., a Delaware corporation
(together with its successors, the "Company") and each of the parties listed on
Exhibit A attached hereto (each, a "Purchaser," collectively, the "Purchasers").
BACKGROUND:
A. The Company desires to sell to each of the Purchasers, and each
of the Purchasers is willing to purchase from the Company, certain shares of
Class B Convertible Redeemable Preferred Stock, par value $.01 per share as set
forth on Exhibit A hereto (such class of stock being called the "Preferred
Stock").
B. The Preferred Stock is convertible into common stock, par value
$0.01 per share, of the Company (such class of stock being called the "Common
Stock").
C. In order to induce each of the Purchasers to purchase the
Preferred Stock from the Company, the Company has agreed to grant certain rights
to each of the Purchasers with respect to the registration of the Common Stock
acquired upon conversion of the Preferred Stock.
Therefore, in consideration of the premises and the covenants
contained herein, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged and confessed, the parties hereby
agree as follows:
AGREEMENTS:
1. Definitions. As used in this Agreement, the following capitalized terms shall
have the following meanings:
"Common Securities" means the Common Stock into which the Preferred
Securities are converted and any other securities of the Company into which the
Preferred Securities are converted or convertible pursuant to the terms thereof
and any other securities into which such Common Stock or other securities are
changed, reclassified, split, combined, or converted or for which they are
exchanged by amendment to the Company's Certificate of Incorporation or by
consolidation, merger, conversion, or otherwise.
"Common Stock" has the meaning given it under the caption
"Background."
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time.
"Holders" means each of the Purchasers, for so long as it is the
registered owner of any of the Registrable Securities, and each successor and
assign of a Purchaser, for so long as such successor and assign is a registered
owner of any of the Registrable Securities. The plural term is applicable
whether there is one or more Persons who meet the definition.
<PAGE>
"Majority" means, with respect to the Holders (or any subgroup of
Holders), the Holders (or Holders within such subgroup) who are the registered
owners of a majority of the outstanding Registrable Securities owned by all
Holders (or Holders within such subgroup); provided however, that, if there is
more than one class of Common Securities outstanding at any time, each class
shall be assigned a fair value relative to each other class by the Board of
Directors of the Company, acting reasonably and in good faith, and the term
"Majority" will be the Holders (or the Holders within such subgroup) of
outstanding Registrable Securities having a majority of the value of the
outstanding Registrable Securities owned by all Holders (or Holders within such
subgroup). For purposes of this definition, each Preferred Security will be
deemed to be the number and type of Common Securities into which it is
convertible by its terms (or would be so convertible at the date on which it
first becomes exercisable if the passage of time or the occurrence of some event
is required before such Preferred Security becomes convertible).
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means an individual, partnership, corporation, limited
liability company, trust, unincorporated organization or government or agency or
political subdivision thereof.
"Preferred Securities" means the shares of Preferred Stock and any
other securities into which such shares are changed, reclassified, split,
combined, or converted or for which they are exchanged by amendment to the
Company's Certificate of Incorporation or by consolidation, merger, conversion,
or otherwise other than as a result of the conversion thereof pursuant to the
conversion feature thereof.
"Preferred Stock" has the meaning given it under the caption
"Background."
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement.
"Registrable Securities" means the Preferred Securities and the
Common Securities but only so long as they remain Restricted Securities.
"Registration Expenses" means any and all expenses incident to the
Company's performance of or compliance with this Agreement, including (i) all
registration and filing fees required by the SEC, stock exchanges, and the NASD;
(ii) fees and expenses of compliance with securities or blue sky laws (including
fees and disbursements of counsel for the underwriters or Holders of Registrable
Securities to be registered in connection with blue sky qualifications of the
Registrable Securities and determination of their eligibility for investment
under the laws of such jurisdictions as a managing underwriter or a Majority of
Holders of the Registrable Securities to be registered may designate); (iii)
fees and expenses of any "qualified independent underwriter" required in
accordance with the rules of the NASD; (iv) printing, messenger, telephone, and
delivery expenses; (v) fees and disbursements of counsel for the Company and of
the Company's independent public accountants (including the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance), (vi) fees and expenses of the underwriters customarily required to
be paid by issuers or sellers of securities (excluding (A) discounts,
commissions, and fees of underwriters, selling brokers, dealer managers, or
similar securities industry professionals relating to the distribution of the
Registrable Securities, (B) transfer taxes relating to the distribution of the
Registrable Securities, and (C) legal expenses of any Person other than the
Company and the Holders of Registrable Securities to be registered as
contemplated by clause (viii)); (vii) the costs of
-2-
<PAGE>
securities acts liability insurance, if the Company chooses to obtain such
insurance; (viii) fees and expenses of counsel to the Holders of the Registrable
Securities to be registered (who shall be selected by a Majority of such
Holders); and (ix) and fees and expenses of other Persons related to the
preparation, printing, and distribution of any Registration Statement, any
Prospectus, any amendment or supplement to any Registration Statement or
Prospectus, any underwriting agreement, any securities sales agreement, or any
other document.
"Registration Statement" means a Registration Statement, including
the Prospectus included therein, registering, under the Securities Act,
securities of the Company and all amendments and supplements to such
Registration Statement, including post-effective amendments, all exhibits
thereto, and all material incorporated by reference in such Registration
Statement. The Company agrees that each Registration Statement in which
Registrable Securities may be included under the Agreement will be on Form S-3
(or any form substituting therefor or the equivalent thereof) to the extent the
Company is eligible to use such form.
"Restricted Securities" means each of the Common Securities and the
Preferred Securities from the date of its original issuance until (i) it has
been effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement covering it, (ii) it is distributed
to the public pursuant to Rule 144 under the Securities Act (or any similar
provisions then in force), or (iii) it has otherwise been transferred and a new
certificate, or other evidence of ownership, for it has been delivered by or on
behalf of the Company and such certificate or other evidence of ownership does
not bear a legend restricting the transfer thereof under federal securities laws
and is not subject to any stop transfer order given by the Company to its
transfer agent.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Underwritten Offering" means an offering in which securities are
sold to an underwriter (either on a firm commitment or best efforts basis) for
reoffering to the public.
2. Registration Rights.
(a) At any time the Company has equity securities outstanding that
requires it to be subject to the reporting requirements of Sections 13 or 15(d)
of the Exchange Act, the Company shall, upon the written request of any
Holder(s) of at least 25% of the outstanding Registrable Securities, use its
best efforts to effect, as promptly as practical but in any event within 60 days
after such request, the registration or qualification of Registrable Securities
under the Securities Act and/or any other applicable federal and/or state
securities laws in order to permit the sale or other disposition of some or all
of the Registrable Securities of the requesting Holder(s) in the manner and in
the jurisdictions described in such request. The Company shall not be required
to effect more than three registrations pursuant to the provisions of this
Subparagraph 2(a) if (and only if) the Registration Statement relating to each
such registration remains effective for the period of time required by
Subparagraph 3(a) and the Company otherwise complies with the provisions of
Paragraph 3 with respect to each such registration. Notwithstanding anything to
the contrary in this Agreement, no Holder has a right to have securities
registered pursuant to this Subparagraph 2(a) during the first 180 days
following the initial public offering of Common Stock by the Company. In
addition, if the offering to which a registration is demanded under this
Subparagraph 2(a) is not an underwritten offering, the Registrable Securities to
be included in such registration may not exceed the greater of (i) 15%
-3-
<PAGE>
of the total outstanding shares of Common Stock (on a fully-diluted basis) or
(ii) such higher percentage that an investment bank of national reputation
selected by mutual agreement of the Holder(s) demanding registration under this
Subparagraph 2(a) and the Company (the fees and expenses of which investment
bank will be paid by the Company) determines may be so registered without a
material adverse effect on the market for the Company's securities. The
limitations described in the preceding sentence do not apply to an underwritten
offering (although such offering may be subject to customary underwriter
cutbacks due to market conditions).
