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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WEBSTAKES.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 7311 13-38989
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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11 WEST 19TH STREET, 10TH FLOOR
NEW YORK, NEW YORK 10010
(212) 481-3600
(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 10010
(212) 481-3600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
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<S> <C>
MICHAEL B. POLLACK, ESQ. JULIE M. ALLEN, ESQ.
BARI S. KREIN, ESQ. O'SULLIVAN GRAEV & KARABELL, LLP
REED SMITH SHAW & MCCLAY LLP 30 ROCKEFELLER PLAZA, 41ST FLOOR
2500 ONE LIBERTY PLACE NEW YORK, NEW YORK 10112
PHILADELPHIA, PENNSYLVANIA 19103-7301 (212) 408-2400
(215) 851-8182
</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. / /
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CALCULATION OF THE REGISTRATION FEE
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<CAPTION>
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PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1),(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $0.01 par value per share............................ $57,500,000 $15,985
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</TABLE>
(1) Includes shares that the Underwriters have the option to purchase from the
Company solely to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee.
------------------------
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.
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<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 JUNE 14, 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 will apply 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 OTHER REGULATORY BODY 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 BARING FURMAN SELZ LLC
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1999.
<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 1.3 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 sponsorships and
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 strategic relationships
with Excite and NBC, 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, MapQuest.com,
PC Flowers & Gifts.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 44 million times and we have awarded over
5,500 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
1.3 million members and, over the last three months, we have added new members
at the rate of over 1,100 per day.
Our proprietary 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.
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;
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
1
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o expanding internationally.
RECENT DEVELOPMENTS
In March 1999 we entered into a strategic relationship with NBC Multimedia,
Inc. Under this relationship, we have the right to be the exclusive third-party
provider of online sweepstakes and contests for the NBC.com and NBC Interactive
Neighborhood web sites. During the term of the agreement, Webstakes-managed
promotions will be prominently 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 a strategic relationship 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 relationship, 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.
THE OFFERING
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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 493,385 shares issuable upon the exercise of options outstanding at
a weighted average exercise price of $7.43;
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 1,892,615 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.
2
<PAGE>
Unless otherwise indicated, all pro forma information in this prospectus
gives effect to:
o the repurchase by us of 50,000 shares of class A mandatorily
redeemable convertible preferred stock and 1,714,608 shares of
common stock in June 1999;
o the issuance in June 1999 of 6,666,667 shares of class B mandatorily
redeemable convertible preferred stock, and the conversion of these
shares into common stock at the same time as the closing of this
offering;
o the issuance in March and June 1999 of warrants to purchase
221,683 shares of common stock at an exercise price of $6.00 per
share in exchange for financial advisory services by a non-employee
consultant; and
o 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.
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."
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<CAPTION>
THREE MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(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 $ 1,067 $ 1,319
Loss from operations................... (213) (190) (1,338) (52) (898)
Net loss............................... (221) (227) (1,414) (62) (884)
Basic and diluted net loss per
share .............................. $ (0.06) $ (0.05) $ (0.27) $ (0.01) $ (0.15)
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 5,714,184
Pro forma basic and diluted net loss
per share........................... -- -- $ -- $
Shares of common stock used in
computing pro forma basic and
diluted net loss per share.......... -- -- --
</TABLE>
The following table is a summary of our balance sheet at March 31, 1999.
The pro forma 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.
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<CAPTION>
AS OF MARCH 31, 1999
--------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
---------- -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................................... $ 2,813
Working capital.................................................... 2,699
Total assets....................................................... 4,237
Notes payable (excluding current portion).......................... 50
Class A mandatorily redeemable convertible preferred stock......... 5,000
Total stockholders' equity (deficit)............................... (1,615)
</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, AND WE MAY NOT BECOME PROFITABLE.
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 $884,000 for
the three months ended March 31, 1999. As of March 31, 1999, our accumulated
deficit was approximately $2.7 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 without the exchange of any cash payments, and for the
three months ended March 31, 1999, approximately 33% of our revenues were
derived from these barter agreements. 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, 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. Factors that may affect our quarterly results include:
o demand for our promotion services;
o our ability to attract visitors to our promotions;
o the amount and timing of our expenses;
o the length of our sales cycle;
o the size and timing of new agreements with our clients;
o our ability to expand our sales force;
o changes in rates paid for promotion services; and
o the announcement of new or enhanced web sites and services by us or
our competitors.
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These factors, together with the rapidly evolving market in which we
operate, 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.
OUR BUSINESS MAY BE AFFECTED BY SEASONAL FLUCTUATIONS IN PROMOTION SPENDING AND
INTERNET USE.
Our limited operating history and rapid growth make it difficult to assess
the impact of seasonal factors on our business. We expect our business to be
subject to seasonal fluctuations that reflect the seasonality in traditional
promotion spending and Internet use. Traditional promotion spending tends to be
highest in the second and fourth quarters of each calendar year. Our experience
is that Internet use is generally lower during the summer and year-end vacation
and holiday periods. Because the market for Internet promotion services is
emerging, additional seasonal patterns may develop in the future as the market
matures.
THE DEMAND FOR OUR INTERNET PROMOTION SERVICES IS UNCERTAIN.
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. Due to these factors, it is difficult to predict promotion
spending on the Internet in general, or demand for our promotion services in
particular. Demand for our promotion services is subject to a high level of
uncertainty and is dependent upon many factors, including:
o recognition of the value of Internet promotions by businesses;
o the ability of our clients to reliably measure the effectiveness of
Internet promotions;
o the ability of Internet promotions to attract consumers; and
o the ability of our clients to sell their products and services to
the consumers participating in our promotions.
The market for Internet promotion services may not continue to grow or be
sustainable. If Internet promotion services do not achieve market acceptance,
our business, results of operations and financial condition would be materially
adversely affected.
WE MAY NOT BE ABLE TO CONTINUE 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.
WE MAY BE UNSUCCESSFUL IN LEVERAGING OUR SWEEPSTAKES EXPERTISE TO BECOME A
FULL-SERVICE ONLINE PROMOTION COMPANY.
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.
6
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WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR MARKET.
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 materially adversely affect our
business, results of operations and financial condition.
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.
WE MAY BE UNABLE 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.
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 MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
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."
WE MAY NOT EFFECTIVELY MANAGE OUR GROWTH.
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
7
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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.
WE DEPEND ON OUR 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 Christopher F. Bragas, 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. Competition
for senior management is intense, and we may not be successful in attracting and
retaining personnel.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, AND WE MAY INFRINGE THE
PROPRIETARY RIGHTS OF OTHERS.
Third parties may infringe or misappropriate our patents, trademarks or
other proprietary 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.
POTENTIAL ACQUISITIONS INVOLVE CERTAIN RISKS.
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. Any acquisitions we make may not
be successful.
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
8
<PAGE>
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."
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. 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 BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION WOULD BE MATERIALLY
ADVERSELY AFFECTED IF INTERNET USAGE DOES NOT GROW.
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.
9
<PAGE>
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.
SYSTEM FAILURES 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 low coverage limits and therefore our insurance may
not adequately compensate us for any losses that may occur due to any
interruptions in our service.
In February 1999, we entered into an Internet hosting agreement with
Frontier GlobalCenter, Inc. to maintain all of our production servers at
Frontier's 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.
Visitors to our web site depend on their Internet service providers and
other web site operators for access to promotions on webstakes.com and on the
web sites of our clients. Each of these providers has experienced significant
outages in the past, and could experience outages, delays and other difficulties
due to system failures unrelated to our systems. The inability of a substantial
number of Internet users to reach our promotions due to these outages could have
a material adverse effect on our business, results of operations and financial
condition.
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.
10
<PAGE>
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.
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 "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.
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. 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 staff. 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 March 31, 1999. Our
capitalization is presented:
o on an actual basis;
o on a pro forma basis; and
o on a pro forma 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 MARCH 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable (excluding current portion)........................... $ 50 $ $
Class A mandatorily redeemable convertible preferred stock, par
value $100, 50,000 shares authorized; and 50,000 shares issued and
outstanding (actual), 0 shares authorized or issued (pro forma and
pro forma as adjusted)............................................ 5,000 -- --
Stockholders' equity (deficit):
Preferred stock, no par value, 1,000,000 shares authorized
(actual, pro forma and pro forma as adjusted); 0 shares issued
(actual, pro forma and pro forma as adjusted)..................
Common stock, par value $.01, 10,000,000 shares authorized
(actual), 50,000,000 shares authorized (pro forma and pro forma
as adjusted); 5,714,184 shares issued and outstanding (actual);
shares issued and outstanding (pro forma);
shares issued and outstanding (pro forma as
adjusted)...................................................... 57
Additional paid-in capital........................................ 1,167
Accumulated deficit............................................... (2,746)
Unearned compensation............................................. (93)
------ --------- -------
Total stockholders' equity (deficit)........................... (1,615)
------ --------- -------
Total capitalization......................................... $3,435 $ $
------ --------- -------
------ --------- -------
</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 March 31, 1999, our pro forma net tangible book value was
$ million, or $ per share of common stock. Pro forma "net tangible book
value" per share equals our total tangible assets minus our total liabilities,
divided by the pro forma number of shares of common stock outstanding. As of
March 31, 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......................... $
Pro forma net tangible book value per share as of
March 31, 1999..................................................... $
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, on a pro forma basis as of March 31, 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)................ % $ %
Purchasers of class B mandatorily
redeemable convertible preferred
stock..............................
New investors........................
-------- ------ --------- -------
Total.............................. 100% $ 100%
-------- ------ --------- -------
-------- ------ --------- -------
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
<S> <C>
Existing stockholders (excluding
class B purchasers)................ $
Purchasers of class B mandatorily
redeemable convertible preferred
stock.............................. $
New investors........................ $
Total.............................. $
</TABLE>
None of the foregoing tables or calculations assume that any options or
warrants outstanding as of March 31, 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 three months ended March 31, 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>
THREE MONTHS ENDED
JANUARY 8, 1996 YEAR ENDED DECEMBER 31, MARCH 31,
(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 $ 1,067 $ 1,319
Operating expenses:
Product development.............. 59 181 549 102 13
Selling and marketing............ 125 1,091 3,619 691 1,371
General and administrative....... 109 536 1,969 326 833
----------- ---------- ---------- ---------- ----------
Total operating expenses.... 293 1,808 6,137 1,119 2,217
----------- ---------- ---------- ---------- ----------
Loss from operations................ (213) (190) (1,338) (52) (898)
Other income (expense).............. (8) (37) (76) (10) 14
----------- ---------- ---------- ---------- ----------
Net loss............................ $ (221) $ (227) $ (1,414) (62) (884)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Basic and diluted net loss per
share............................ $ (0.06) $ (0.05) $ (0.27) $ (0.01) $ (0.15)
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
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 5,714,184
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Pro forma basic and diluted net loss
per share........................ -- -- $ -- $
---------- ----------
---------- ----------
Shares of common stock used in
computing pro forma basic and
diluted net loss per share....... -- -- --
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31, AS OF MARCH 31, 1999
----------------------------- --------------------
1996 1997 1998 ACTUAL PRO FORMA
------- ------- ------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................................... $ 24 $ 85 $ 18 $2,813 $
Working capital......................................... (249) (149) (1,124) 2,699
Total assets............................................ 134 476 1,196 4,237
Notes payable (excluding current portion)............... -- -- 67 50
Class A mandatorily redeemable convertible preferred
stock................................................ -- -- -- 5,000
Stockholders' equity (deficit).......................... (191) 125 (753) (1,615)
</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.
Revenues from promotion services are recognized ratably in the period
during which we run the promotion, provided that no significant Webstakes.com
obligations remain and collection of the resulting receivable is reasonably
assured. Payments received from clients prior to our running their promotions
are recorded as deferred revenue and are recognized as revenue ratably as the
promotions are run. 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, prizes and visitors delivered to
webstakes.com. 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.
Barter expenses, principally advertisements, 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. In 1998, barter
revenues were 42% of our total revenues, and for the three months ended
March 31, 1999, 33% of total revenues. In the future, we expect barter revenue
to decrease as a percentage of total revenue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Revenues. Revenues primarily result from the sale of promotion services.
Revenues increased from approximately $1.1 million for the three months ended
March 31, 1998 to $1.3 million for the three months ended March 31, 1999. We
recorded $446,000 and $435,000 of barter revenues during these same periods,
representing approximately 42% and 33% 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 $102,000 for the three months ended March 31,
1998, or 9.6% of total revenues as compared to approximately $13,000 for the
three months ended March 31, 1999, or 1.0% 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."
Therefore, we have capitalized $161,000 of product development expenses for the
three months ended March 31, 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.
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, barter expense and other marketing
expenses. Sales and marketing expenses were approximately $691,000 for the three
months
16
<PAGE>
ended March 31, 1998, or 64.7% of total revenues, and approximately
$1.4 million for the three months ended March 31, 1999, or 103.9% 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 and an increase in barter expense. The
increase in barter revenue resulted in the related increase in barter expense.
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.
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 $326,000 for
the three months ended March 31, 1998, or 30.6% of total revenues, and $833,000
for the three months ended March 31, 1999, or 63.2% 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 in future periods.
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 $10,000 for the three months ended
March 31, 1998 and net interest income of $14,000 for the three months ended
March 31, 1999.
Deemed Dividend. In June 1999, we issued 6,666,667 shares of class B
mandatorily redeemable convertible preferred stock for an aggregate purchase
price of $40.0 million, or $6.00 per share. In accordance with Emerging Issues
Task Force No. D-60 "Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature," the $ million
difference between the purchase price of the class B mandatorily redeemable
convertible preferred stock and the fair market value on the date of issuance
will be accounted for as a deemed dividend and amortized using the effective
interest method from the date of issuance through the date the securities are
first convertible. This will occur in the quarter in which this offering is
completed.