(b) Each time the Company proposes to file a Registration Statement
(other than in connection with the initial public offering of Common Stock or a
Registration Statement on Form S-4 or S-8 or any form substituting therefor or
the equivalent thereof) on which equity securities of the Company are to be
registered for sale by the Company or any other Person (including a Registration
Statement to be filed pursuant to Subparagraph 2(a))(a "Triggering Registration
Statement"), the Company shall give written notice of such proposed filing to
all Holders of Registrable Securities at least 30 days before the anticipated
filing date of the Triggering Registration Statement and such notice shall offer
each Holder of Registrable Securities the opportunity to have any or all of the
Registrable Securities so held included in the Triggering Registration Statement
or, at the option of the Company, in a separate Registration Statement to be
filed concurrently with the Triggering Registration Statement. Each Holder of
Registrable Securities desiring to have Registrable Securities registered under
this Subparagraph 2(b) shall so advise the Company in writing within 30 days
after the date such notice is given by the Company (which request shall set
forth the amount of Registrable Securities for which registration is requested).
The Company shall include in the Triggering Registration Statement or separate
Registration Statement all such Registrable Securities so requested to be
included therein. Notwithstanding the foregoing, if the Company has proposed to
file the Triggering Registration Statement in connection with an Underwritten
Offering by the Company and a managing underwriter of such offering delivers a
written opinion to the Company that the total amount or kind of securities that
the Company and any other Persons intend to include in such proposed offering is
so large that it is likely to affect in a materially adverse way the success of
such proposed offering, then the amount of securities to be offered for the
accounts of Holders of Registrable Securities and such other Persons (other than
the Company) shall be reduced pro rata to the extent necessary to reduce the
total amount of securities to be included in such proposed offering to the
amount recommended by such managing underwriter; provided, however, that the
percentage reduction of such Registrable Securities shall not be greater than
the percentage reduction of the securities of any such other Person.
Furthermore, if a managing underwriter of an Underwritten Offering by the
Company (but not any other Person) delivers an opinion to the Company that the
inclusion in such proposed offering of any Registrable Securities would
materially adversely affect the success of such proposed offering by the
Company, the Registrable Securities need not be included and the notice of the
proposed filing need not be given so long as the securities of any other Person
(other than the Company) are not included therein. The Company agrees that it
will not grant to any Person registration rights that are equal to or more
favorable than those granted under this Agreement.
3. Registration Procedures. In connection with the Company's registration
obligations pursuant to Paragraph 2 hereof, the Company will or, to the extent
such matters are dependent on third parties, use its best efforts to:
(a) after a Registration Statement relating to any or all
Registrable Securities becomes effective, prepare and file with the SEC such
post-effective amendments to such
-4-
<PAGE>
Registration Statement as may be necessary to keep such Registration Statement
effective for the lesser of (i) the period of time necessary to effect the
complete distribution of the Registrable Securities thereunder and (ii) 180
days; cause the Prospectus to be supplemented by any required supplement and
cause the Prospectus as so supplemented to be filed pursuant to Rule 424 under
the Securities Act (it being understood that the Company shall not be deemed to
have used its best efforts to keep a Registration Statement effective during the
applicable period if it voluntarily takes any action that would result in
Holders of the Registrable Securities covered thereby not being able to sell
such Registrable Securities during that period);
(b) notify the selling Holders of Registrable Securities and, if the
sale of Registrable Securities is to be made in an Underwritten Offering, each
managing underwriter, if any, promptly, and (if requested by any such Person)
confirm such advice in writing, (i) when a Registration Statement covering such
Registrable Securities, or any amendment or post-effective amendment thereto,
has been filed, when the same has become effective, and when any supplement to
the Prospectus has been filed, (ii) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any Proceedings
for that purpose, (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities for
sale in any jurisdiction or the initiation or threatening of any proceeding for
such purpose, and (v) of the happening of any event that makes any statement
made in the Registration Statement, the Prospectus, or any document incorporated
therein by reference untrue in any material respect or that requires the making
of any changes in the Registration Statement, the Prospectus, or any document
incorporated therein by reference in order to make the statements therein not
misleading in any material respect;
(c) obtain the withdrawal of any order suspending the effectiveness
of the Registration Statement at the earliest possible moment;
(d) if reasonably requested by a managing underwriter of an
Underwritten Offering or a Holder of Registrable Securities to be registered in
connection with an Underwritten Offering, promptly incorporate in a Prospectus
(by filing the Registration Statement or an amendment or post-effective
amendment thereto or a supplement to the Prospectus, as appropriate) such
information as the managing underwriter and the Majority of the Holders of the
Registrable Securities being registered agree should be included therein
relating to the sale of the Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being sold to such underwriters, the purchase price being paid therefor by such
underwriters, and any other terms of the Underwritten Offering of the
Registrable Securities to be sold in such offering;
(e) furnish to each selling Holder of Registrable Securities and
each managing underwriter involved in an Underwritten Offering of such
Registrable Securities, without charge, at least one signed copy of the
Registration Statement covering such Registrable Securities and each amendment
and post-effective amendment thereto (including exhibits) and a copy of all
documents incorporated therein by reference;
(f) deliver to each selling Holder of Registrable Securities and the
underwriters, if any, involved in an Underwritten Offering of such Registrable
Securities, without charge, as many copies of the Prospectus relating to such
Registrable Securities (including each Preliminary prospectus) and any amendment
or supplement thereto as such Persons may reasonably request;
-5-
<PAGE>
(g) prior to any public offering of Registrable Securities, register
or qualify or cooperate with the selling Holders of Registrable Securities, the
underwriters, if any, involved in an Underwritten Offering of such Registrable
Securities, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or blue sky laws of such jurisdictions as any seller or underwriter
reasonably requests in writing and do any and all other acts or things necessary
or advisable to enable the disposition in such jurisdictions of such Registrable
Securities;
(h) cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, involved in an Underwritten Offering of such
Registrable Securities to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Securities to be sold; and enable such Registrable Securities to be in such
denominations and registered in such names as a managing underwriter may request
at least two business days prior to any sale of Registrable Securities to the
underwriters;
(i) cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriters, if any, to consummate the disposition of
such Registrable Securities;
(j) upon the occurrence of any event contemplated by Subparagraph
3(b)(v), prepare, file and use its best efforts to cause a supplement,
amendment, or post-effective amendment to the Registration Statement or the
related Prospectus or any document incorporated therein by reference to be
declared effective by the SEC or other requisite regulatory authority or file
any other required document, within 30 days of such occurrence so that, as
thereafter delivered to the purchasers of the Registrable Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(k) cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar securities
issued by the Company are then listed;
(l) enter into such agreements (including an underwriting agreement
and agreements relating to indemnification) and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of such
Registrable Securities; provided the Company need not enter into any such
agreement or take any such other action if it exposes the Company to liability
greater than the liability to which issuers are customarily exposed in
connection with offerings for the benefit of stockholders;
(m) comply with all applicable rules and regulations of the SEC and
make generally available to its security holders earnings statements satisfying
the provisions of Section 11(a) of the Securities Act; and
(n) cooperate with each seller of Registrable Securities and each
underwriter participating in the disposition of such Registrable Securities and
their respective counsel in connection with any filings required to be made with
the NASD.
-6-
<PAGE>
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish to the Company in writing
such information regarding the distribution of such securities as the Company
may from time to time reasonably request in writing.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Subparagraph 3(b)(v), such
Holder will forthwith discontinue disposition of Registrable Securities until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Subparagraph 3(j) or until it is advised in writing by the
Company that the use of the Prospectus may be resumed, which, in any event,
shall be within 30 days of such notice of discontinuance. If so directed by the
Company, such Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Registrable Securities current at the time of
receipt of such notice. Any suspension or discontinuance of the effectiveness of
the Registration Statement shall toll the 180 day period of effectiveness of the
Registration Statement set forth in Paragraph 3(a) such that the number of days
of any such suspension or discontinuance shall not be counted toward the 180 day
period of effectiveness required by Paragraph 3(a).
4. Registration Expenses.
(a) All Registration Expenses will be borne by the Company
regardless of whether a Registration Statement relating to the Registrable
Securities becomes effective. The Company will, in any event, pay its internal
expenses (including all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, the
fees and expenses incurred in connection with the listing of the securities to
be registered on each securities exchange on which similar securities issued by
the Company are then listed, and the fees and expenses of any Person, including
special experts, retained by the Company.
(b) In connection with each Registration Statement registering the
sale of Registrable Securities as required hereby, the Company will reimburse
the Holders of Registrable Securities for Registration Expenses incurred by
them.
5. Exchange Act Compliance; Rule 144. The Company covenants that, so long as it
is required to do so during the term of this Agreement, it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder. In addition, the Company
will take such further action as any Holder may reasonably request to enable
such Holder to sell such Holder's Registrable Securities without registration
under the Securities Act within the limitation of the exemptions provided by (a)
Rule 144 under the Securities Act, as such rule may be amended from time to
time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
6. Participation in Underwritten Offerings. No Holder may participate in any
Underwritten Offering arranged for by the Company or any other Person unless
such Holder (a) agrees to sell such Holder's securities on the basis provided in
any underwriting arrangements approved by the Company or the other Persons who
arranged for such Underwritten Offering and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements, and
other documents required under the terms of such underwriting
-7-
<PAGE>
arrangements. Nothing in this Paragraph shall be construed to create any
additional rights regarding the registration of Registrable Securities in any
Person other than as set forth herein.
7. Indemnification. In the event any Registrable Securities are included in a
Registration Statement pursuant to this Agreement:
(a) Company Indemnity. Without limitation of any other
indemnity provided to any Holder, either in connection with the Preferred Stock
offering or otherwise, to the extent permitted by law, the Company shall
indemnify and hold harmless each Holder, the affiliates, representatives,
officers, directors and partners of each Holder, any underwriter (as defined in
the Securities Act) for such Holder, and each Person, if any, who controls such
Holder or underwriter (within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages or liabilities (joint or several) to
which they may become subject under the Securities Act, the Exchange Act or
other federal or state securities law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such Registration Statements including any preliminary
Prospectus or final Prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
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, (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, or (iv) any state securities law or any rule
or regulation promulgated under the Securities Act, the Exchange Act or any
state securities law, and the Company shall reimburse each Holder, affiliate,
officer or director or partner, underwriter or controlling Person for reasonable
legal or other expenses incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, action or expense; provided,
however, that the Company shall not be liable to any Holder in any such case for
any such loss, claim, damage, liability or action to the extent that it arises
out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information by such Holder furnished expressly for use
in connection with such registration by such Holder.
(b) Holder Indemnity. Each Holder shall indemnify and hold
harmless the Company and any underwriter (as defined in the Securities Act) and
each Person, if any, who controls the Company or the underwriter (within the
meaning of the Securities Act or the Exchange Act), against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Securities Act, the Exchange Act or any state securities law, and the Holder
shall reimburse the Company and each such underwriter or controlling person of
any of the foregoing for reasonable legal or other expenses incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; insofar as such losses, claims, damages or liabilities (or
actions with respect thereof) arise out of or are based upon any statements or
information provided in writing by such Holder to the Company specifically for
use in connection with the registration statement. The amount any Holder shall
be obligated to pay pursuant to this provision shall be limited to the net
proceeds to such Holder of the Registrable Securities sold pursuant to the
Registration Statement which gives rise to such obligation.
(c) Notice; Right to Defend. Promptly after receipt by an
indemnified party under this Paragraph 7 of notice of the commencement of any
action (including any governmental action), such indemnified party shall, if a
claim in respect thereof is to be made against any indemnifying party under this
Paragraph 7, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
-8-
<PAGE>
participate in and if the indemnifying party agrees in writing that it will be
responsible for any costs, expenses, judgments, damages and losses incurred by
the indemnified party with respect to such claim, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with counsel
mutually satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and expenses
to be paid by the indemnifying party, if the indemnified party reasonably
believes that representation of such indemnified party by the counsel retained
by the indemnifying party would be inappropriate due to actual or potential
differing interests between such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall relieve such indemnifying party of any
liability to the indemnified party under this Agreement only if and to the
extent that such failure is prejudicial to its ability to defend such action,
and the omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Agreement.
(d) Contribution. If the indemnification provided for in this
Agreement is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
hand in connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relevant fault of the indemnifying party and the indemnified
party shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the indemnifying party or by
the indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding the foregoing, the amount any Holder shall be obligated to
contribute pursuant to this Agreement shall be limited to an amount equal to the
net proceeds to such Holder of the Registrable Securities sold pursuant to the
Registration Statement which gives rise to such obligation to contribute (less
the aggregate amount of any damages which the Holder has otherwise been required
to pay in respect of such loss, claim, damage, liability or action arising from
the sale of such Registrable Securities).
(e) Survival of Indemnity. The indemnification provided by
this Agreement shall be a continuing right to indemnification and shall survive
the registration and sale of any Registrable Securities by any person entitled
to indemnification hereunder and the expiration or termination of this
Agreement.
8. Limitations on Other Registration Rights. Except as otherwise set forth in
this Agreement, the Company shall not, without the prior written consent of the
Holders of Registrable Securities representing a majority thereof held by all
the Holders, allow any Registration Statement filed on behalf of any Person
(including the Company) other than a Holder to become effective during any
period when the Company is not in compliance with this Agreement.
9. Remedies.
(a) Time is of Essence. The Company agrees that time is of the
essence of each of the covenants contained herein and that, in the event of a
dispute
-9-
<PAGE>
hereunder, this Agreement is to be interpreted and construed in a manner that
will enable the Holders to sell their Registrable Securities as quickly as
possible after such Holders have indicated to the Company that they desire their
Registrable Securities to be registered. Any delay on the part of the Company
not expressly permitted under this Agreement, whether material or not, shall be
deemed a material breach of this Agreement.
(b) Remedies Upon Default or Delay. The Company acknowledges
the breach of any part of this Agreement may cause irreparable harm to a Holder
and that monetary damages alone may be inadequate. The Company therefore agrees
that the Holder shall be entitled to injunctive relief or such other applicable
remedy as a court of competent jurisdiction may provide. Nothing contained
herein will be construed to limit a Holder's right to any remedies at law,
including recovery of damages for breach of any part of this Agreement.
10. Further Assurances. From time to time after the date of this Agreement, each
party to this Agreement will, at the expense of the requesting party, execute
and deliver such further instruments and documents and take such other action as
any other party to this Agreement may reasonably request in order more
effectively to carry out or confirm the intent of this Agreement.