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 nine quarters preceding March 31, 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,
1997 1997 1997 1997 1998 1998 1998 1998 1999
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 130 $314 $ 281 $893 $ 1,067 $1,196 $ 1,250 $1,286 $ 1,319
Operating expenses:
Product development............. 46 12 24 99 102 120 166 161 13
Selling and marketing........... 130 217 266 478 691 800 1,094 1,034 1,371
General and administrative...... 58 41 187 250 326 447 529 667 833
----- ---- ----- ---- ------- ------ ------- ------ -------
Total operating expenses.......... 234 270 477 827 1,119 1,367 1,789 1,862 2,217
----- ---- ----- ---- ------- ------ ------- ------ -------
Income (loss) from operations..... (104) 44 (196) 66 (52) (171) (539) (576) (898)
Other income (expense), net....... (18) (15) (12) 8 (10) (15) (25) (26) 14
----- ---- ----- ---- ------- ------ ------- ------ -------
Net income (loss)................. $(122) $ 29 $(208) $ 74 $ (62) $ (186) $ (564) $ (602) $ (884)
----- ---- ----- ---- ------- ------ ------- ------ -------
----- ---- ----- ---- ------- ------ ------- ------ -------
</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
March 31, 1999, we had $2.8 million in cash and cash equivalents.
Net cash used in investing activities was approximately $203,000 for 1997,
$301,000 for 1998 and $143,000 for the three months ended March 31, 1999. As of
March 31, 1999, our principal capital commitments consisted of obligations
outstanding under operating and capital leases. All net cash used in investing
activities was used for capital expenditures, primarily the acquisition of
equipment. We have spent approximately $713,000 on capital expenditures since
inception through March 31, 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.
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Net cash provided by financing activities was approximately $1.7 million
for 1998 and $3.7 million for the three months ended March 31, 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 in order 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 $884,000 for the
three months ended March 31, 1999. At March 31, 1999, we had an accumulated
deficit of approximately $2.7 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.
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. 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
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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 begun to assess the Year 2000 readiness of our
information technology systems, including the hardware and software that enable
us to provide and deliver webstakes.com, as well as our other systems. Our
assessment and remediation plan consists of:
o quality assurance testing of our internally developed proprietary
software;
o contacting third-party vendors and licensors of material hardware,
software and services that we use both directly and indirectly;
o contacting vendors of material non-information technology systems;
o assessment of repair or replacement requirements;
o repair or replacement;
o implementation; and
o creation of contingency plans in the event of Year 2000 failures.
We have determined that our own internal systems are Year 2000 compliant,
and Frontier GlobalCenter, Inc. has informed us that its systems are Year 2000
compliant. In addition, we have been informed by many of the vendors of the
material hardware and software components of our systems that the products we
use are currently Year 2000 compliant. We will require vendors of our other
material hardware and software components of our systems to provide assurances
of their Year 2000 compliance by June 30, 1999. We will not be able to
completely evaluate whether systems will need to be revised or replaced until
our testing is complete and our vendors respond to our inquiries.
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,
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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 are engaged in an ongoing Year 2000 assessment and we
have not developed any contingency plans. The results of our Year 2000 testing
and the responses received from third-party vendors and service providers will
be taken into account in determining the need for and nature and extent of any
contingency plans.
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.
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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 1.3 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 sponsorships and
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 strategic relationships
with Excite and NBC, which we believe will increase awareness of the
Webstakes.com brand and attract additional visitors to webstakes.com. Our
clients include CBS Sportsline, Citibank, CDW and MapQuest.
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 $79.4 billion on promotion marketing in 1997, an 11% increase
over 1996, 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 100 million worldwide in 1998 to approximately 320
million worldwide by the end of 2002, and that the value of transactions on the
Internet will increase from approximately $12 billion in 1997 to approximately
$426 billion in 2002.
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
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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 550,000 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 twelve 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 Sports & Health
o TV, Movies & Video
o Travel & Outdoors
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.
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
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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
COMPUTING PRODUCTS
$150 CDW Gift Certificate
Minolta Digital Camera
Creative PC-DVD Player
Microtek Scanner
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
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
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
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
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
GAMES & CASINO
Polaroid Instant Camera
Sony Playstation
Samsung Television
$150 Spiegel Gift Certificate
$160 Universal Amusement Gift Certificate
TV, MOVIES & VIDEO
Panasonic Television/VCR
Samsung Camcorder
Audible Mobileplayer
$150 Sony Theatres Gift Certificate
CAMPUS
$150 Eddie Bauer Gift Certificate
Minolta Digital Camera
$150 Sam Goody Gift Certificate
Sanyo Refrigerator
Aiwa Stereo System
GIFTS, FLOWERS & FOOD
Kitchen Aid Mixer
Godiva Chocolates
Omaha Steaks
Digital Espresso Machine
Harry & David Fruits
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 the question and clicking on the
prize entry button. This final mouse click takes members to the web site of the
chosen sponsoring client.
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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
8,300 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
Webstakes.com believes that it is important to build and maintain the trust
of its 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.
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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;
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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, Speedy Click and Spree.com. Tenant and Affiliate
sponsorship packages include fewer 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 550,000 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.
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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.
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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 31 employees as of May 31, 1999.
These employees are located at Webstakes.com's 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. In 1998, our five largest
clients, iVillage.com, Jam TV, PC World, SonicNet and Virtual Vegas accounted
for approximately 24% of our revenues. Our clients have also included CBS
Sportsline, CDW, Cyberian Outpost, Internet Shopping Network, iMALL, Netscape,
Spree.com, The Gist, uBid and Xoom.
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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 proprietary 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.
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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 may not be able to compete successfully in our
market" 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. 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
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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 materially adversely affect our business."
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 processing and rights to withhold permission to use their data
for direct marketing. The directive could,
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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 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 May 31, 1999, we employed 62 people including 31 in sales and
marketing, 17 in engineering and product development and 14 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.
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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 Finance and
Chief Financial Officer
Joseph Lamport...................... 42 Vice President of Partnership Services and
Product Development
Kenneth J. Grosso................... 31 Vice President of Partnership Development
Alfonzso Holmes..................... 34 Chief Technology Officer
Arnold Greenberg.................... 66 Director
Lisa Z. Crane....................... 40 Director*
Kristopher A. Wood.................. 27 Director*
........................ Director*
</TABLE>
- - ------------------
* Nominee
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
Webstakes.com's 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 Finance and Chief
Financial Officer of Webstakes.com since September 1998. From August 1989
through August 1998, 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
C.P.A. and received his B.S. degree from State University of New York at
Oneonta.
Joseph Lamport has been Vice President of Partnership Services and Product
Development since September 1998. Mr. Lamport is responsible for client service.
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 through June 1999.
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,
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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.
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.
Lisa Z. Crane has agreed to serve as a director of Webstakes.com upon
completion of this offering. Since January 1999, Ms. Crane has 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.
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 & 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 on the boards of directors 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, to designate two
directors to serve on our board. We are required to appoint these designees to
the board and to have them elected. This right to designate directors expires
three years after the closing of this offering. Mr. Wood and 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.
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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*
*
</TABLE>
- - ------------------
* Nominee
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
. 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 .
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.
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 which will
36
<PAGE>
become effective upon completion of this offering, 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 and
vest over a two year period.
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. No options have been granted
under the 1999 Equity Compensation Plan to date.
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 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
37
<PAGE>
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 which will become effective upon
completion of this offering with Messrs. Krein and Feldman pursuant to which
Mr. Krein will serve as Chairman of the Board and Chief Executive Officer and
Mr. Feldman will serve as President. In connection with these employment
agreements, Messrs. Krein and Feldman will 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 beginning
on the date of grant and vest over a two year period. 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 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 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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides certain information regarding the beneficial
ownership of our common stock as of June , 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 10010. 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............................................... 1,470,000 13.4% %
Daniel J. Feldman............................................. 1,470,000 13.4
At Home Corporation(1)........................................ 1,166,667 10.7
XL Ventures, LLC(2)........................................... 1,166,667 10.7
The Travelers Insurance Company(3)............................ 833,333 7.6
Invesco Private Capital Inc.(4)(5)............................ 691,667 6.3
Joseph Lamport................................................ 588,000 5.4
Arnold Greenberg(6)........................................... 166,667 1.5
Lisa Z. Crane(7)**............................................ 166,667 1.5
Kristopher Wood(6)(8)**....................................... 1,166,667 10.7
(6)(9)**..........................................
All executive officers and directors as a group (4 persons).. 3,694,667 34.8
</TABLE>
- - ------------------
* Less than 1% of total.
** Nominee
(1) The address of At Home Corporation is 425 Broadway Street, Redwood, CA
94063.
(2) The address of XL Ventures, LLC is 1105 North Market Street, Suite 1300,
Wilmington, DE 19801.
(3) The address of The Travelers Insurance Company is 388 Greenwich Street,
36th Floor, New York, NY 10013.
(Footnotes continued on next page)
39
<PAGE>
(Footnotes continued from previous page)
(4) The address of Invesco is 1166 Avenue of the Americas, New York, NY 10036.
(5) 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.
(6) Does not include 16,000 shares issuable upon the exercise of stock options
which will be granted upon completion of this offering.
(7) Includes 166,667 shares held by National Broadcasting Company, Inc.
Ms. Crane is an employee of National Broadcasting Company, Inc. Does not
include 16,000 shares issuable upon the exercise of stock options
transferred by Ms. Crane pursuant to a contractual obligation to National
Broadcasting Company, Inc. Ms. Crane disclaims beneficial ownership of all
of these shares.
(8) Includes 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.
(9) [New Director]
40
<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 in 10 years.
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"),
41
<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 Amended and Restated Certificate of Incorporation 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.
42
<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>
After 180 days from the date of this prospectus (subject to
volume limitations)
Upon the filing of a registration statement to register for
resale shares of common stock issuable upon the exercise
of options granted under our stock option plans.
At various times after 180 days from the date of this
prospectus.
</TABLE>
43
<PAGE>
LOCK-UP AGREEMENTS
Our officers and directors, holders of shares of our common
stock and holders of warrants to purchase 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.
44
<PAGE>
UNDERWRITING
The underwriters of this offering named below, for whom Bear, Stearns & Co.
Inc., ING Baring Furman Selz 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 Baring Furman Selz 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 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., which may be
waived, 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.
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<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 will apply 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 prospectus in electronic format is being made available on an Internet
web site maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in this offering have agreed to make a prospectus in electronic
format available on web sites maintained by each of these dealers.
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.
46
<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 80 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 O'Sullivan Graev & Karabell, 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 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.
47
<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 three months ended
March 31, 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 three months ended March 31, 1998 (unaudited) and
March 31, 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 three months ended March 31, 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 three months ended March 31, 1998 (unaudited) and March
31, 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 PRO FORMA
------------------------ MARCH 31, AS OF MARCH 31,
1997 1998 1999 1999
--------- ----------- ------------ ---------------
(UNAUDITED) (UNAUDITED)
(SEE NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 85,365 $ 17,573 $ 2,812,554
Accounts receivable, less allowance of $12,700,
$125,000 and $175,694................................ 113,336 615,230 579,287
Prepaid expenses and other current assets.............. 2,751 125,174 109,326
--------- ----------- ------------
Total current assets................................. 201,452 757,977 3,501,167
--------- ----------- ------------
Fixed assets, net........................................ 232,858 437,759 567,369
Capitalized software development costs, net.............. -- -- 147,958
Other assets............................................. 41,708 -- 20,043
--------- ----------- ------------
Total assets......................................... $ 476,018 $ 1,195,736 $ 4,236,537
--------- ----------- ------------
--------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 155,257 $ 221,745 $ 480,583
Accrued liabilities.................................... 22,081 169,136 91,537
Deferred revenues...................................... 23,333 117,297 105,260
Capital lease obligations.............................. -- 31,764 57,710
Notes payable-related party, current portion........... 150,000 1,342,222 66,667
--------- ----------- ------------
Total current liabilities............................ 350,671 1,882,164 801,757
--------- ----------- ------------
Notes payable, net of current portion.................. -- 66,667 50,000
--------- ----------- ------------
Total liabilities.................................... 350,671 1,948,831 851,757
--------- ----------- ------------
Class A mandatorily redeemable convertible preferred
stock--par value $100, 50,000 shares authorized and no
shares issued and outstanding at December 31, 1997,
1998, 50,000 shares issued and outstanding at
March 31, 1999 (unaudited)............................. -- -- 5,000,000
Stockholders' equity (deficit):
Common stock--par value $.01, 10,000,000 shares
authorized, 4,999,176, 5,714,184 and 5,714,184 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999 (unaudited), respectively............. 49,992 57,142 57,142
Additional paid-in capital............................. 526,914 1,140,624 1,167,321
Accumulated deficit.................................... (447,934) (1,861,977) (2,746,323)
Deferred compensation.................................. (3,625) (88,884) (93,360)
--------- ----------- ------------
Total stockholders' equity (deficit)................. 125,347 (753,095) (1,615,220)
--------- ----------- ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 476,018 $ 1,195,736 $ 4,236,537
--------- ----------- ------------
--------- ----------- ------------
</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 THREE MONTHS ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31,
--------------- -------------------------- --------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 79,584 $1,618,277 $ 4,798,893 $ 1,066,610 $ 1,318,628
Operating expenses:
Product development................... 59,073 181,260 548,818 101,875 13,451
Selling and marketing................. 124,754 1,090,721 3,618,557 690,309 1,370,489
General and administrative............ 108,665 535,963 1,969,214 326,111 833,116
----------- ---------- ------------ ----------- -----------
Total operating expenses........... 292,492 1,807,944 6,136,589 1,118,295 2,217,056
----------- ---------- ------------ ----------- -----------
Loss from operations.................. (212,908) (189,667) (1,337,696) (51,685) (898,428)
Interest income (expense), net.......... (8,187) (37,172) (76,347) (10,142) 14,082
----------- ---------- ------------ ----------- -----------
Net loss................................ $ (221,095) $ (226,839) $ (1,414,043) $ (61,827) $ (884,346)
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Basic and diluted net loss per share.... $ (0.06) $ (0.05) $ (0.27) $ (0.01) $ (0.15)
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
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 5,714,184
----------- ---------- ------------ ----------- -----------
----------- ---------- ------------ ----------- -----------
Pro forma basic and diluted net loss per
share (see Note 2)....................
Shares of common stock used in computing
pro forma basic and diluted net loss
per share (see Note 2)................