11. Notices. All notices, requests, demands, and other communications hereunder
shall be in writing and shall be personally delivered, delivered by facsimile or
courier service, or mailed, certified with first class postage prepaid, to the
address set forth below:
If to a Holder: At the most current address given by such Holder to the
Company, in accordance with the provisions of this
Paragraph, which address initially is, with respect to
each Holder, the address set forth below such Holder's
name on the signature page of this Agreement
If to the Company: Initially at its address set forth below its name on the
signature page of this Agreement and thereafter at such
other address as may be designated from time to time by
notice given in accordance with the provisions of this
Paragraph
Each such notice, request, demand, or other communication shall be deemed to
have been given (whether actually received or not) on the date of actual
delivery thereof, if personally delivered or delivered by facsimile transmission
(if receipt is confirmed at the time of such transmission by telephone or
facsimile-machine-generated confirmation), or on the third day following the
date of mailing, if mailed in accordance with this Paragraph, or on the day
specified for delivery to the courier service (if such day is one on which the
courier service will give normal assurances that such specified delivery will be
made). Any notice, request, demand, or other communication given otherwise than
in accordance with this Paragraph shall be deemed to have been given on the date
actually received. Any party may change its address for purposes of this
Paragraph by giving written notice of such change to all other parties in the
manner hereinabove provided. Whenever any notice is required to be given by law
or by this Agreement, a written waiver thereof, signed by the Person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of that notice.
12. Severability. If any provision of this Agreement is held to be illegal,
invalid, or unenforceable under present or future laws effective during the term
hereof, such provision shall be fully severable and this Agreement shall be
construed and enforced as if such
-10-
<PAGE>
illegal, invalid, or unenforceable provision had never comprised a part of this
Agreement; the remaining provisions of this Agreement shall remain in full force
and effect and shall not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Agreement. Furthermore, in lieu of each
such illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
13. Parties Bound; Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
including, without limitation and without the need for an express assignment,
subsequent Holders of Registrable Securities.
14. Entirety; Amendments and Waivers. This Agreement (including any Exhibits
hereto and the documents delivered pursuant hereto) constitutes the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements or understandings relating to the subject matter
hereof and may be modified or amended only by an instrument in writing executed
by the Company and each Holder of the Registrable Securities. Any party may
waive any of the conditions contained herein or any of the obligations of any
other party hereunder, but any such waiver shall be effective only if in writing
and signed by the party waiving such conditions or obligations.
15. Paragraph Headings. The Paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Specific Performance. The Company hereby agrees and acknowledges that the
remedy at law for any breach by the Company of the provisions of this Agreement
will be inadequate and that the Holders shall be entitled to equitable remedies,
including specific performance and injunctive relief, therefor.
17. Governing Law and Venue. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO
ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. EACH PARTY HEREBY
IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF THE COURTS LOCATED IN
DELAWARE AND AGREES THAT ANY LITIGATION BETWEEN THE PARTIES WILL BE FILED IN
COURTS LOCATED IN DELAWARE.
18. Expenses. Except as otherwise expressly set forth herein, each party hereto
will bear its own legal and other expenses incurred in connection with the
preparation, execution, and performance of this Agreement.
19. Attorney's Fees. If any action is brought to enforce or interpret the terms
of this Agreement (including through arbitration), the prevailing party shall be
entitled to reasonable legal fees, costs, and necessary disbursements in
addition to any other relief to which such party may be entitled.
-11-
<PAGE>
20. Counterparts. This Agreement may be executed in any number of counterparts
and shall be effective when each party hereto has executed at least one
counterpart, with the same effect as if all signing parties had signed the same
document. All counterparts will be construed together and evidence only one
agreement, which, notwithstanding the actual date of execution of any
counterpart, shall be deemed to be dated day and year first written above. In
making proof of this Agreement, it shall not be necessary to account for a
counterpart executed by any party other than the party against whom enforcement
is sought or to account for more than one counterpart executed by the party
against whom enforcement is sought.
21. Execution by Facsimile. The manual signature of any party hereto that is
transmitted to any other party by facsimile shall be deemed for all purposes to
be an original signature.
22. Non-Waiver; Rights are Cumulative. Neither a failure of a party to this
Agreement to exercise any power reserved to it in this Agreement or any
ancillary agreement or to insist upon compliance by any other party hereto with
any obligation or condition in this Agreement or any ancillary agreement nor any
custom or practice of the parties at variance with the terms hereof or any
ancillary agreement shall constitute a waiver of such first party's rights to
demand exact compliance with the terms of this Agreement or such ancillary
agreement. Waiver by a party to this Agreement of any particular default shall
not affect or impair such party's right with respect to any subsequent default
of the same or of a different nature; nor shall any delay, forbearance, or
omission of such party to exercise any power or right arising out of any breach
or default by any other party hereto of any of the terms, provisions, or
covenants of this Agreement or under any ancillary agreement affect or impair
such first party's rights; nor shall such constitute a waiver by such first
party of any rights hereunder or under any ancillary agreement or rights to
declare any subsequent breach or default. Subsequent acceptance by a party to
this Agreement of any performance or payments due to it hereunder or any
ancillary agreement will not be deemed to be a waiver by such first party of any
preceding breach by any other party of any terms, provisions, covenants, or
conditions of this Agreement or any ancillary agreement. Each party's rights
under this Agreement and the ancillary agreements are cumulative and neither the
existence of, nor the exercise or enforcement by a party of, any right or remedy
under this Agreement or the ancillary agreements shall preclude the exercise or
enforcement by such party of any other right or remedy under this Agreement, any
ancillary agreement, or law.
23. No Strict Construction. This Agreement is the result of substantial
negotiations among the parties and their counsel and has been prepared by their
joint efforts. Accordingly, the fact that counsel to one party or another may
have drafted this Agreement or any portion hereof is immaterial and this
Agreement will not be strictly construed against any party.
24. Construction. Whenever the context requires, the gender of all words used in
this Agreement includes the masculine, feminine, and neuter. Unless otherwise
stated, all references to Paragraphs or Subparagraphs are to paragraphs or
subparagraphs of this Agreement. All references in this Agreement to "dollars"
or "$" means United States of America dollars. The term "including" and
variations of the term mean including without limitation.
[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY.]
-12-
<PAGE>
Executed on the date or dates indicated below, to be effective as of
the date first written above.
WEBSTAKES.COM, INC
By: /s/ [ILLEGIBLE]
---------------------------
Title: CEO
------------------------
Date: June 14, 1999
-------------------------
Address:
11 West 19th Street
10th Floor
New York, New York 10011
Facsimile Number: 212-857-4743
<PAGE>
XL VENTURES, LLC
By: XL Ventures (Delaware), Inc.
Its Managing Member
--------------------------------
By: Mark A. Angelson
Deputy Chairman
Date:________________, 1999
<PAGE>
AT HOME CORPORATION, a Delaware
corporation
By: /s/ Mark C. Stevens
-----------------------------
Name: Mark C. Stevens
Title: Executive Vice President, Business Affairs
Date: June 10, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL
PARTNERS III, L.P.
BY: CPCP Associates, L.P., its General Partner
BY: INVESCO Private Capital, Inc., its General
Partner
By: /s/ Howard Goldstein
-------------------------------------------
Name: Howard Goldstein
Title: Managing Director
Date: June 10, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS II, L.P.
By: CPCO Associates, L.P., its Investment
General Partner
By: INVESCO Private Capital, Inc., its General
Partner
By: /s/ Howard Goldstein
-------------------------------------------
Name: Howard Goldstein
Title: Managing Director
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS I, C.V.