</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)
--------- ------- ----------- -------- ----------- -----------
--------- ------- ----------- -------- ----------- -----------
Adjustment of deferred compensation to
non-employees to current fair value
(unaudited)................................. (15,587) 15,587 --
Stock options to non-employees (unaudited).... 42,284 (42,284) --
Amortization of deferred compensation
(unaudited)................................. 22,221 22,221
Net and comprehensive loss (unaudited)...... (884,346) (884,346)
--------- ------- ----------- -------- ----------- -----------
Balance March 31, 1999 (unaudited).............. 5,714,184 $57,142 $ 1,167,321 $(93,360) $(2,746,323) $(1,615,220)
--------- ------- ----------- -------- ----------- -----------
--------- ------- ----------- -------- ----------- -----------
</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 THREE MONTHS ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -------------------------
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) $ (61,827) $ (884,346)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 7,471 37,661 147,515 25,684 74,076
Bad debt expense............................. 2,499 11,829 208,604 18,087 50,694
Compensation expense......................... -- -- 3,625 906 22,221
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) (178,823) (14,751)
(Increase) decrease in prepaid expenses and
other current assets...................... -- (2,751) (122,423) (75,122) 15,848
Increase in capitalized software development
costs..................................... -- -- -- -- (161,409)
(Increase) decrease in other assets.......... -- (41,708) 41,708 -- (20,043)
Increase (decrease) in accounts payable...... 48,161 107,096 66,488 (36,332) 258,838
Increase (decrease) in accrued liabilities... 16,934 5,147 147,055 53,112 (77,599)
Increase (decrease) in deferred revenue...... -- 23,333 93,964 99,466 (12,037)
----------- ---------- ------------ --------- -----------
NET CASH USED IN OPERATING ACTIVITIES.............. (201,510) (125,160) (1,513,179) (154,849) (713,508)
----------- ---------- ------------ --------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of fixed assets......................... (64,934) (203,060) (301,444) (64,230) (143,480)
----------- ---------- ------------ --------- -----------
NET CASH USED IN INVESTING ACTIVITY................ (64,934) (203,060) (301,444) (64,230) (143,480)
----------- ---------- ------------ --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... 260,000 390,000 1,820,000 283,333 120,000
Principal payments on notes payable -- -- (61,111) -- (22,222)
Proceeds from issuance of common stock........... 30,029 -- -- -- --
Principal payments on capital lease
obligations.................................... -- -- (12,058) -- (20,809)
Proceeds from issuance of class A mandatorily
redeemable convertible preferred stock......... -- -- -- -- 3,575,000
----------- ---------- ------------ --------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 290,029 390,000 1,746,831 283,333 3,651,969
----------- ---------- ------------ --------- -----------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD..... 23,585 61,780 (67,792) 64,254 2,794,981
CASH, BEGINNING OF PERIOD.......................... -- 23,585 85,365 85,365 17,573
----------- ---------- ------------ --------- -----------
CASH, END OF PERIOD................................ $ 23,585 $ 85,365 $ 17,573 $ 149,619 $ 2,812,554
----------- ---------- ------------ --------- -----------
----------- ---------- ------------ --------- -----------
CASH PAID DURING THE PERIOD FOR INTEREST........... $ 18,530 $ 5,079 $ 4,287
------------ --------- -----------
------------ --------- -----------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, 1998 and the three months ended March 31, 1999 (unaudited),
certain convertible notes and interest were converted into common stock
and preferred stock (see Note 8).
During 1998 and the three months ended March 31, 1999, the Company entered
into capital leases for computer equipment with a cost of $43,822 and
$46,755 (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 March 31, 1999 and for the three months
ended March 31, 1999 and 1998 are unaudited. 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 three months ended March 31, 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. 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%, 78% and 98% of
total revenues for the Inception Period and the years ended December 31, 1997
and 1998,
F-7
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
respectively. Promotion services revenues were approximately 81% (unaudited) and
97% (unaudited) of total revenues for the three months ended March 31, 1998 and
1999, respectively.
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 33% (unaudited) of total revenues for the three
months ended March 31, 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.
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 three months ended March 31, 1999,
revenues from the Company's five largest customers accounted for 25% (unaudited)
of total revenues. At March 31, 1999 two customers individually accounted for
11% (unaudited) and 12% (unaudited) of the net accounts receivable balance.
FIXED ASSETS
Depreciation of equipment, furniture and fixtures and purchased computer
software 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.
F-8
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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 and allowance for doubtful accounts.
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 March 31, 1999, all
66,228 and 114,009 of the options outstanding at December 31, 1997 and 1998,
respectively, and 66,228 (unaudited) and 244,213 (unaudited) of the options
outstanding at March 31, 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.
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet as of March 31, 1999 gives effect to:
(a) the repurchase in June 1999 of the 50,000 shares of class A and
1,714,608 shares of common stock and the issuance of 6,666,667 shares
of class B and assumed conversion upon the closing of the IPO into
6,666,667 shares of common stock;
(b) the issuance of 64,000 stock options to non-employee directors, and
(c) the issuance of warrants to purchase 221,683 shares of common stock in
exchange for financial advisory services from non-employee consultants.
The pro forma 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: (a) the issuance, in June 1999, and conversion, upon the
closing of the IPO of all 6,666,667 outstanding shares of class B to common
stock and the repurchase, in June 1999 of 50,000 shares of class A and 1,714,608
shares of common stock, (b) the issuance of 64,000 stock options to non-employee
directors, and (c) issuance in March and June 1999 of warrants to purchase
221,683 shares of common stock in exchange for financial advisory services from
non-employee consultants.
F-9
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 three months ended
March 31, 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.
CAPITALIZED SOFTWARE
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 associated with research and development are
expensed as incurred. Software development costs incurred subsequent to
establishing technological feasibility are capitalized. Technological
feasibility is established upon the completion of a detailed program design (in
the absence of any high risk issues or uncertainties). Amortization commences
upon beginning operations and utilization of the software title and is
recognized as a component of cost of sales by the straight-line method over the
shorter of three years or the remaining estimated useful life. It is reasonably
possible that the estimate of the remaining estimated economic life of the
software will be reduced significantly in the near term and that the
amortization of the capitalized software costs may be accelerated materially in
the near term. The Company evaluates the recoverability of capitalized software
costs on an on-going basis and immediately writes off any amounts determined to
be unrecoverable. Adoption resulted in capitalization of certain direct costs
related to enhancements of the Company's proprietary software of $161,409
(unaudited). During the first quarter of 1999, amortization expense was $13,451
(unaudited).
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.
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.
F-10
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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, MARCH 31,
--------------------- -----------
1997 1998 1999
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and office equipment........................... $266,264 $ 542,144 $ 671,591
Furniture and fixtures.................................. 11,275 34,307 48,340
Leasehold improvements.................................. 451 10,133 10,133
Capital leases.......................................... -- 43,822 90,577
-------- --------- ---------
277,990 630,406 820,641
Less accumulated depreciation and amortization........ (45,132) (192,647) (253,272)
-------- --------- ---------
$232,858 $ 437,759 $ 567,369
-------- --------- ---------
-------- --------- ---------
</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 $25,684 (unaudited) and $60,625 (unaudited) for
the three months ended March 31, 1998 and 1999, respectively.
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.
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.
F-11
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN:--(CONTINUED)
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock--Issued to Employees" 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 Board of Directors of 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 over the vesting period. Final
measurement will occur on the vesting date.
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)...................................................... 130,704 $ 15.12
Outstanding, March 31, 1999 (unaudited).................................. 244,713 $ 9.00
</TABLE>
F-12
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN:--(CONTINUED)
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% on
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 $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.
F-13
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. CONVERTIBLE NOTES AND EQUIPMENT LOAN--RELATED PARTY--(CONTINUED)
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.
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.
F-14
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 services to be provided plus
three payments of $100,000 due on June 30, 1999, 2000 and 2001 in exchange for
services from non-employee consultants. In 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 recorded as compensation expense over the
vesting period. Final measurement will occur on the vesting date. Final vesting
will occur upon completion of the Company's IPO.
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 May 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 the SOC, 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.
F-15
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
The exercise price of all stock options granted under the 1999 Plan is
determined by the SOC 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."
In accordance with EITF D-60 "Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable Conversion Feature,"
the difference between the issuance price of the class B and the intrinsic value
of the common stock on the date of issuance will be accounted for as a preferred
stockholders' deemed dividend and amortized using the effective interest method
from the date of issuance to the date the securities are first convertible,
which is upon completion of the IPO.
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 Webstakes.com. See "Use of Proceeds."
F-16
<PAGE>
WEBSTAKES.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED):--(CONTINUED)
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. 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 advertising 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. In accordance with EITF 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 whichever 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 over the vesting
period. Final measurement will occur on the vesting date.
F-17
<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
Business............................................... 22
Management............................................. 34
Principal Stockholders................................. 39
Description of Capital Stock........................... 41
Shares Eligible for Future Sale........................ 43
Underwriting........................................... 45
Legal Matters.......................................... 47
Experts................................................ 47
Where You Can Get More Information..................... 47
Index to Financial Statements.......................... F-1
</TABLE>
DEALER PROSPECTUS DELIVERY OBLIGATION
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.
SHARES
WEBSTAKES.COM, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
ING BARING FURMAN SELZ LLC
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
, 1999
------------------------------------------------------------
------------------------------------------------------------
<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 by-laws 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 by-laws 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.
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.
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. 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 of the above-described sales were exempt from registration
(i) pursuant to Section 4(2) of the Securities Act as transactions not involving
a public offering or (ii) Rule 701 promulgated under the Securities Act. No
underwriters were involved in connection with the sales of securities referred
to in this Item 15.
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 20, 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
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.3 -- Master Lease Agreement No. L6731 with Leasing Technologies International, Inc. dated November 19,
1998.
10.4* -- Services Agreement between the Registrant and MatchLogic, Inc. dated June , 1999
10.5* -- Sponsorship Agreement between the Registrant and Excite, Inc. dated June , 1999
10.6* -- Letter Agreement between Registrant and Steven H. Krein, dated June , 1999
10.7* -- Letter Agreement between Registrant and Daniel Feldman, dated June , 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)
25 -- Powers of Attorney (See Signature Page)
27.1 -- Financial data schedule
99.1 -- Consent of Nominee Director of Lisa Crane
99.2 -- Consent of Nominee Director of Kristopher Wood
</TABLE>
- - ------------------
* To be filed by amendment.
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 June 14, 1999.
WEBSTAKES.COM, INC.
By: ________/s/ STEVEN H. KREIN_______
Steven H. Krein
Chief Executive Officer
We, the undersigned directors and/or officers of Webstakes.com, Inc. (the
"Registrant"), hereby severally constitute and appoint Steven H. Krein and
Daniel J. Feldman, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to each of them to sign for us, in our names and in the capacities indicated
below, the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, and any and all amendments to said Registration Statement
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as amended,
of equity securities of the Registrant, and to file or cause to be filed the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as each of them might or could do in person, and hereby
ratifying and confirming all that said attorneys, and each of them, or their
substitute or substitutes, shall do or cause to be done by virtue of this Power
of Attorney. This power of attorney may be executed in counterparts.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------------ ------------------------------------------------- --------------
<C> <S> <C>
/s/ STEVEN H. KREIN Chief Executive Officer and Director June 14, 1999
- - ------------------------------------------ (Principal Executive Officer)
Steven H. Krein
/s/ DANIEL J. FELDMAN President and Director June 14, 1999
- - ------------------------------------------
Daniel J. Feldman
/s/ CHRISTOPHER F. BRAGAS Vice President of Finance and June 14, 1999
- - ------------------------------------------ Chief Financial Officer;
Christopher F. Bragas (Principal Accounting Officer)
/s/ ARNOLD GREENBERG Director June 14, 1999
- - ------------------------------------------
Arnold Greenberg
</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 three months ended March 31, 1999:
Provision for doubtful accounts (unaudited)....... $125,000 $ 50,694 $ -- $175,694
-------- -------- -------- --------
-------- -------- -------- --------
</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 20, 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* -- Services Agreement between the Registrant and MatchLogic, Inc. dated June , 1999
10.5* -- Sponsorship Agreement between the Registrant and Excite, Inc. dated June , 1999
10.6* -- Letter Agreement between Registrant and Steven H. Krein, dated June , 1999
10.7* -- Letter Agreement between Registrant and Daniel Feldman, dated June , 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)
25 -- Powers of Attorney (See Signature Page)
27.1 -- Financial data schedule
99.1 -- Consent of Nominee Director of Lisa Crane
99.2 -- Consent of Nominee Director of Kristopher Wood
</TABLE>
- - ------------------
* To be filed by amendment.
<PAGE>
BY-LAWS
of
NETSTAKES, INC.
(a Delaware corporation)
(the "Corporation")
Amended and Restated as of June 2, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
By-Laws
Page
----
<S> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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
</TABLE>
-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.
In the absence of a specification in the certificate of
incorporation or by-laws of the Corporation as to the number of shares
and/or the amount of other securities having voting power the holders of
which shall be present or represented by proxy at any meeting in order
to constitute a quorum for, and the votes that shall be necessary for,
the transaction of any business,
(1) A majority of the shares entitled to vote,
present in person or represented by proxy, shall constitute a quorum at
a meeting of stockholders;
(2) In all matters other than the election of
directors, the affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to vote on
the subject matter shall be the act of the stockholders;
(3) Directors shall be elected by a plurality of
votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of directors;
(4) Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and the
affirmative vote of the majority of shares of such class or classes
present in person or represented by proxy at the meeting, shall be the
act of such class.
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.
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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.
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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.
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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
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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
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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
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(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.
<PAGE>
NETSTAKES, INC.
STOCK OPTION PLAN
Scope and Purpose of Plan
The purpose of the NetStakes, Inc. Stock Option Plan (defined below) is
to provide an incentive for key employees of the Company or its Affiliates
(defined below) to remain in the service of the Company or its Affiliates, to
extend to them the opportunity to acquire a proprietary interest in the Company
so that they will apply their best efforts for the benefit of the Company, and
to aid the Company in attracting and retaining key personnel.
PARAGRAPH 1. Definitions.
1.1. "Act" shall mean the Securities Exchange Act of 1934, as amended,
or any similar or superseding statute on statutes.