By: Chancellor KME IV Partner, L.P., its
Investment General Partner
By: INVESCO Private Capital, Inc., its General
Partner
By: /s/ Howard Goldstein
-------------------------------------------
Name: Howard Goldstein
Title: Managing Director
<PAGE>
CITIVENTURE 96 PARTNERSHIP, L.P.
By: INVESCO Private Capital, Inc., its investment
Advisor
By: /s/ Howard Goldstein
-------------------------------------------
Name: Howard Goldstein
Title: Managing Director
<PAGE>
MS CUBED, LLC
By: /s/ Jeffrey [ILLEGIBLE]
----------------------------
Name: Jeffrey [ILLEGIBLE]
--------------------------
Title: Managing Member
-------------------------
Date: [ILLEGIBLE], 1999
--------------------------
<PAGE>
MAMARONECK CAPITAL LLC
BY: /s/ Andy Stenzler
----------------------------
Name: Andy Stenzler
--------------------------
Title: Manager
-------------------------
Date: June 10, 1999
-------------------------
<PAGE>
DRAKE & CO. FOR THE ACCOUNT OF
CITIVENTURE III
By: /s/ Michael Going
----------------------------
Name: Michael Going
-------------------------
Title: DRAKE & CO. NOMINEE
-------------------------
DATE: 6/10/99
-------------------------
<PAGE>
PROSPECT STREET NYC DISCOVERY
FUND, L.P.
By: PROSPECT STREET DISCOVERY
FUND, INC., its general partner
By: /s/ Stephen G. Hall
---------------------------------------
Name: STEPHEN G. HALL
-------------------------------------
Title: Principal
------------------------------------
Date:________________, 1999
<PAGE>
CATTERTON-SIMON PARTNERS III, L.P.
By: Catterton-Simon Managing Partner III,
L.L.C., its general partner
By: /s/ Craig H. Sakin
---------------------------------------
Name: Craig H. Sakin
Title: Authorized Person
Date: 6/11/99
-------------------------------------
CHANNEL-WEBSTAKES, LLC
By: Catterton Partners Management Company
LLC, its Managing Member
By: /s/ Craig H. Sakin
---------------------------------------
Name: Craig H. Sakin
Title: Authorized Person
Date: 6/11/99
-------------------------------------
<PAGE>
WINSTON PARTNERS, L.P. RAJ SANDHU
By: Chatterjee Fund Management, L.P., its
general partner ------------------------------------
By: /s/ Peter A. Hurwitz Date:
--------------------------------- ------------------------------
Date: Address for notices:
-------------------------------
Peter A. Hurwitz 101 W. 67th Street Apt. #47D
Address for notices: Attorney in Fact New York, NY 10023
c/o The Chatterjee Group
888 Seventh Avenue Suite 3000 PETER HURWITZ
New York, NY 10106
/s/ Peter A. Hurwitz
------------------------------------
WINSTON PARTNERS II LLC
Date:
By: Chatterjee Advisors LLC, its Manager ------------------------------
Address for notices:
By: /s/ Peter A. Hurwitz Manager
--------------------------------- 40 Half Moon Lane
Irvington, NY 10533
Date:
-------------------------------
ADAM GRAEV
Address for notices:
/s/ Adam Graev
c/o The Chatterjee Group ------------------------------------
888 Seventh Avenue Suite 3000
New York, NY 10106 Date:
------------------------------
Address for notices:
WINSTON PARTNERS II LDC
525 East 72nd Street Apt. #7B
By: /s/ Peter A. Hurwitz New York, NY 10021
---------------------------------
Date: DILIP ADVANI
-------------------------------
Peter A. Hurwitz /s/ Delip Advani
Address for notices: Attorney in Fact ------------------------------------
c/o Citco Date:
Kaya Flamboyan 9 ------------------------------
Willemstad, Curacao
Netherlands Antilles Address for notices:
167 East 61st Street
Apt. 17D
New York, NY 10021
<PAGE>
WINSTON PARTNERS, L.P. RAJ SANDHU
By: Chatterjee Fund Management, L.P., its /s/ Raj Sandhu
general partner ------------------------------------
By: /s/ Peter A. Hurwitz Date:
--------------------------------- ------------------------------
Attorney-in-Fact
Date: Address for notices:
-------------------------------
101 W. 67th Street Apt. #47D
Address for notices: New York, NY 10023
c/o The Chatterjee Group
888 Seventh Avenue Suite 3000 PETER HURWITZ
New York, NY 10106
/s/ Peter A. Hurwitz
------------------------------------
WINSTON PARTNERS II LLC
Date:
By: Chatterjee Advisors LLC, its Manager ------------------------------
Address for notices:
By: /s/ Peter A. Hurwitz Manager
--------------------------------- 40 Half Moon Lane
Irvington, NY 10533
Date:
-------------------------------
ADAM GRAEV
Address for notices:
/s/ Adam Graev
c/o The Chatterjee Group ------------------------------------
888 Seventh Avenue Suite 3000
New York, NY 10106 Date:
------------------------------
Address for notices:
WINSTON PARTNERS II LDC
525 East 72nd Street Apt. #7B
By: /s/ Peter A. Hurwitz New York, NY 10021
---------------------------------
Attorney-in-Fact
Date: DILIP ADVANI
-------------------------------
/s/ Dilip Advani
Address for notices: ------------------------------------
c/o Citco Date:
Kaya Flamboyan 9 ------------------------------
Willemstad, Curacao
Netherlands Antilles Address for notices:
167 East 61st Street
Apt. 17D
New York, NY 10021
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By: /s/ Jordan M. Stitzer
Name: JORDAN M. STITZER
Vice President
Title:
Date: , 1999
<PAGE>
PRIMUS CAPITAL FUND IV LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc., its
General Partner
By: /s/ Kevin J. McGinty
---------------------------------------
Name: Kevin J. McGinty
-------------------------------------
Title: Managing Director
------------------------------------
<PAGE>
PRIMUS EXECUTIVE FUND LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc., its
General Partner
By: /s/ Kevin J. McGinty
---------------------------------------
Name: Kevin J. McGinty
-------------------------------------
Title: Managing Director
------------------------------------
<PAGE>
ALLEN CAPITAL ARCHON PARTNERS L.P.
By: Allen Capital Inc.
By: /s/ Brad Roberts
---------------------------------------
Brad Roberts, President
-13-
<PAGE>
I WIN INVESTORS, LLC
By: /s/ Robert Russell
---------------------------------------
Name: Robert Russell
Title: Manager
<PAGE>
ALPINE SPECTRUM INVESTORS LLC
By: G(2) Investment Partners Mgr
---------------------------------------
By: [ILLGIBLE]
---------------------------------------
<PAGE>
GREENBERG FAMILY FUND LLC
/s/ Arnold Greenberg
-------------------------------------------
Name: Arnold Greenberg, Manager
Date: June , 1999
<PAGE>
NATIONAL BROADCASTING COMPANY, INC.
By: /s/ [ILLEGIBLE]
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Date: ________________, 1999
[Registration Rights Agreement]
<PAGE>
WPG SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its General
Partner
By: /s/ McGehee Porter
---------------------------------------
Name: McGehee Porter
Title Managing Director
WPG INSTITUTIONAL SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its General
Partner
By: /s/ McGehee Porter
---------------------------------------
Name: McGehee Porter
Title Managing Director
WPG NETWORKING FUND, L.P.
By: Weiss Peck & Greer, LLC, Its General
Partner
By: /s/ McGehee Porter
---------------------------------------
Name: McGehee Porter
Title Managing Director
CA CAPITAL MANAGEMENT LTD.