1.2. "Affiliates" shall mean (a) any corporation, other than the
Company, in an unbroken chain of corporations ending with the Company if each of
the corporations, other than the Company, owns stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock in one
of the other corporations in such chain, and (b) any corporation, other than the
Company, in an unbroken chain of corporations beginning with the Company, if
each of the corporations, other than the last corporation in the unbroken
chain, owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
1.3. "Agreement" shall mean the written agreement between the Company
and an Optionee evidencing the Option granted by the Company.
1.4. "Board of Directors" shall mean the board of directors of the
Company.
1.5. "Change in Control" shall mean:
(a) a dissolution or liquidation of the Company;
(b) a merger or consolidation (other than a merger effecting a
re-incorporation of the Company in another state or any other merger or
a consolidation in which the shareholders of the surviving corporation
and their proportionate interests therein immediately after the merger
or consolidation are substantially identical to the shareholders of
the Company and their proportionate interests therein immediately prior
to the merger or consolidation) in which the Company is not the
surviving corporation (or survives only as a
<PAGE>
subsidiary of another corporation in a transaction in which the
shareholders of the parent of the Company and their proportionate
interests therein immediately after the transaction are not
substantially identical to the shareholders of the Company and their
proportionate interests therein immediately prior to the transaction;
provided, however, that the Board of Directors may at any time prior to
such a merger or consolidation provide by resolution that the foregoing
provisions of this parenthetical shall not apply if a majority of the
Board of Directors of such parent immediately after the transaction
consists of individuals who constituted a majority of the Board of
Directors immediately prior to the transaction); or
(c) a transaction in which any person (other than a
shareholder of the Company on the date of the Optionee's Agreement)
becomes the owner of fifty percent (50%) or more of the total combined
voting power of all classes of stock of the Company (provided, however,
that the Board of Directors may at any time prior to such transaction
provide by resolution that this Subparagraph shall not apply if such
acquiring person is a corporation and a majority of the Board of
Directors of the acquiring corporation immediately after the
transaction consists of individuals who constituted a majority of the
Board of Directors immediately prior to the acquisition of such fifty
percent (50%) or more total combined voting power).
1.6. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.7. "Committee" shall mean the committee appointed pursuant to
Paragraph 3 of the Plan by the Board of Directors to administer this Plan.
1.8. "Company" shall mean NetStakes, Inc., a Delaware corporation.
1.9. "Disability" shall mean a total and permanent disability as
defined in the Company's long term disability plan, or if the Company has no
long term disability plan in effect at the time of the Optionee's disability,
shall have the meaning provided in Code section 22(e)(3). Notwithstanding the
preceding sentence, for any Incentive Option, "Disability" shall have the
meaning provided in Code section 22(e)(3).
1.10. "Eligible Individuals" shall mean the employees of the Company or
of any of its Affiliates. In addition, but with respect only to grants of
Nonstatutory Options, the term "Eligible Employees" shall include non-employee
Directors and Consultants. For purposes of this Plan: the term "employee" shall
mean an individual employed by the Company or its Affiliates whose income from
those entities is subject to Federal Insurance Contributions Act (i.e., "FICA")
withholding; the term "Directors" shall mean any member of the Board of
Directors of the Company or any of its Affiliates; and the term "Consultants"
shall mean individuals engaged to provide services to the Company or any of its
affiliates as independent contractors whether or not such engagement is pursuant
to a written contract. Notwithstanding the foregoing provisions of this
Paragraph, to ensure that the requirements of Paragraph 3.1 are satisfied, the
Committee may from time to time specify individuals who shall not be eligible
for the grant of Options or options or stock appreciation
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rights or allocations of stock under any plan of the Company or its Affiliates
(as such terms are used in subsection (d)(3) of Rule 16b-3 promulgated under the
Act); provided, however, that the Committee may at any time determine that any
individual who has been so excluded from eligibility shall become eligible for
grants of Options and grants of such options or stock appreciation rights or
allocations of stock under any plans of the Company and its Affiliates.
1.11. "Exercise Price" shall mean the price per share of Stock as
established pursuant to Paragraph 6.2 of the Plan.
1.12. "Fair Market Value" of a share of Stock on a particular date
shall be the closing price for such Stock on such date (or, if the date is not a
business day, then on the next preceding business day), which shall be: (i) if
the Stock is listed or admitted for trading on any United States national
securities exchange, the last reported sale price for the Stock on such exchange
as reported in any newspaper of general circulation; (ii) if the Stock is quoted
on NASDAQ or any similar system of automated dissemination of quotations of
securities prices in common use, the mean between the closing high bid and low
asked quotations for such day of the Stock on such system; or (iii) if neither
clause (i) nor (ii) is applicable, a value determined by any fair and reasonable
means prescribed by the Committee.
1.13. "Incentive Options" shall mean stock options that are intended to
satisfy the requirements of Code section 422.
1.14. "Nonstatutory Options" shall mean stock options that do not
satisfy the requirements of Code section 422.
1.15. "Optionee" shall mean an Eligible Individual to whom an Option
has been granted.
1.16. "Options" shall mean either Incentive Options or Nonstatutory
Options, or both.
1.17. "Plan" shall mean NetStakes, Inc. Stock Option Plan.
1.18. "Retirement" shall mean an Optionee's termination of employment
with the Company on or after attainment of age 65.
1.19. "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar or superseding statute or statutes.
1.20. "Stock" shall mean the Company's authorized common stock, $0.01
par value, together with any other securities that may be received upon the
exercise of Options granted under the Plan.
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PARAGRAPH 2. Stock and Maximum Number of Shares Subject to the Plan.
2.1. Description of Stock and Maximum Shares Allocated. The Stock which
may be issued upon the exercise of an Option may either be authorized but
unissued or reacquired shares of Stock, as the Board of Directors may, in its
sole and absolute discretion, from time to time determine.
Subject to the adjustments provided in Paragraph 6.6, the aggregate
number of shares of Stock to be issued pursuant to the exercise of all Options
granted under the Plan may equal but shall not exceed 250,000 shares.
2.2. Restoration of Unpurchased Shares. If an Option granted under the
Plan expires or terminates for any reason during the term of this Plan and prior
to the exercise of the Option in full, the shares of Stock subject to, but not
issued under, such Option shall again be available for Options granted under the
Plan after such shares become available again.
PARAGRAPH 3. Administration of the Plan.
3.1. Committee. The Plan shall be administered by the Committee. The
Committee shall consist of not less than three (3) individuals. In the event
that the Stock is registered under section 12 of the Act, all members of the
Committee shall be "disinterested persons," as defined in Rule 16b-3(d)(3)
promulgated under the Act, and in such event members of the Committee shall not
have received Options or stock options, stock appreciation rights, or an
allocation of stock under any plan of the Company or its affiliates (as such
terms are used in subsection (d)(3) of Rule 16b-3 promulgated under the Act)
while they are serving as members of the Committee and must not have received
Options or other equity securities under any plan of the Company or its
Affiliates within one (1) year prior to their appointment to the Committee.
3.2. Duration, Removal, Etc. The members of the Committee shall serve
at the pleasure of the Board of Directors, which shall have the power, at any
time and from time to time, to remove members from the Committee or to add
members to the Committee. Vacancies on the Committee, however caused, shall be
filled by action of the Board of Directors.
3.3. Meetings and Actions of Committee. The Committee shall elect one
of its members as its Chairman and shall hold its meetings at such times and
places as it may determine. All decisions and determinations of the Committee
shall be made by the majority vote or decision of all of its members present at
a meeting; provided, however, that any decision or determination reduced to
writing and signed by all of the members of the Committee shall be as fully
effective as if it had been made at a meeting duly called and held. The
Committee may make any rules and
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regulations for the conduct of its business that are not inconsistent with the
provisions of this Plan and with the bylaws of the Company as it may deem
advisable.
3.4. Committee's Powers. Subject to the express provisions of this
Plan, the Committee shall have the authority, in its sole and absolute
discretion, (a) to adopt, amend, and rescind administrative and interpretive
rules and regulations relating to the Plan; (b) to determine the terms and
provisions of the respective Agreements (which need not be identical), including
provisions defining or otherwise relating to (i) subject to Paragraph 6, the
term and the period or periods and extent of exercisability of the Options, (ii)
the extent to which the transferability of shares of Stock issued upon exercise
of Options is restricted, (iii) the effect of termination of employment upon the
exercisability of the Options, and (iv) the effect of approved leaves of absence
(consistent with any applicable regulations of the Internal Revenue Service);
(c) to accelerate the time of exercisability of any Option that has been
granted; (d) to construe the terms of any Agreement and the Plan; and (e) to
make all other determinations and perform all other acts necessary or advisable
for administering the Plan, including the delegation of such ministerial acts
and responsibilities as the Committee deems appropriate. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in the
Plan or in any Agreement in the manner and to the extent it shall deem expedient
to carry it into effect, and it shall be the sole and final judge of such
expediency. The Committee shall have full discretion to make all determinations
on the matters referred to in this Paragraph and such determinations shall be
final, binding, and conclusive.
PARAGRAPH 4. Eligibility and Participation.
4.1. Eligible Individuals. Options may be granted under the Plan only
to persons who are Eligible Individuals at the time of grant. Notwithstanding
any provision contained in the Plan to the contrary, a person shall not be
eligible to receive an Incentive Option hereunder if he, at the time such Option
is granted, would own (within the meaning of Code sections 422 and 424) Stock
possessing more than ten percent (10%) of the total combined voting power or
value of all classes of Stock of the Company or of an Affiliate, unless at the
time such Incentive Option is granted the Exercise Price per share of Stock is
at least one hundred ten percent (110%) of the Fair Market Value of each share
of Stock to which the Incentive Option relates and the Incentive Option is not
exercisable after the expiration of five (5) years from the date it is granted.
4.2. No Right to Option. The adoption of the Plan shall not be deemed
to give any person a right to be granted an Option.
PARAGRAPH 5. Grant of Options and Certain Terms of the Agreements.
5.1. Award Criteria. Subject to the express provisions of this
Paragraph, the Committee shall, in its sole discretion, determine which Eligible
Individuals shall be granted Options under the Plan from time to time. In making
grants, the Committee shall take into consideration the
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level of responsibility within the organization and the contribution the
potential Optionee has made or may make to the success of the Company or its
Affiliates and such other considerations as the Committee may from time to time
specify. The Committee shall also determine the number of shares subject to each
of such Options and shall authorize and cause the Company to grant Options in
accordance with such determinations.
5.2. Grant. The date on which the Committee completes all action
constituting an offer of an Option to an individual, including the specification
of the Exercise Price and the number of shares of Stock to be subject to the
Option, shall be the date on which the Option covered by an Agreement is
granted, even though certain terms of the Agreement may not be at such time
determined and even though the Agreement may not be executed until a later time.
For purposes of the preceding sentence, an offer shall be deemed made if the
Committee has completed all such action except communication of the grant of the
Option to the potential Optionee. In no event, however, shall an Optionee gain
any rights in addition to those specified by the Committee in its grant,
regardless of the time that may pass between the grant of the Option and the
actual execution of the Agreement by the Company and the Optionee.
Each Option granted under the Plan shall be evidenced by an Agreement,
executed by the Company and the Eligible Individual to whom the Option is
granted, incorporating such terms as the Committee shall deem necessary or
desirable. More than one Option may be granted to the same Eligible Individual
and be outstanding concurrently. In the event an Eligible Individual is granted
both one or more Incentive Options and one or more Nonstatutory Options, such
grants shall be evidenced by separate Agreements, one for each of the Incentive
Option grants and one for each of the Nonstatutory Option grants.
5.3. Transferability Restrictions. Each Agreement may contain or
otherwise provide for conditions giving rise to the forfeiture of the Stock
acquired pursuant to an Option granted under the Plan and for such restrictions
on the transferability of the shares of Stock acquired pursuant to an Option as
the Committee, in its sole and absolute discretion, shall deem proper or
advisable. Such conditions giving rise to forfeiture may include, but need not
be limited to, the requirement that the Optionee render substantial services to
the Company or its Affiliates for a specified period of time. Such restrictions
on transferability may include, but need not be limited to, options and rights
of first refusal in favor of the Company and shareholders of the Company other
than a Optionee who is a party to the particular Agreement or a subsequent
person who is bound by such Agreement.
PARAGRAPH 6. Terms and Conditions of Options
All Options granted under the Plan shall comply with, be deemed to
include, and shall be subject to the following terms and conditions:
6.1. Number of Shares. Each Agreement shall state the number of shares
of Stock to which it relates.
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6.2. Exercise Price. Each Agreement shall state the Exercise Price per
share of Stock. Except as provided in Paragraph 4.1, the Exercise Price per
share of Stock subject to any Incentive Option under this Plan shall not be less
than the greater of (a) the par value per share of Stock or (b) one hundred
percent (100%) of the Fair Market Value per share of Stock on the date of the
grant of the Incentive Option. The Exercise Price per share of Stock subject to
a Nonstatutory Option shall be determined by the Committee upon the granting of
the Nonstatutory Option.
6.3. Medium and Time of Payment, Method of Exercise, and Withholding
Taxes. The Exercise Price of an Option shall be payable upon the exercise of the
Option:
(a) in cash;
(b) by certified or cashiers check payable to the order of the
Company;
(c) with the consent of the Committee, with shares of Stock
owned by the Optionee, including a multiple series of exchanges of such
Stock; or
(d) with the consent of the Committee, by a combination of
cash and such shares.
Exercise of an Option shall not be effective until the Company has received
written notice of exercise. Such notice must specify the number of whole shares
to be purchased and be accompanied by payment in full of the aggregate Exercise
Price of the number of shares purchased in cash (as set forth above) or by
delivery of shares of Stock in negotiable form with a value at least equal to
the Exercise Price, which shares of Stock shall be valued based on the Fair
Market Value of the Stock (or a combination of cash and Stock). The Company
shall not in any case be required to sell, issue, or deliver a fractional share
of Stock with respect to any Option.
The Committee may, in its discretion, require an Optionee to pay to
the Company at the time of exercise of an Option (or portion of an Option) the
amount that the Company deems necessary to satisfy its obligation to withhold
Federal, state, or local income or other taxes incurred by reason of the
exercise. If the exercise of an Option does not give rise to an obligation to
withhold Federal income or other taxes on the date of exercise, the Company may,
in its discretion, require an Optionee to place shares of Stock purchased under
the Option in escrow for the benefit of the Company until such time as Federal
income or other tax withholding is no longer required with respect to such
shares or until such withholding is required on amounts included in the gross
income of the Optionee as a result of the exercise of an Option or the
disposition of shares of Stock acquired pursuant to the exercise. At such later
time, the Company, in its discretion, may require an Optionee to pay to the
Company the amount that the Company deems necessary to satisfy its obligation to
withhold Federal, state, or local income or other taxes incurred by reason of
the exercise of the Option or the disposition of shares of Stock. Upon receipt
of such payment by the Company, such shares of Stock shall be released from
escrow to the Optionee.
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6.4. Term, Time of Exercise, and Transferability of Options. In
addition to such other terms and conditions as may be included in a particular
Agreement granting an Option, an Option shall be exercisable during an
Optionee's lifetime only by the Optionee or by the Optionee's guardian or legal
representative.
The Committee shall in any Agreement prescribe a vesting schedule that
governs when the Option becomes fully vested and exercisable. Unless the
Agreement prescribes a different schedule, the following schedule shall apply:
An Optionee shall be entitled to exercise:
(1) 25% of the Stock subject to the Option on or after the
date which is one (1) calendar year from the date the
Option is granted,
(2) 50% of the Stock subject to the Option on or after the
date which is two (2) calendar years from the date the
Option is granted;
(2) 75% of the Stock subject to the Option on or after the
date which is three (3) calendar years from the date the
Option is granted; and
(3) 100% of the Stock subject to the Option on or after the
date which is four (4) calendar years from the date the
Option is granted.
Notwithstanding anything in this Paragraph or the directly preceding sentence to
the contrary, all Options shall become exercisable immediately with respect to
any Optionee who is an Eligible Individual on the date of a Change in Control,
and the Committee shall, in its sole discretion, as of the effective date of
such transaction, either (1) change the number and kind of shares of Stock
(including substitution of shares of another corporation) and Exercise Price in
the manner it deems appropriate; provided, however, that in no event may any
change be made under this Paragraph to an Incentive Option which would either
constitute a "modification" within the meaning of Code section 424(h)(3) or a
violation of the Code section 424(a) Restrictions; or (2) purchase the Options
from each Optionee by tendering cash equal to the Fair Market Value of the Stock
represented by the Options less the Exercise Price of the Option specified in
each Agreement, without regard to the determination as to the periods and
installments of exercisability made pursuant to an Optionee's Agreement, if
(and only if) such Options have not at that time expired or been terminated.
An Option shall not be transferrable other than by will or the laws of
descent and distribution.
The provisions of the remainder of this Paragraph shall apply to the
extent an Optionee's Agreement does not expressly provide otherwise. If an
Optionee ceases to be an Eligible Individual, the Option shall terminate ninety
(90) days after the date such Optionee ceases to be an Eligible Individual.
Notwithstanding the foregoing, if an Optionee ceases to be an Eligible
Individual by reason of Disability or Retirement, the Optionee shall have the
right for twelve (12) months after the
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date of Disability or Retirement to exercise an Option, to the extent such
Option is otherwise exercisable on such date. If an Optionee ceases to be an
Eligible Individual by reason of death, Optionee's designated beneficiary shall
have the right for twelve (12) months after the date of death to exercise the
Option, to the extent such Option is otherwise exercisable on such date. At the
end of such twelve (12) month or ninety (90) day period, as applicable, the
Option shall terminate and cease to be exercisable. Each Optionee shall have
the right to designate a beneficiary on the form provided by the Committee. If
no beneficiary is designated, Optionee's estate shall have the rights of a
beneficiary. Notwithstanding any other provision of this Plan, no Option shall
be exercisable after the expiration of ten (10) years from the date it is
granted, or in the case of an Incentive Option, the period specified in
Paragraph 4.1, if applicable (the "Maximum Term"). Subject to the foregoing
paragraph, the portion of the Option which is not exercisable on the date the
Optionee ceases to be an Eligible Individual shall terminate and be forfeited to
the Company on the date of such cessation.
Except as provided above, the Committee shall have the authority to
prescribe in any Agreement that the Option evidenced by the Agreement may be
exercised in full or in part as to any number of shares subject to the Option at
any time or from time to time during the term of the Option, or in such
installments at such times during said term as the Committee may prescribe.
Except as provided above and unless otherwise provided in any Agreement, an
Option may be exercised at any time or from time to time during the term of the
Option. Such exercise may be as to any or all whole (but no fractional) shares
which have become purchasable under the Option.
Within a reasonable time (or such time as may be permitted by law)
after the Company receives written notice that the Optionee has elected to
exercise all or a portion of an Option, such notice to be accompanied by payment
in full of the aggregate Option Exercise Price of the number of shares of Stock
purchased, the Company shall issue and deliver a certificate representing the
shares acquired in consequence of the exercise and any other amounts payable in
consequence of such exercise. In the event that an Optionee exercises both an
Incentive Option, or portion of one, and a Nonstatutory Stock Option, or a
portion of one, separate Stock certificates shall be issued, one for the Stock
subject to the Incentive Option and one for the Stock subject to the
Nonstatutory Stock Option. The number of the shares of Stock transferrable due
to an exercise of an Option under this Plan shall not be increased due to the
passage of time, except as may be provided in an Agreement; provided, however,
the number of such shares of Stock which are transferrable may increase due to
the occurrence of certain events which are fully described in Paragraph 6.6.
Nothing in the Plan or in any Option granted under the Plan shall
require the Company to issue any shares upon exercise of any Option if such
issuance would, in the reasonable judgment of the Committee based upon the
advice of counsel for the Company, constitute a violation of the Securities Act,
or any other applicable statute or regulation, as then in effect. At the time of
any exercise of an Option, the Company may, as a condition precedent to the
exercise of such Option, require from the Optionee (or in the event of his
death, his legal representatives, heirs, legatees, or distributees) such written
representations, if any, concerning his intentions with regard to the retention
or disposition of the shares being acquired by exercise of such Option and such
written covenants and agreements, if any, as to the manner of disposal of such
shares as, in the opinion of
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counsel to the Company, may be necessary to ensure that any disposition by such
Optionee (or in the event of his death, his legal representatives, heirs,
legatees, or distributees), will not involve a violation of the Securities Act
or any other applicable state or federal statute or regulation, as then in
effect. Certificates for shares of Stock, when issued, may have the following or
similar legend, or statements of other applicable restrictions, endorsed on
them, and may not be immediately transferable:
The shares of stock evidenced by this certificate have been
issued to the registered owner in reliance upon written
representations that these shares have been purchased for
investment. These shares have not been registered under the
Securities Act of 1933, as amended, or any applicable state
securities laws, in reliance upon an exemption from
registration. Without such registration, these shares may not
be sold, transferred, assigned or otherwise disposed of
unless, in the opinion of the Company and its legal counsel,
such sale, transfer, assignment or disposition will not be in
violation of the Securities Act of 1933, as amended,
applicable rules and regulations of the Securities and
Exchange Commission, and any applicable state securities
laws.
6.5. Limitation on Aggregate Value of Shares That May Become First
Exercisable During Any Calendar Year Under an Incentive Option. Except as is
otherwise provided in Paragraph 6.6, with respect to any Incentive Option
granted under this Plan, the sum of (a) and (b) may not (with respect to any
Optionee) exceed $100,000, with such Fair Market Value to be determined as of
the date the Incentive Option or such other incentive stock option is granted,
where:
(a) is the aggregate Fair Market Value of shares of Stock
subject to such Incentive Option that first become purchasable in a
calendar year under such Incentive Option; and
(b) is the aggregate Fair Market Value of shares of Stock or
stock of any Affiliate (or a predecessor of the Company or an
Affiliate) subject to any other incentive stock option (within the
meaning of section 422 of the Code) of the Company or its Affiliates
(or a predecessor corporation of any such corporation) that first
become purchasable in a calendar year under such Incentive Stock
Option.
For purposes of this Paragraph, "predecessor corporation" means (i) a
corporation that was a party to a transaction described in Code section 424(a)
(or which would be so described if a substitution or assumption under such
section had been effected) with the Company, (ii) a corporation which, at the
time the new incentive stock option (within the meaning of Code section 422) is
granted, is an Afffliate of the Company or a predecessor corporation of any such
corporations, or (iii) a predecessor corporation of any such corporations.
6.6. Adjustment Upon Changes in Capitalization, Merger, Etc.
Notwithstanding any other provision in the Plan to the contrary, in the event of
any change in the number of outstanding shares of Stock:
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(a) effected without receipt of consideration by the Company
by reason of a stock dividend, split, combination, exchange of shares,
merger, or other recapitalization, in which the Company is the
surviving corporation; or
(b) by reason of a spin-off of a part of the Company into a
separate entity, or assumptions and conversions of outstanding grants
due to an acquisition by the Company of a separate entity,
(1) the maximum number and class of shares that may be issued under this Plan,
(2) the number and class of shares subject to each outstanding Option, and (3)
the Exercise Price of each outstanding Option shall be automatically adjusted to
accurately and equitably reflect the effect of such change; provided, however,
that any or all such adjustments shall not occur with respect to an Incentive
Option, unless:
(i) the excess of the aggregate Fair Market Value of the
shares subject to the Incentive Option immediately after any such
adjustment over the aggregate Exercise Price of such shares is not more
than the excess of the aggregate Fair Market Value of all shares
subject to the Incentive Option immediately before such adjustment over
the aggregate Exercise Price of all such shares subject to the
Incentive Option; and
(ii) the new or adjusted Incentive Option does not give the
Optionee additional benefits which such Optionee did not have under the
old Incentive Option (collectively these Subparagraphs (i) and (ii) are
the "Code section 424(a) Restrictions").
In the event of a dispute concerning such adjustment, the Committee has full
discretion to determine the resolution of the dispute. Such determination shall
be final, binding, and conclusive. The maximum number of shares that may be
issued under this Plan or the number of shares subject to any outstanding Option
shall be automatically reduced to the extent necessary to eliminate any
fractional shares.
6.7. Rights as a Shareholder. An Optionee shall have no right
as a shareholder with respect to any shares covered by his Option until a
certificate representing such shares is issued to him. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash or other
property) or distributions or other rights for which the record date is prior to
the date such certificate is issued, except as provided in Paragraph 6.6.
6.8. Modification, Extension, and Renewal of Options. Subject
to the terms and conditions of, and within the limitations of, the Plan, the
Committee may modify, extend, or renew outstanding Options granted under the
Plan or accept the surrender of Options outstanding under the Plan (to the
extent not previously exercised) and authorize the granting of substitute
Options (to the extent not previously exercised). Except as provided in
Paragraph 6.6, no modification of an Option granted under the Plan shall,
without the consent of the Optionee, alter or impair any rights or obligations
under any Option previously granted under the Plan to such Optionee under the
Plan,
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except as may be necessary, with respect to Incentive Options, to satisfy the
requirements of Code section 422.
6.9. Furnish Information. Each Optionee shall furnish to the Company
all information requested by the Company to enable it to comply with any
reporting or other requirement imposed upon the Company by or under any
applicable statute or regulation.
6.10. Obligation to Exercise; Termination of Employment. The granting
of an Option under the Plan shall impose no obligation upon the Optionee to
exercise it or any part of it. In the event of an Optionee's termination of
employment with the Company or an Affiliate, the unexercised portion of an
Option granted under the Plan shall terminate in accordance with Paragraph 6.4.
6.11. Agreement Provisions. The Agreements authorized under the Plan
shall contain such provisions in addition to those required by the Plan
(including, without limitation, restrictions or the removal of restrictions upon
the exercise of the Option and the retention or transfer of shares thereby
acquired) as the Committee shall deem advisable.
Each Agreement shall identify the Option it evidences as an Incentive
Option or a Nonstatutory Option, as the case may be, and no Agreement shall
cover both an Incentive Option and a Nonstatutory Option. Each Agreement
relating to an Incentive Option granted under this Plan shall contain such
limitations and restrictions upon the exercise of the Incentive Option to which
it relates as shall be necessary for the Incentive Option to which such
Agreement relates to constitute an incentive stock option, as defined in Code
section 422. If this Plan or any Agreement does not contain any provision
required to be included herein under Code section 422, that provision shall be
deemed to be incorporated herein with the same force and effect as if that
provision had been set out at length herein; provided, however, that, to the
extent any Option that is intended to qualify as an Incentive Option cannot so
qualify, that Option (to that extent) shall be deemed a Nonstatutory Option for
all purposes of this Plan and any Agreement.
PARAGRAPH 7. Remedies and Specific Performance.
7.1. Remedies. The Company shall be entitled to recover from an
Optionee reasonable attorneys' fees incurred in connection with the enforcement
of the terms and provisions of the Plan and any Agreement, whether by an action
to enforce specific performance, or an action for damages for its breach or
otherwise.
7.2. Specific Performance. The Company shall be entitled to enforce the
terms and provisions of this Paragraph, including the remedy of specific
performance, in New York County, New York.
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PARAGRAPH 8. Duration of Plan.
No Options may be granted under the Plan more than ten (10) years after
the earlier of the date the Plan is adopted or the date the Plan is approved by
the stockholders of the Company.
PARAGRAPH 9. Amendment and Termination of Plan.
The Board of Directors may at any time terminate or from time to time
amend or suspend the Plan; provided, however, that no such amendment shall,
without approval of the shareholders of the Company, except as provided in
Paragraph 6, (a) increase the aggregate number of shares of Stock as to which
Options may be granted under the Plan or (b) change the designation of the
employees or class of employees eligible to receive options under the Plan. No
Option may be granted during any suspension of the Plan or after the Plan has
been terminated, and no amendment, suspension, or termination shall, without an
Optionee's consent, alter or impair, other than as provided in the Plan and the
Optionee's Agreement, any of the rights or obligations under any Option
previously granted to such Optionee under the Plan.
PARAGRAPH 10. General.
10.1. Application of Funds. The proceeds received by the Company from
the sale of shares pursuant to Options shall be used for general corporate
purposes.
10.2. Right of the Company and Affiliates to Terminate Employment.
Nothing contained in the Plan, or in any Agreement, shall confer upon any
Optionee the right to continue in the employ of the Company or any Affiliate, or
interfere in any way with the rights of the Company or any Affiliate to
terminate his employment any time.