By: /s/ McGehee Porter
---------------------------------------
Name: McGehee Porter
Title: Managing Director
<PAGE>
EXHIBIT A
Investor List
<TABLE>
<CAPTION>
Dollar Investment Number of Shares
----------------- ----------------
<S> <C> <C>
XL Ventures, LLC $ 7,000,000 1,166,667
At Home Corporation 7,000,000 1,166,667
Chancellor Private Capital Partners III, L.P. 496,962 82,827
Chancellor Private Capital Offshore Partners II, L.P. 818,586 136,431
Chancellor Private Capital Offshore Partners I, C.V. 75,738 12,623
Citiventure 96 Partnership, L.P. 1,945,314 324,219
MS Cubed LLC 750,000 125,000
Mamaroneck Capital LLC 99,996 16,666
Drake & Co. for the Account of Citiventure III 813,402 135,567
Prospect Street NYC Discovery Fund L.P. 5,000,000 833,333
Catterton-Simon Partners III, L.P. 1,000,000 333,333
Channel-Webstakes, LLC 1,200,000
Winston Partners, L.P. 700,000 116,667
Winston Partners II LLC 700,000 116,667
Winston Partners II LDC 500,000 83,333
Raj Sandhu 58,000 9,667
Peter Hurwitz 15,000 2,500
Adam Graev 12,000 2,000
Dilip Advani 15,000 2,500
The Travelers Insurance Company 5,000,000 833,333
Primus Capital Fund IV Limited Partnership 2,880,000 480,000
Primus Executive Fund Limited Partnership 120,000 20,000
Allen Capital Archon Partners L.P. 1,000,000 166,667
I Win Investors, LLC 500,000 83,333
Alpine Spectrum Investors LLC 500,000 83,333
Arnold Greenberg 1,000,000 166,667
National Broadcasting Company, Inc. 1,000,000 166,667
WPG Software Fund, L.P. 114,000
WPG Institutional Software Fund L.P. 248,800
WPG Networking Fund L.P. 27,200
CA Capital Management Ltd. 10,000
TOTAL 39,999,998 6,666,667
=========== =========
</TABLE>
<PAGE>
EXHIBIT H
ESCROW AGREEMENT AMONG WEBSTAKES.COM, INC.,
THE PURCHASERS AND THE ESCROW AGENT
<PAGE>
Exhibit H
ESCROW AGREEMENT
This AGREEMENT made this 10th day of June, 1999 between Webstakes.com,
Inc., a Delaware corporation (the "Issuer"), Reed Smith Shaw & McClay LLP, a
limited liability partnership organized under the laws of the Commonwealth of
Pennsylvania (the "Escrow Agent"), and the parties listed on Exhibit A (each a
"Purchaser" and collectively the "Purchasers").
W I T N E S S E T H:
WHEREAS, the Issuer and the Purchasers intend to execute a certain Stock
Purchase Agreement dated June 11, 1999 (the "Purchase Agreement") relating to
the sale of 6,666,667 shares of the Issuer's Class B Convertible Redeemable
Preferred Stock (the "Shares") to be conducted pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, as amended (the "Act"); and
WHEREAS, the Issuer proposes to establish the Escrow Account (as defined
below) with the Escrow Agent in connection with the Purchase Agreement and the
Escrow Agent is willing to establish such Escrow Account (as defined below) on
the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Escrow Funds.
1.1 Each Purchaser shall deposit with the Escrow Agent the
respective sum applicable to such Purchaser as set forth on Exhibit A (the
"Escrowed Funds"), into a federally insured non-interest-bearing escrow account
established by the Escrow Agent (the "Escrow Account"). Each Purchaser agrees
that the Escrow Agent shall not be obligated to accept deposits not made in the
form of a wire transfer. Amounts deposited in the Escrow Account which have
cleared the federal funds wire system are herein referred to as the "Escrowed
Funds".
1.2 The Escrowed Funds shall be wired to the Escrow Account as
follows:
Bank Name: Summit Bank, Princeton, New Jersey
ABA No.: 021-202162
Account Name: Reed Smith Shaw & McClay LLP Attorney Trust Account
Account No.: 901707619
2. Disbursement from the Escrow Account.
2.1 In the event that at any time up to the close of banking hours
on June 16, 1999 (the "Termination Date"), the Escrow Agent receives a joint
instruction letter ("Instruction Letter") executed by (i) Stone Investments,
Inc., (ii) the Issuer and (iii) Neil S. Belloff, Esq. (or such other designee as
determined by the Purchasers) on behalf of the Purchasers, stating that the
<PAGE>
conditions to close the transactions contemplated by the Purchase Agreement, as
set forth in Sections 5 through 7 inclusive, thereof, have been satisfied, the
Escrow Agent shall thereafter (i) disburse the sum of twenty-four million
dollars to Stone Investments, Inc.; and (ii) disburse the amount of the Escrowed
Funds less twenty-four million dollars to the Issuer.
2.2 In the event the Escrow Agent does not receive the Instruction
Letter before the Termination Date, the Escrow Agent shall promptly refund to
each Purchaser the amount of Escrowed Funds received from such Purchaser which
is then held in the Escrow Account, without interest thereon or deduction
therefrom, and the Escrow Agent shall notify the Issuer thereof.
2.3 Upon disbursement of the Escrowed Funds pursuant to the terms of
this Section 2, the Escrow Agent shall be relieved of all further obligations
and released from all liability under this Agreement. It is expressly agreed and
understood that in no event shall the aggregate amount of payments made by the
Escrow Agent exceed the amount of the Escrowed Funds.
3. Rights, Duties and Responsibilities of Escrow Agent. The parties hereto
acknowledge and recognize that the Escrow Agent has acted as counsel for the
Issuer. The parties hereto covenant and agree that in performing any of its
duties under this Agreement, the Escrow Agent shall not be liable for any loss,
costs or damage which it may incur as a result of serving as Escrow Agent
hereunder, except for any loss, costs or damage arising out of its willful
default or gross negligence. Specifically, Escrow Agent shall not incur any
liability with respect to (i) any action taken or omitted to be taken in good
faith with respect to any questions relating to the duties and responsibilities
hereunder, or (ii) any action taken or omitted to be taken in reliance upon any
document, including any written notice of instruction provided for in this
Escrow Agreement, not only as to its due execution and the validity and
effectiveness of its provisions, but also to the truth and accuracy of any
information contained therein, which Escrow Agent shall in good faith believe to
be genuine, to have been signed or presented by a proper person or persons and
to conform with the provisions of this Escrow Agreement. Purchasers and Issuer
hereby agree to indemnify and hold harmless the Escrow Agent against any and all
losses, claims, damages, liabilities and expenses, including without limitation,
reasonable attorneys' fees and disbursements which may be imposed upon or
incurred by the Escrow Agent in connection with its serving as Escrow Agent
hereunder.
4. Resignation of Escrow Agent. The Escrow Agent may, at any time prior to
the receipt by the Escrow Agent of a written notice of dispute from either of
the parties, resign as Escrow Agent. Such resignation shall be permissible and
effective upon the delivery of the Escrowed Funds by the Escrow Agent to a bank
or attorney as shall be chosen by the Escrow Agent or mutually selected by
Issuer and Purchaser.