10.3. Liability of the Company. Neither the Company, any of its
Affiliates, its directors, officers or employees, nor any member of the
Committee shall be liable for any act, omission, or determination taken or made
in good faith with respect to the Plan or any Option granted under it, and
members of the Board of Directors and the Committee shall be entitled to
indemnification and reimbursement by the Company in respect of any claim, loss,
damage, or expense (including attorneys' fees, the costs of settling any suit
(provided such settlement is approved by independent legal counsel selected by
the Company) and amounts paid in satisfaction of a judgment, except a judgment
based on a finding of bad faith) arising from such claim, loss, etc. to the full
extent permitted by law and under any directors' and officers' liability or
similar insurance coverage that may from time to time be in effect. In addition,
neither the Company, its directors, officers or employees, nor any of the
Company's Affiliates shall be liable to any Optionee or other person if it is
determined for any reason by the Internal Revenue Service of any court having
jurisdiction that any incentive stock options granted hereunder do not qualify
for tax treatment as incentive stock options under Code section 422.
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10.4. Information Confidential. As partial consideration for the
granting of each Option under the Plan, the Agreement may, in the Committee's
sole and absolute discretion, provide that the Optionee shall agree with the
Company that he will keep confidential all information and knowledge that he has
relating to the manner and amount of his participation in the Plan; provided,
however, that such information may be disclosed as required by law and may be
given in confidence to the Optionee's spouse, tax and financial advisors, or to
a financial institution to the extent that such information is necessary to
secure a loan. In the event any breach of this promise comes to the attention of
the Committee, it shall take into consideration such breach, in determining
whether to recommend the grant of any future Option to such Optionee, as a
factor mitigating against the advisability of granting any such future Option to
such individual.
10.5. Other Benefits. Participation in the Plan shall not preclude the
Optionee from eligibility in any other stock option plan of the Company or any
Affiliate or any old age benefit, insurance, pension, profit sharing,
retirement, bonus, or other extra compensation plans which the Company or any
Affiliate has adopted, or may, at any time, adopt for the benefit of its
employees.
10.6. Execution of Receipts and Releases. Any payment of cash or any
issuance or transfer of shares of Stock to the Optionee, or to his legal
representative, heir, legatee, or distributee, in accordance with the provisions
of the Plan, shall, to the extent thereof, be in full satisfaction of all claims
of such persons under the Plan. The Committee may require any Optionee, legal
representative, heir, legatee, or distributee, as a condition precedent to such
payment, to execute a release and receipt for such payment in such form as it
shall determine.
10.7. No Guarantee of Interests. Neither the Committee nor the Company
guarantees the Stock from loss or depreciation.
10.8. Payment of Expenses. All expenses incident to the administration,
termination, or protection of the Plan, including, but not limited to, legal and
accounting fees, shall be paid by the Company or its Affiliates; provided,
however, the Company or an Affiliate may recover any and all damages, fees,
expenses, and costs arising out of any actions taken by the Company or an
Affiliate to enforce its rights under the Plan.
10.9. Company Records. Records of the Company or its Affiliates
regarding the Optionee's period of employment, termination of employment and the
reason for such termination, leaves of absence, re-employment, and other matters
shall be conclusive for all purposes under the Plan, unless determined by the
Committee to be incorrect.
10.10. Information. The Company and its Affiliates shall, upon request
or as may be specifically required under the Plan, furnish or cause to be
furnished all of the information or documentation that is necessary or required
by the Committee to perform its duties and functions under the Plan.
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10.11. Company Action. Any action required of the Company relating to
the Plan shall be by resolution of its Board of Directors or by a person or
entity authorized to act by resolution of the Board of Directors.
10.12. Severability. If any provision of this Plan is held to be
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions of the Plan, but such provision shall be fully
severable, and the Plan shall be construed and enforced as if the illegal or
invalid provision had never been included in the Plan.
10.13. Notices. Whenever any notice is required or permitted under the
Plan or any Agreement, such notice must be in writing and personally delivered,
telecopied (if confirmed), or sent by mail or by a nationally recognized courier
service. Any notice required or permitted to be delivered under this Plan or any
Agreement shall be deemed to be delivered on the date on which it is personally
delivered, or, if mailed, whether actually received or not, on the third
business day after it is deposited in the United States mail, certified or
registered, postage prepaid, addressed to the person who is to receive it at the
address which such person has previously specified by written notice delivered
in accordance with this Paragraph or, if by courier, twenty-four (24) hours
after it is sent, addressed as described in this Paragraph. The Company or an
Optionee may change, at any time and from time to time, by written notice to the
other, the address which it or he had previously specified for receiving
notices. Until changed in accordance with the Plan, the Company and each
Optionee shall specify as its and his address for receiving notices the address
set forth in the Agreement pertaining to the shares to which such notice
relates.
10.14. Waiver of Notice. Any person entitled to notice under the Plan
may waive such notice.
10.15. Successors. The Plan shall be binding upon the Optionee, his
legal representatives, heirs, legatees, distributees, and transferees (if
applicable) upon the Company, its successors, and assigns, and upon the
Committee, and its successors.
10.16. Headings. The titles and headings of Paragraphs are included for
convenience of reference only and are not to be considered in construction of
the Plan's provisions.
10.17. Governing Law. All questions arising with respect to the
provisions of the Plan shall be determined by application of the laws of the
State of New York except to the extent New York law is preempted by Federal law.
Questions arising with respect to the provisions of an Agreement that are
matters of contract law shall be governed by the laws of the state specified in
the Agreement, except to the extent preempted by Federal law and except to the
extent that New York corporate law conflicts with the contract law of such
state, in which event New York corporate law shall govern. The obligation of the
Company to sell and deliver Stock under the Plan is subject to applicable laws
and to the approval of any governmental authority required in connection with
the authorization, issuance, sale, or delivery of such Stock.
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10.18. Word Usage. Words used in the masculine shall apply to the
feminine where applicable, and wherever the context of this Plan dictates, the
plural shall be read as the singular and the singular as the plural.
PARAGRAPH 11. Effective Date.
The Plan shall take effect on February 15, 1998, the date it was
adopted by the Board of Directors.
If this Plan is not approved by the holders of a majority of the votes
entitled to be voted at a meeting of holders of outstanding shares of equity
securities of the Company no later than one year from the date the Plan is
adopted, no Incentive Options can be granted under this Plan and all Options
granted under this Plan shall be deemed to be Nonstatutory Options for all
purposes of the Plan and any Agreements.
IN WITNESS WHEREOF, NetStakes, Inc., acting by and through its duly
authorized officer, has executed this Plan on this the 25 day of February,
1998.
NETSTAKES, INC,
a Delaware corporation
By: /s/ Steven Krein
---------------------------------
Its: President
---------------------------------
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NETSTAKES, INC.
1999 EQUITY COMPENSATION PLAN
The purpose of the Netstakes, Inc. 1999 Equity Compensation
Plan (the "Plan") is to provide (i) designated employees of Netstakes, Inc.
(the "Company") and its subsidiaries, (ii) certain consultants and advisors
who perform services for the Company or its subsidiaries and (iii)
non-employee members of the Board of Directors of the Company (the "Board")
with the opportunity to receive grants of incentive stock options,
nonqualified stock options and restricted stock. The Company believes that the
Plan will encourage the participants to contribute materially to the growth of
the Company, thereby benefiting the Company's shareholders, and will align the
economic interests of the participants with those of the shareholders.
1. Administration.
(a) Authority. The Plan shall be administered and
interpreted by the Board. If the Company has an initial public offering
("Public Offering") of its stock as described in Section 18(b), the Plan shall
thereafter be administered by a committee, which shall consist of two or more
persons appointed by the Board, all of whom shall be "outside directors" as
defined under section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code") and related Treasury regulations, and "non-employee directors" as
defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Board may ratify or approve any grants made to
participants. References in the Plan to the "Board," as they relate to Plan
administration, shall be deemed to refer to the committee if a committee is
appointed to administer the Plan. The full Board of Directors must approve
grants to non-employee directors.
(b) Board Authority. The Board shall have the sole authority
to (i) determine the individuals to whom grants shall be made under the Plan,
(ii) determine the type, size and terms of the grants to be made to each such
individual, (iii) determine the time when the grants will be made and the
duration of any applicable exercise or restriction period, including the
criteria for exercisability and the acceleration of exercisability and (iv)
deal with any other matters arising under the Plan. The Board may require that
a grantee execute a shareholder's agreement, with such terms as the Board
deems appropriate, with respect to any Company stock distributed pursuant to
this Plan.
(c) Board Determinations. The Board shall have full power
and authority to administer and interpret the Plan, to make factual
determinations and to adopt or amend such rules, regulations, agreements and
instruments for implementing the Plan and for the conduct of its business as
it deems necessary or advisable, in its sole discretion. The Board's
interpretations of the Plan and all determinations made by the Board pursuant
to the powers vested in it hereunder shall be conclusive and binding on all
persons having any interest in the Plan or in any awards granted hereunder.
All powers of the Board shall be executed in its sole discretion, in the best
interest of the Company, not as a fiduciary, and in keeping with the
objectives of the Plan and need not be uniform as to similarly situated
individuals.
<PAGE>
2. Grants.
Awards under the Plan may consist of grants of incentive
stock options as described in Section 5 ("Incentive Stock Options"),
nonqualified stock options as described in Section 5 ("Nonqualified Stock
Options") (Incentive Stock Options and Nonqualified Stock Options are
collectively referred to as "Options") or restricted stock as described in
Section 6 ("Restricted Stock") (hereinafter collectively referred to as
"Grants"). All Grants shall be subject to the terms and conditions set forth
herein and to such other terms and conditions consistent with this Plan as the
Board deems appropriate and as are specified in writing by the Board to the
individual in a grant instrument (the "Grant Instrument") or an amendment to
the Grant Instrument. Grants under a particular Section of the Plan need not
be uniform as among the grantees.
3. Shares Subject to the Plan.
(a) Shares Authorized. Subject to the adjustment specified
below, the aggregate number of shares of common stock of the Company ("Company
Stock") that may be issued or transferred under the Plan is ____ shares, and the
maximum aggregate number of shares of Common Stock that shall be subject to
Grants made under the Plan to any individual during any calendar year shall be
____ shares. The shares may be authorized but unissued shares of Company
Stock or reacquired shares of Company Stock, including shares purchased by the
Company on the open market for purposes of the Plan. If and to the extent
Options granted under the Plan terminate, expire or are cancelled, forfeited,
exchanged or surrendered without having been exercised, or if any shares of
Restricted Stock are forfeited, the shares subject to such Grants shall again be
available for purposes of the Plan.
(b) Adjustments. If there is any change in the number or
kind of shares of Company Stock outstanding (i) by reason of a stock dividend,
spinoff, recapitalization, stock split or combination or exchange of shares
(ii) by reason of a merger, reorganization or consolidation in which the
Company is the surviving corporation, (iii) by reason of a reclassification or
change in par value, or (iv) by reason of any other extraordinary or unusual
event affecting the outstanding Company Stock as a class without the Company's
receipt of consideration, or if the value of outstanding shares of Company
Stock is substantially reduced as a result of a spinoff or the Company's
payment of an extraordinary dividend or distribution, the maximum number of
shares of Company Stock available for Grants, the maximum number of shares of
Company Stock that any individual participating in the Plan may be granted in
any year, the number of shares covered by outstanding Grants, the kind of
shares issued under the Plan, and the price per share or the applicable market
value of such Grants may be appropriately adjusted by the Board to reflect any
increase or decrease in the number of, or change in the kind or value of,
issued shares of Company Stock to preclude, to the extent practicable, the
enlargement or dilution of rights and benefits under such Grants; provided,
however, that any fractional shares resulting from such adjustment shall be
eliminated. Any adjustments determined by the Board shall be final, binding
and conclusive. The Board is not required to make any changes that would
result in a modification of an outstanding option or require shareholder
approval.
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4. Eligibility for Participation.
(a) Eligible Persons. All employees of the Company and its
subsidiaries ("Employees"), including Employees who are officers or members of
the Board, and members of the Board who are not Employees ("Non-Employee
Directors") shall be eligible to participate in the Plan. Consultants and
advisors who perform services to the Company or any of its subsidiaries ("Key
Advisors") shall be eligible to participate in the Plan if the Key Advisors
render bona fide services and such services are not in connection with the
offer or sale of securities in a capital-raising transaction.
(b) Selection of Grantees. The Board shall select the
Employees, Non-Employee Directors and Key Advisors to receive Grants and shall
determine the number of shares of Company Stock subject to a particular Grant
in such manner as the Board determines. Employees, Key Advisors and
Non-Employee Directors who receive Grants under this Plan shall hereinafter be
referred to as "Grantees."
5. Granting of Options.
(a) Number of Shares. The Board shall determine the number
of shares of Company Stock that will be subject to each Grant of Options to
Employees, Non-Employee Directors and Key Advisors.
(b) Type of Option and Price.
(i) The Board may grant Incentive Stock Options that are
intended to qualify as "incentive stock options" within the meaning of section
422 of the Code or Nonqualified Stock Options that are not intended so to
qualify or any combination of Incentive Stock Options and Nonqualified Stock
Options but not in tandem, all in accordance with the terms and conditions set
forth herein. Incentive Stock Options may be granted only to Employees.
Nonqualified Stock Options may be granted to Employees, Non-Employee Directors
and Key Advisors.
(ii) The purchase price (the "Exercise Price") of
Company Stock subject to an Option shall be determined by the Board and may be
equal to, greater than, or less than the Fair Market Value (as defined below)
of a share of Company Stock on the date the Option is granted; provided,
however, that (x) the Exercise Price of an Incentive Stock Option shall be
equal to, or greater than, the Fair Market Value of a share of Company Stock
on the date the Incentive Stock Option is granted and (y) an Incentive Stock
Option may not be granted to an Employee who, at the time of grant, owns stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or any parent or subsidiary of the Company,
unless the Exercise Price per share is not less than 110% of the Fair Market
Value of Company Stock on the date of grant.
(iii) If the Company Stock is publicly traded, then
the Fair Market Value per share shall be determined as follows: (x) if the
principal trading market for the Company Stock is a national securities
exchange or the Nasdaq National Market, the mean of the high and
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the low price on the relevant date upon which a sale was reported, or (y) if
the Company Stock is not principally traded on such exchange or market, the
mean between the last reported "bid" and "asked" prices of Company Stock on
the relevant date, as reported on Nasdaq or, if not so reported, as reported
by the National Daily Quotation Bureau, Inc. or as reported in a customary
financial reporting service, as applicable and as the Board determines. If the
Company Stock is not publicly traded or, if publicly traded, is not subject to
reported transactions or "bid" or "asked" quotations as set forth above, the
Fair Market Value per share shall be as determined in good faith by the Board.
(c) Option Term The Board shall determine the term of each
Option. The term of any Option shall not exceed ten years from the date of
grant. However, an Incentive Stock Option that is granted to an Employee who,
at the time of grant, owns stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company, or any parent or
subsidiary of the Company, may not have a term that exceeds five years from
the date of grant.
(d) Exercisability of Options. Options shall become
exercisable in accordance with such terms and conditions, consistent with the
Plan, as may be determined by the Board and specified in the Grant Instrument
or an amendment to the Grant Instrument. The Board may accelerate the
exercisability of any or all outstanding Options at any time for any reason.
(e) Termination of Employment, Disability or Death.
(i) Except as provided below, an Option may only be
exercised while the Grantee is employed by the Company as an Employee, engaged
as a Key Advisor or serving as a member of the Board. In the event that a
Grantee who is an employee ceases to be employed by the Company for any reason
other than a "disability," death, or "termination for cause," any Option which
is otherwise exercisable by the Grantee shall terminate unless exercised
within 90 days after the date on which the Grantee ceases to be employed by
the Company (or within such other period of time as may be specified by the
Board), but in any event no later than the date of expiration of the Option
term. Any of the Grantee's Options that are not otherwise exercisable as of
the date on which the Grantee ceases to be employed by the Company shall
terminate as of such date.
(ii) In the event the Grantee who is an employee
ceases to be employed by the Company on account of a "termination for cause"
by the Company, any Option held by the Grantee whether or not exercisable
shall terminate as of the date the Grantee ceases to be employed by the
Company.
(iii) In the event the Grantee who is an employee
ceases to be employed by the Company because the Grantee is "disabled," any
Option which is otherwise exercisable by the Grantee shall terminate unless
exercised within one year after the date on which the Grantee ceases to be
employed by the Company (or within such other period of time as may be
specified by the Board) at the time of grant, but in any event no later than
the date of expiration of the Option term. Any of the Grantee's Options which
are not otherwise exercisable as of the date on which the Grantee ceases to be
employed by the Company shall terminate as of such date.
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(iv) If the Grantee who is an employee dies while
employed by the Company or within 90 days after the date on which the Grantee
ceases to be employed on account of a termination of employment specified in
Section 5(e)(i) above (or within such other period of time as may be specified
by the Board) at the time of grant, any Option that is otherwise exercisable
by the Grantee shall terminate unless exercised within one year after the date
on which the Grantee ceases to be employed by the Company (or within such
other period of time as may be specified by the Board), but in any event no
later than the date of expiration of the Option term. Any of the Grantee's
Options that are not otherwise exercisable as of the date on which the Grantee
ceases to be employed by the Company shall terminate as of such date.
(v) For purposes of this Section 5 and Section 6:
(A) The term "Company" shall mean the
Company or its subsidiaries.
(B) "Employed by the Company" shall mean
employment or service as an Employee, Key Advisor or member of the Board (so
that, for purposes of exercising Options and satisfying conditions with
respect to Restricted Stock, a Grantee shall not be considered to have
terminated employment or service until the Grantee ceases to be an Employee,
Key Advisor or member of the Board, unless the Board determines otherwise). A
Key Advisor or Director shall not be deemed an employee of the Company solely
as a result of being deemed "Employed by the Company" under this Plan.
(C) "Disability" shall mean a Grantee's
becoming disabled within the meaning of section 22(e)(3) of the Code.
(D) "Termination for cause" shall mean,
except to the extent specified otherwise by the Board, a finding by the Board
that the Grantee has breached his or her employment or service contract with
the Company, or has been engaged in disloyalty to the Company, including,
without limitation, fraud, embezzlement, theft, commission of a felony or
proven dishonesty in the course of his or her employment or service, or has
disclosed trade secrets or confidential information of the Company to persons
not entitled to receive such information. In the event a Grantee's employment
is terminated for cause, in addition to the immediate termination of all
Grants, the Grantee shall automatically forfeit all shares underlying any
exercised portion of an Option for which the Company has not yet delivered the
share certificates, upon refund by the Company of the Exercise Price paid by
the Grantee for such shares.
(f) Termination of Board Service. Unless the Board, in its
discretion, shall otherwise determine:
(i) If a Non-Employee Director ceases to be a Director
of the Company for any reason other than resignation, removal for cause or
death, any then outstanding stock option held by such Non-Employee Director
shall be exercisable by the Non-Employee Director (but only to the extent
exercisable by the Non-Employee Director immediately prior to ceasing to
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be a Director) at any time prior to the expiration date of such stock option
or within one year after the date the Non-Employee Director ceases to be a
Director, whichever is the shorter period;
(ii) If, during his or her term of office as a
Director, a Non-Employee Director resigns from the Board (which shall not
include not standing for reelection at the end of his or her then current
term) or is removed from office for cause, any then outstanding stock option
held by the Non-Employee Director shall be exercisable by the Non-Employee
Director (but only to the extent exercisable by the Non-Employee Director
immediately prior to ceasing to be a Director) at any time prior to the
expiration date of such stock option or within 90 days after the date of
resignation or removal, whichever is the shorter period;
(iii) Following the death of a Non-Employee
Director during service as a Director of the Company, any outstanding stock
option held by the Non-Employee Director at the time of death (whether or not
exercisable by the Non-Employee Director immediately prior to death) shall be
exercisable by the person entitled to do so under the Will of the Non-Employee
Director, or, if the Non-Employee Director shall fail to make testamentary
disposition of the stock option or shall die intestate, by the legal
representative of the Non-Employee Director, at any time prior to the
expiration date of such stock option or within one year after the date of
death, whichever is the shorter period;
(iv) Following the death of a Non-Employee Director
after ceasing to be a Director, any outstanding stock option held by such
Non-Employee Director at the time of death shall be exercisable (but only to
the extent exercisable by the Non-Employee Director immediately prior to
death) by such person entitled to do so under the Will of the Non-Employee
Director or by such legal representative at any time prior to the expiration
date of such stock option or within one year after the date of death,
whichever is the shorter period.
Interpretation of the foregoing shall be done by the Board and any
determination by the Board shall be final and binding.
(g) Exercise of Options. A Grantee may exercise an
Option that has become exercisable, in whole or in part, by delivering a
notice of exercise to the Company with payment of the Exercise Price. The
Grantee shall pay the Exercise Price for an Option as specified by the Board
(x) in cash, (y) with the approval of the Board, by delivering shares of
Company Stock owned by the Grantee for more than six months (including Company
Stock acquired in connection with the exercise of an Option, subject to such
restrictions as the Board deems appropriate) and having a Fair Market Value on
the date of exercise equal to the Exercise Price or (z) by such other method
as the Board may approve, including, after a Public Offering, payment through
a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Shares of Company Stock used to exercise an Option
shall have been held by the Grantee for the requisite period of time to avoid
adverse accounting consequences to the Company with respect to the Option. The
Grantee shall pay the Exercise Price and the amount of any withholding tax due
(pursuant to Section 7) at the time of exercise.
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(h) Limits on Incentive Stock Options. Each Incentive
Stock Option shall provide that, if the aggregate Fair Market Value of the
stock on the date of the grant with respect to which Incentive Stock Options
are exercisable for the first time by a Grantee during any calendar year,
under the Plan or any other stock option plan of the Company or a parent or
subsidiary, exceeds $100,000, then the option, as to the excess, shall be
treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be
granted to any person who is not an Employee of the Company or a parent or
subsidiary (within the meaning of section 424(f) of the Code). Notwithstanding
any other provision contained in the Plan or in any award agreement, but
subject to the possible exercise of the Board's discretion contemplated in the
last sentence of this paragraph, the aggregate fair market value on the date
of grant, of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Employee during any calendar year under
all plans of the corporation employing such Employee, any parent or subsidiary
corporation of such corporation and any predecessor corporation of any such
corporation shall not exceed $100,000. If the date on which one or more of
such Incentive Stock Options could first be exercised would be accelerated
pursuant to any provision of the Plan or any award agreement, and the
acceleration of such exercise date would result in a violation of the
limitation set forth in the preceding sentence, then, notwithstanding any such
provision, but subject to the provisions of the next succeeding sentence, the
exercise dates of such Incentive Stock Options shall be accelerated only to
the date or dates, if any, that do not result in a violation of such
limitation and, in such event, the exercise dates of the Incentive Stock
Options with the lowest option prices shall be accelerated to the earliest
such dates. The Board may, in its discretion, authorize the acceleration of
the exercise date of one or more Incentive Stock Options even if such
acceleration would violate the $100,000 limitation set forth in the first
sentence of this paragraph and even if such Incentive Stock Options are
thereby converted in whole or in part to Nonqualified Stock Options.
6. Restricted Stock Grants.
The Board may issue or transfer shares of Company Stock to
an Employee, Non-Employee Director or Key Advisor under a Grant of Restricted
Stock, upon such terms as the Board deems appropriate. The following
provisions are applicable to Restricted Stock:
(a) General Requirements. Shares of Company Stock issued or
transferred pursuant to Restricted Stock Grants may be issued or transferred
for consideration or for no consideration, as determined by the Board. The
Board may establish conditions under which restrictions on shares of
Restricted Stock shall lapse over a period of time or according to such other
criteria as the Board deems appropriate. The period of time during which the
Restricted Stock will remain subject to restrictions will be designated in the
Grant Instrument as the "Restriction Period."
(b) Number of Shares. The Board shall determine the number
of shares of Company Stock to be issued or transferred pursuant to a
Restricted Stock Grant and the restrictions applicable to such shares.
(c) Requirement of Employment. If the Grantee ceases to be
employed by the Company (as defined in Section 5(e)) during a period
designated in the Grant Instrument as the
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Restriction Period, or if other specified conditions are not met, the
Restricted Stock Grant shall terminate as to all shares covered by the Grant
as to which the restrictions have not lapsed. The Board may, however, provide
for complete or partial exceptions to this requirement as it deems
appropriate.
(d) Restrictions on Transfer and Legend on Stock
Certificate. During the Restriction Period, a Grantee may not sell, assign,
transfer, pledge or otherwise dispose of the shares of Restricted Stock except
to a Successor Grantee under Section 8(a). Each certificate for a share of
Restricted Stock shall contain a legend giving appropriate notice of the
restrictions in the Grant. The Grantee shall be entitled to have the legend
removed from the stock certificate covering the shares subject to restrictions
when all restrictions on such shares have lapsed. The Board may determine that
the Company will not issue certificates for shares of Restricted Stock until
all restrictions on such shares have lapsed, or that the Company will retain
possession of certificate for shares of Restricted Stock until all
restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. Unless the Board
determines otherwise, during the Restriction Period, the Grantee shall have
the right to vote shares of Restricted Stock and to receive any dividends or
other distributions paid on such shares, subject to any restrictions deemed
appropriate by the Board.
(f) Lapse of Restrictions. All restrictions imposed on
Restricted Stock shall lapse upon the expiration of the applicable Restriction
Period and the satisfaction of all conditions imposed by the Board. The Board
may determine, as to any or all Restricted Stock Grants, that the restrictions
shall lapse without regard go any Restriction Period. The Company will hold in
escrow all shares subject to restriction and will release them to the Grantee
when such restrictions lapse or return them to the Company if such Restricted
Stock is forfeited.
7. Withholding of Taxes.
(a) Required Withholding. All Grants under the Plan shall be
subject to applicable federal (including FICA), state and local tax
withholding requirements. The Company may require the Grantee or other person
receiving shares under the Plan to pay to the Company the amount of any such
taxes that the Company is required to withhold with respect to the Grant, or
the Company may deduct from other wages paid by the Company the amount of any
withholding taxes due with respect to the Grant.
(b) Election to Withhold Shares. If the Board so permits, a
Grantee may elect to satisfy the Company's income tax withholding obligation
with respect to an Option or Restricted Stock by having shares withheld up to
an amount that does not exceed the applicable withholding tax rate for federal
(including FICA), state and local tax liabilities. The election must be in a
form and manner prescribed by the Board and shall be subject to the prior
approval of the Board. The Board has the right to withhold any Grants until
appropriate provisions for the payment of withholding taxes has been made.
8. Transferability of Grants.
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(a) Nontransferability of Grants. Except as provided below,
only the Grantee may exercise rights under a Grant during the Grantee's
lifetime. A Grantee may not transfer those rights except by will or by the
laws of descent and distribution or, with respect to Grants other than
Incentive Stock Options, if permitted in any specific case by the Board,
pursuant to a domestic relations order. When a Grantee dies, the personal
representative or other person entitled to succeed to the rights of the
Grantee ("Successor Grantee") may exercise such rights. A Successor Grantee
must furnish proof satisfactory to the Company of his or her right to receive
the Grant under the Grantee's will or under the applicable laws of descent and
distribution.
(b) Transfer of Nonqualified Stock Options. Notwithstanding
the foregoing, the Board may provide, in a Grant Instrument, that a Grantee
may transfer Nonqualified Stock Options to family members or other persons or
entities according to such terms as the Board may determine; provided that the
transferred Option shall continue to be subject to the same terms and
conditions as were applicable to the Option immediately before the transfer.
9. Shareholders Agreement/Right of First Refusal.
As a condition to all Grants made to Grantees pursuant to
this Plan, the shares of Company Stock distributed to him or her under this
Plan shall be subject to the shareholders agreement contained in this Section
9 and Section 10 below and any such other shareholders agreement the Board
deems appropriate (as permitted by Section 9(e) below).