5. Indemnification and Contribution.
5.1 The Issuer agrees to indemnify the Escrow Agent and its
officers, directors, employees, agents and shareholders (jointly and severally
the "Indemnitees") against, and hold them harmless of and from, any and all
loss, liability, cost, damage and expense,
-2-
<PAGE>
including, without limitation, reasonable counsel fees, which the Indemnitees
may suffer or incur by reason of any action, claim or proceeding brought against
the Indemnitees arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates, unless such action, claim or
proceeding is the result of the willful misconduct of the Indemnitees.
5.2 If the indemnification provided for in this Section 5 is
applicable, but for any reason is held to be unavailable, the Issuer shall
contribute such amounts as are just and equitable to pay, or to reimburse the
Indemnitees for, the aggregate of any and all losses, liabilities, costs,
damages and expenses, including counsel fees, actually incurred by the
Indemnitees as a result of or in connection with, and any amount paid in
settlement of any action, claim or proceeding arising out of or relating in any
way to any actions or omissions of the Indemnitors.
5.3 Any Indemnitee which proposes to assert the right to be
indemnified under this Section 5, promptly after receipt of notice of
commencement of any action, suit or proceeding against such Indemnitee in
respect of which a claim is to be made against the Issuer under this Section 5,
will notify the Issuer of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served, but the omission so to notify the Issuer
of any such action, suit or proceeding shall not relieve the Issuer from any
liability which it may have to any Indemnitee otherwise than under this Section
5. In case any such action, suit or shall be brought against any Indemnitee and
it shall notify the Issuer of the commencement thereof, the Issuer shall be
entitled to participate in and, to the extent that they shall wish, to assume
the defense thereof, with counsel satisfactory to such Indemnitee. The
Indemnitee shall have the right to employ its counsel in any such action, but
the fees and expenses of such counsel shall be at the expense of such Indemnitee
unless (i) the employment of counsel by such Indemnitee has been authorized b
the Issuer, (ii) the Indemnitee shall have concluded reasonably that there may
be a conflict of interest among the Issuer and the Indemnitee in the conduct of
the defense of such action (in which case the Issuer shall not have the right to
direct the defense of such action on behalf of the Indemnitee) or (iii) the
Issuer in fact shall not have employed counsel to assume the defense of such
action, in each of which case the fees and expenses of counsel shall be borne by
the Issuer.
5.4 The provisions of this Section 5 shall survive any termination
of this Agreement, whether by disbursement of the Escrowed Funds, resignation of
the Escrow Agent or otherwise.
6. Governing Law and Assignment. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York and shall be
binding upon the parties hereto and their respective successors and assigns;
provided, however, that any assignment or transfer by any party of its rights
under this Agreement or with respect to the Escrowed Funds shall be void as
against the Escrow Agent unless: (a) written notice thereof shall be given to
the Escrow Agent; and (b) the Escrow Agent shall have consented in writing to
such assignment or transfer.
7. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be determined to be invalid or
unenforceable, the remaining
-3-
<PAGE>
provisions of this Agreement or the application of such provision to persons or
circumstances other than those to which it is held invalid or unenforceable
shall not be affected thereby and shall be valid and enforceable to the fullest
extent permitted by law.
8. Captions. All captions are for convenience only and shall not limit or
define the text hereof.
9. Execution in Several Counterparts. This Agreement may be executed in
several counterparts or by separate instruments and all of such counterparts and
instruments shall constitute one agreement, binding on all of the parties
hereto.
10. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings (written or oral) of the
parties in connection herewith.
IN WITNESS OF, the undersigned have executed this Agreement as of the day
and year first above written.
WEBSTAKES.COM, INC.
(the Issuer)
By: ________________________________________
Steven H. Krein, Chief Executive Officer
REED SMITH SHAW & McCLAY LLP
(the Escrow Agent)
By: ________________________________________
Bari S. Krein, Partner
-4-
<PAGE>
XL VENTURES, LLC
By: XL Ventures (Delaware), Inc.
Its Managing Member
_____________________________
By: Mark A. Angelson
Deputy Chairman
Date: _________________, 1999
<PAGE>
AT HOME CORPORATION, a Delaware
corporation
By: _____________________________
Name: Mark C. Stevens
Title: Executive Vice President,
Business Affairs
Date: June , 1999
<PAGE>
PROSPECT STREET NYC DISCOVERY
FUND, L.P.
By: PROSPECT STREET DISCOVERY
FUND, INC., its general partner
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _______________________, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL
PARTNERS III, L.P.
BY: CPCP Associates, L.P., its General
Partner
BY: INVESCO Private Capital, Inc., its
General Partner
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _______________________, 1999
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS II, L.P.
By: CPCO Associates, L.P., its
Investment General Partner
By: INVESCO Private Capital, Inc., its
General Partner
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
CHANCELLOR PRIVATE CAPITAL OFFSHORE
PARTNERS I, C.V.
By: Chancellor KME IV Partner, L.P., its
Investment General Partner
By: INVESCO Private Capital, Inc., its
General Partner
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
CITIVENTURE 96 PARTNERSHIP, L..P.
By: INVESCO Private Capital, Inc., its
Investment Advisor
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
GREENBERG FAMILY FUND, LLC
__________________________________
Name: Arnold Greenberg, Manager
Date: June , 1999
<PAGE>
ALLEN CAPITAL ARCHON PARTNERS L.P.
By: Allen Capital Inc.
By:_____________________________________
Brad Roberts, President
<PAGE>
ALPINE SPECTRUM INVESTORS, LLC
By:_____________________________________
By:_____________________________________
<PAGE>
PRIMUS CAPITAL FUND IV LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc.,
its General Partner
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
PRIMUS EXECUTIVE FUND LIMITED
PARTNERSHIP
By: Primus Venture Partners IV Limited
Partnership, its General Partner
By: Primus Venture Partners IV, Inc.,
its General Partner
By: _______________________________
Name: _____________________________
Title: ____________________________
<PAGE>
THE TRAVELERS INSURANCE COMPANY
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _______________________, 1999
<PAGE>
NATIONAL BROADICASTING COMPANY, INC.
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _______________________, 1999
<PAGE>
MS CUBED, LLC
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _______________________, 1999
<PAGE>
DRAKE & CO. FOR THE ACCOUNT OF
CITIVENTURE III
By: _______________________________
Name: _____________________________
<PAGE>
MAMARONECK CAPITAL LLC
By: _______________________________
Name: _____________________________
Title: ____________________________
Date: _____________________________
<PAGE>
WINSTON PARTNERS, L.P.
By: Chatterjee Fund Management, L.P.,
its general partner
By:_______________________________
Date:_____________________________
Address for notices:
c/o The Chatterjee Group
888 Seventh Avenue Suite 3000
New York, NY 10106
WINSTON PARTNERS II LLC
By: Chatterjee Advisors LLC, its Manager
By:_______________________________
Date:_____________________________
Address for notices:
c/o The Chatterjee Group
888 Seventh Avenue Suite 3000
New York, NY 10106
WINSTON PARTNERS II LDC
By:_______________________________
Date:_____________________________
Address for notices:
c/o Citco
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
RAJ SANDHU
__________________________________
Date:_____________________________
Address for notices:
101 W. 67th Street Apt. #47D
New York, NY 10023
PETER HURWITZ
__________________________________
Date:_____________________________
Address for notices:
40 Half Moon Lane
Irvington, NY 10533
ADAM GRAEV
__________________________________
Date:_____________________________
Address for notices:
525 East 72nd Street Apt. #7B
New York, NY 10021
DILIP ADVANI
__________________________________
Date:_____________________________
Address for notices:
167 East 61st Street
Apt. 17D
New York, NY 10021
<PAGE>
CATTERTON-SIMON PARTNERS III, L.P.
By: Catterton-Simon Managing Partner
III, L.L.C., Its general partner
By:_________________________________
Name: Craig H. Sakin
Title: Authorized Person
Date:_______________________________
CHANNEL-WEBSTAKES, LLC
By: Catterton Partners Management Company
LLC, Its Managing Member
By:_________________________________
Name: Craig H. Sakin
Title: Authorized Person
Date:_______________________________
<PAGE>
I WIN INVESTORS, LLC
By:_____________________________
Name: Robert Russell
Title:
<PAGE>
WPG SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________
Name:
Title
WPG INSTITUTIONAL SOFTWARE FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________
Name:
Title
WPG NETWORKING FUND, L.P.
By: Weiss Peck & Greer, LLC, Its
General Partner
By:_____________________________
Name:
Title
CA CAPITAL MANAGEMENT LTD.
By:_____________________________
Name:
Title: Its Attorney in Fact
<PAGE>
SCHEDULE 3.3
Share Ownership Table
64,000 options to be issued to outside directors upon consummation of IPO
<PAGE>
Webstakes.com
Current Common Stock Ownership table
June 11, 1999
<TABLE>
<CAPTION>
0/S Common Stock Options Warrants Preferred TOTAL
# Shares 0/S Vested 3/31/99 Convertible to Common Common Percent
-------- --- -------------- --------------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Holders
Steven Krein 1,470,000 1,470,000 17.90%
Daniel Feldman 1,470,000 1,470,000 17.90%
Joseph Lamport 588,000 588,000 7.16%
Mark Biango 392,784 392,784 4.78%
Steve Sacks 78,792 78,792 0.96%
Stone Investments, Inc.-Loan 1** 999,600 999,600 12.17%
Stone Investments, Inc.-Loan 2** 715,008 715,008 8.70%
Preferred Stock Holders
Stone Preferred** 50,000 2,284,968 27.82%
0.00%
-- 0.00%
-- 0.00%
Stock Option Information
2,450,000 available
Option Sub 493,385 46,725 46,725 0.57%
Allen & Co Warrants
Initial
* 168,350 168,350 2.05%
-- 0.00%
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 5,714,184 493,385 46,725 168,350 50,000 8,214,227 100.00%
=====================================================================================================================
</TABLE>
* Additional 53,333 options will be issued subsequent to consummation of the
private equity.
** Subsequent to consummation of the private equity, shares will be
repurchased by the Company.
<PAGE>
SCHEDULE 3.4
The Company owns a 6.25% interest in The Net's Best LLC and has the right
to acquire an additional 5%.
<PAGE>
SCHEDULE 3.6
CLASS A PREFERRED STOCKHOLDER AND WAIVER AND CONSENT
<PAGE>
CLASS A PREFERRED STOCKHOLDER WAIVER AND CONSENT
In connection with this waiver and consent made by Stone
Investments, Inc., ("Stone"), a Delaware corporation, reference is made to that
certain stock purchase agreement (the "Stock Purchase Agreement") by and among
Webstakes.com, Inc. ("Webstakes"), a Delaware corporation and the purchasers
(the "Purchasers") listed on Exhibit A to the Stock purchase Agreement dated
June 11, 1999 pursuant to which the Purchasers have agreed to purchase shares of
newly issued Webstakes Class B Preferred Stock. Webstakes has amended its
Certificate of Incorporation pursuant to a Certificate of Amendment
("Certificate of Amendment") which amendment created a new class of preferred
stock, Class B Convertible Redeemable Preferred Stock (the "Class B Preferred
Stock").
As an inducement for the parties to enter into the Stock Purchase
Agreement and to consummate the transactions contemplated thereby, Stone hereby
represents and certifies as follows:
Stone consents to Webstakes' issuance of the Class B Preferred Stock
to the Purchasers pursuant to the terms of the Stock Purchase Agreement;
Stone waives those rights contained in Section D.6(c) of the
Certificate of Amendment.
Stone waives those preemptive rights granted to it pursuant to the
terms of Section D.7 of the Certificate of Amendment;
Stone waives the occurrence of any and all events which would
constitute an Events of Default as defined in Section D.9 of the Certificate of
Amendment; and
Stone understands, agrees with and acknowledges the reasonableness
of the aforesaid waivers and consents, and agrees to take all reasonable actions
necessary to effectuate the intents and purposes thereof.
STONE INVESTMENTS, INC.
By: /s/ Gary M. Goltz
---------------------------------
Gary M. Goltz, Vice President
-2-
<PAGE>
SCHEDULE 3.9
In May 1999, the Company ordered $680,000 of computer equipment which will
be subject to a lease with Leasing Technologies International, Inc.
<PAGE>
SCHEDULE 3.10(d)
The Company hired Steven Caputo at an annual salary of $175,000.
<PAGE>
SCHEDULE 3.10(f)
The Company loaned $35,000 to its President, Dan Feldman pursuant to a
five-year promissory note.
<PAGE>
SCHEDULE 3.10(h)
See Schedule 3.9
<PAGE>
SCHEDULE 3.10(I)
See Schedule 3.9.
<PAGE>
SCHEDULE 3.13
In April 1999, the Company sold certain equipment to Leasing Technologies,
International, Inc. ("LTI") for approximately $160,000 and simultaneously leased
the equipment back from LTI.
<PAGE>
SCHEDULE 3.30
1. The Company is party to a written loan agreement with Stone dated
December 24, 1997 pursuant to which Stone loaned the Company the principal
amount of $200,000.
2. Stone Analytics, an affiliate of Stone, provides the Company with
statistical analysis, modeling services and software development. With the
exception of a one page letter between the parties dated January 5, 1999 (the
"Letter"), there is no written agreement between the parties, and to date the
Company has not made any payments for such services. Pursuant to an invoice
dated June 11, 1999, Stone Analytics, Inc. billed the Company in the amount of
$54,986 for consulting services and related expenses rendered pursuant to the
Letter. The Company is in discussions with this entity regarding continuing
their business relationship.
3. Business Transaction Express, Inc., an affiliate of Stone Capital,
Inc., provides the Company with data verification services. There is no written
agreement between the parties, and to date the Company has not made any payments
for such services. The Company is in discussions with this entity regarding
continuing their business relationship.
4. The Company is a shareholder of The Net's Best, a newspaper circular
marketing company. Stone Investments, Inc. is a fifty percent shareholder of
that entity. The Company and The Net's Best are parties to an agreement dated
September 1998 which runs for a term of 15 months for which there is no
termination provision other than the natural expiration of the agreement or a
breach thereof.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 19, 1999 relating to the financial statements and
financial statement schedule of Webstakes.com, Inc, which appears in such
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
July 22, 1999
<PAGE>
CONSENT OF FORRESTER RESEARCH, INC.
-----------------------------------
March 5, 1999
Forrester Research, Inc. ("Forrester") consents to the inclusion of our name and
the intellectual property contained in the attached document in the preliminary
prospectus and the final prospectus of Bear Stearns' client to be prepared in
connection with the client's initial public offering of securities.
Forrester does not consent to be an expert in the registration statement or as
having prepared or certified any part of the registration statement.
Mike Shirer
Public Relations Manager
Forrester Research, Inc.
617-806-6011
<PAGE>
EXHIBIT 99.3
CONSENT OF DIRK HALL
I, Dirk Hall, hereby consent to be named as a nominee director in the
Registration Statement on Form S-1 of Webstakes.com, Inc., a Delaware
Corporation and all amendments thereto.
/s/ Dirk Hall
----------------------------
Dirk Hall
Dated: July 23, 1999