(a) Offer. Prior to a Public Offering, if at any time an
individual desires to sell, encumber, or otherwise dispose of shares of
Company Stock that were distributed to him or her under this Plan and that are
transferable, the individual shall first offer the shares to the Company by
giving the Company written notice disclosing: (a) the name of the proposed
transferee of the Company Stock; (b) the certificate number and number of
shares of Company Stock proposed to be transferred or encumbered; (c) the
proposed price; (d) all other terms of the proposed transfer; and (e) a
written copy of the proposed offer. Within 60 days after receipt of such
notice, the Company shall have the option to purchase all or part of such
Company Stock at the then current Fair Market Value (as defined in Section
5(b)).
(b) Sale. In the event the Company (or a shareholder, as
described below) does not exercise the option to purchase Company Stock, as
provided above, the individual shall have the right to sell, encumber or
otherwise dispose of his shares of Company Stock on the terms of the transfer
set forth in the written notice to the Company, provided such transfer is
effected within 15 days after the expiration of the option period. If the
transfer is not effected within such period, the Company must again be given
an option to purchase, as provided above.
(c) Assignment of Rights. The Board, in its sole discretion,
may waive the Company's right of first refusal pursuant to this Section 9 and
the Company's repurchase right pursuant to Section 10 below. If the Company's
right of first refusal or repurchase right is so waived, the Board may, in its
sole discretion, assign such right to the remaining shareholders of the
Company in the same proportion that each shareholder's stock ownership bears
to the stock ownership of all the shareholders of the Company, as determined
by the Board. To the extent
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that a shareholder has been give such right and does not purchase his or her
allotment, the other shareholders shall have the right to purchase such
allotment on the same basis.
(d) Public Offering. On and after a Public Offering, the
Company shall have no further right to purchase shares of Company Stock under
this Section 9 and Section 10 below, and their limitations shall be null and
void.
(e) Shareholder's Agreement. Notwithstanding the foregoing,
the Board may require that a Grantee execute a shareholder's agreement, with
such terms as the Board deems appropriate, with respect to any Company Stock
distributed pursuant to this Plan, in which case the provisions of this
Section 9 and Section 10 below shall not apply to such Company Stock.
10. Shareholders Agreement/Purchase by the Company.
Prior to a Public Offering, if a Grantee ceases to be
employed by, or provide service to, the Company, the Company shall have the
right to purchase all or part of any Company Stock distributed to him or her
under this Plan at its then current Fair Market Value (as defined in Section
5(b)) (or at such other price as may be established in the Grant Instrument);
provided, however, that such repurchase shall be made in accordance with
applicable accounting rules to avoid adverse accounting treatment.
11. Consequences of a Change of Control.
(a) Notice and Acceleration. Upon a Change of Control,
unless the Board determines otherwise, (i) the Company shall provide each
Grantee with outstanding Grants written notice of such Change of Control; (ii)
all outstanding Options shall automatically accelerate and become fully
exercisable, and (iii) the restrictions and conditions on all outstanding
Restricted Stock shall immediately lapse.
(b) Assumption of Grants. Upon a Change of Control where the
Company is not the surviving corporation (or survives only as a subsidiary of
another corporation), unless the Board determines otherwise, all outstanding
Grants shall be assumed by, or replaced with comparable options or stock by,
the surviving corporation.
(c) Other Alternatives. Notwithstanding the foregoing,
subject to subsection (d) below, in the event of a Change of Control, the
Board may take one or both of the following actions: the Board may (i) require
that Grantees surrender their outstanding Options in exchange for a payment by
the Company, in cash or Company Stock as determined by the Board, in an amount
equal to the amount by which the then Fair Market Value of the shares of
Company Stock subject to the Grantee's unexercised Options exceeds the
Exercise Price of the Options, or (ii) after giving Grantees an opportunity to
exercise their outstanding Options, terminate any or all unexercised Options
at such time as the Board deems appropriate. Such surrender or termination
shall take place as of the date of the Change of Control or such other date as
the Board may specify.
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(d) Limitations. Notwithstanding anything in the Plan to the
contrary, in the event of a Change of Control, the Board shall not have the
right to take any actions described in the Plan (including without limitation
actions described in Subsection (c) above) that would make the Change of
Control ineligible for pooling of interests accounting treatment or that would
make the Change of Control ineligible for desired tax treatment if, in the
absence of such right, the Change of Control would qualify for such treatment
and the Company intends to use such treatment with respect to the Change of
Control.
12. Requirements for Issuance or Transfer of Shares.
(a) Limitations on Issuance or Transfer of Shares. No
Company Stock shall be issued or transferred in connection with any Grant
hereunder unless and until all legal requirements applicable to the issuance
or transfer of such Company Stock have been complied with to the satisfaction
of the Board. The Board shall have the right to condition any Grant made to
any Grantee hereunder on such Grantee's undertaking in writing to comply with
such restrictions on his or her subsequent disposition of such shares of
Company Stock as the Board shall deem necessary or advisable as a result of
any applicable law, regulation or official interpretation thereof, and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued or
transferred under the Plan will be subject to such stop-transfer orders and
other restrictions as may be required by applicable laws, regulations and
interpretations, including any requirement that a legend be placed thereon.
13. Amendment and Termination of the Plan.
(a) Amendment. The Board may amend or terminate the Plan at
any time; provided, however, that the Board shall not amend the Plan without
shareholder approval if such approval is required by Section 162(m) of the
Code or changes the class of employees or number of shares available
hereunder.
(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
Plan is terminated earlier by the Board or is extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A
termination or amendment of the Plan that occurs after a Grant is made shall
not materially impair the rights of a Grantee unless the Grantee consents or
unless the Board acts under Section 20(b). The termination of the Plan shall
not impair the power and authority of the Board with respect to an outstanding
Grant. Whether or not the Plan has terminated, an outstanding Grant may be
terminated or amended under Section 20(b) or may be amended by agreement of
the Company and the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan shall be
binding upon and enforceable against the Company and its successors and
assigns.
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14. Funding of the Plan.
This Plan shall be unfunded. The Company shall not be
required to establish any special or separate fund or to make any other
segregation of assets to assure the payment of any Grants under this Plan. In
no event shall interest be paid or accrued on any Grant, including unpaid
installments of Grants.
15. Rights of Participants.
Nothing in this Plan shall entitle any Employee, Key
Advisor, Non-Employee Director or other person to any claim or right to be
granted a Grant under this Plan. Neither this Plan nor any action taken
hereunder shall be construed as giving any individual any rights to be
retained by or in the employ of the Company or any other employment rights.
16. No Fractional Shares.
No fractional shares of Company Stock shall be issued or
delivered pursuant to the Plan or any Grant. The Board shall determine whether
cash, other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
17. Headings.
Section headings are for reference only. In the event of a
conflict between a title and the content of a Section, the content of the
Section shall control.
18. Effective Dates.
(a) Effective Date of the Plan. The Plan shall be effective
on the earlier of (i) adoption of the plan by the Board or (ii) approval by
the shareholders.
(b) Public Offering. The provisions of the Plan that refer
to a Public Offering, or that refer to, or are applicable to persons subject
to, section 16 of the Exchange Act or section 162(m) of the Code, shall be
effective, if at all, upon the initial registration of the Company Stock under
section 12(g) of the Exchange Act, and shall remain effective thereafter for
so long as such stock is so registered.
19. Miscellaneous.
(a) Grants in Connection with Corporate Transactions and
Otherwise. Nothing contained in this Plan shall be construed to (i) limit the
right of the Board to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including Grants
to employees thereof who become Employees of the Company, or for other proper
corporate purposes, or (ii) limit the right of the Company to grant stock
options or make
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other awards outside of this Plan. Without limiting the foregoing, the Board
may make a Grant to an employee of another corporation who becomes an Employee
by reason of a corporate merger, consolidation, acquisition of stock or
property, reorganization or liquidation involving the Company or any of its
subsidiaries in substitution for a stock option or restricted stock grant made
by such corporation.
(b) Compliance with Law. The Plan, the exercise of Options
and the obligations of the Company to issue or transfer shares of Company
Stock under Grants shall be subject to all applicable laws and to approvals by
any governmental or regulatory agency as may be required. With respect to
persons subject to Section 16 of the Exchange Act, it is the intent of the
Company that the Plan and all transactions under the Plan comply with all
applicable provisions of Rule 16b-3 or its successors under the Exchange Act.
The Board may revoke any Grant if it is contrary to law or modify a Grant to
bring it into compliance with any valid and mandatory government regulation.
The Board may also adopt rules regarding the withholding of taxes on payments
to Grantees. The Board may, in its sole discretion, agree to limit its
authority under this Section.
(c) Governing Law. The validity, construction,
interpretation and effect of the Plan and Grant Instruments issued under the
Plan shall exclusively be governed by and determined in accordance with the
law of the State of Delaware.
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MASTER LEASE AGREEMENT
This Master Lease Agreement (the "Lease") is made the 19th day of October, 1998
between Leasing Technologies International, Inc., with its principal office at
221 Danbury Road, Wilton, CT 06897 (the "Lessor"), and Netstakes, Inc., with its
principal office at 11 West 19th Street, 10th Floor, New York, NY 10011 (the
"Lessee"). The parties hereto agree as follows:
1. Lease:
This Lease establishes the general terms and conditions by which Lessor may
lease to Lessee the Equipment (the "Equipment") listed on each Equipment
Schedule executed periodically pursuant to this Lease. Each such Equipment
Schedule shall incorporate by reference the terms of this Lease, and shall be a
separate lease agreement as to the Equipment listed thereon for all purposes,
including default. In the event of any conflict between the terms and conditions
of this Lease and the terms and conditions of any Equipment Schedule(s) or
Rider(s) thereto, the terms and conditions of such Equipment Schedule(s) or
Rider(s) shall prevail.
2. Definitions:
(a) The "Installation Date" means the date determined in accordance with
the applicable Equipment Schedule.
(b) The "Commencement Date" means, as to any item of Equipment designated
on any Equipment Schedule where the Installation Date for such item of Equipment
falls on the first day of the month, that date, or, in any other case, the first
day of the month following the month in which such Installation Date falls.
(c) The "Daily Rental" means 1/30th of the amount set forth as the monthly
rental in the applicable Equipment Schedule.
3. Term of Lease:
The term of this Lease, as to all Equipment designated on any Equipment
Schedule, shall commence on the Installation Date for such Equipment, and shall
continue for an initial period ending that number of months as is specified on
the applicable Equipment Schedule from the Commencement Date for the last item
of Equipment to be installed (the "Initial Term"). The term of this Lease for
all such Equipment shall be automatically extended for successive monthly
periods until terminated in accordance with Section 13 of this Lease. Any
termination shall be effective only on the last day of the Initial Term or the
last day of any such successive period.
4. Rental:
The monthly rental payable hereunder is as set forth in the Equipment
Schedule(s). Rental shall begin to accrue on the Installation Date for each item
of Equipment and shall be due and payable by Lessee in advance on the first day
of each month. If the Installation Date does not fall on the first day of a
month, the rental for that period of time from the Installation Date until the
Commencement Date shall be an amount equal to the Daily Rental multiplied by the
number of days from (and including) the Installation Date to (but not including)
the Commencement Date and shall be due and payable on the Installation Date. In
addition to the monthly rental set forth in the Equipment Schedule(s), Lessee
shall pay to Lessor an amount equal to all taxes paid, payable or required to be
collected by Lessor, however designated, which are levied or based on the
rental, on the Lease or on the Equipment or on its purchase for lease hereunder,
or on its use, lease, operation, control or value (including, without
limitation, state and local privilege or excise taxes based on gross revenue),
any penalties or interest in connection therewith which are attributable to
Lessee's negligence or taxes or amounts in lieu thereof paid or payable by
Lessor in respect of the foregoing, but excluding taxes based on Lessor's net
income. Personal property taxes assessed on the Equipment during the term hereof
shall be paid by Lessee. Lessee agrees that Lessor, or Lessor's agent shall file
all required property tax returns and reports and pay all taxes thereon
pertaining to the Equipment. In such event, Lessee shall reimburse Lessor or
Lessor's agent for all costs and expenses incurred in connection therewith,
provided that such costs and expenses (including property taxes) shall not
exceed the property taxes pursuant to statutory tax rates and regulations. If
requested by Lessor, Lessee agrees to file, on behalf of Lessor, all required
property tax returns and reports concerning the Equipment with all appropriate
governmental agencies, and, within not more than thirty (30) days after the due
date of such filing to send Lessor confirmation of such filing.
Interest on any past due payments, including but not limited to
administrative charges and any other charges or fees arising out of or related
to this Lease, shall accrue at the rate of 1 1/2% per month, or if such rate
shall exceed the maximum rate allowed by law, then at such maximum rate, and
shall be payable on demand. Charges for taxes, penalties and interest shall be
promptly paid by Lessee when invoiced by Lessor.
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As security for the full performance of all of Lessee's obligations under
each Equipment Schedule, Lessee shall, simultaneously with the execution and
delivery of each Equipment Schedule, deposit with Lessor the amount set forth on
such Equipment Schedule. The security deposit shall be promptly returned to
Lessee by Lessor upon the expiration of such Equipment Schedule and return or
purchase of all Equipment, as the case may be, provided that all Lessee
obligations under such Equipment Schedule have been fulfilled.
5. Installation, Use and Quiet Possession of Equipment:
(a) Lessee, at its own expense, will provide the required suitable electric
current to operate the Equipment and appropriate installation facilities as
specified by the manufacturer.
(b) Any equipment, cards, disks, tapes or other items not specified in the
Equipment Schedule(s) which are used on or in connection with the Equipment must
meet the specifications of the manufacturer and shall be acquired by Lessee at
its own expense.
(c) Lessee shall use the Equipment solely in connection with Lessee's
business and for no other purpose. Subject to the preceding sentence, Lessee
shall be entitled to unlimited usage of the Equipment without extra charge by
Lessor.
(d) Unless otherwise set forth in the applicable Equipment Schedule, Lessee
will at all times keep the Equipment in its sole possession and control. The
Equipment shall not be moved from the location stated in the applicable
Equipment Schedule without the prior written consent of Lessor.
(e) After prior notice to Lessor, Lessee may, at its own expense, make
alterations in or add attachments to the Equipment provided, such alterations or
attachments do not interfere with the normal and satisfactory operation or
maintenance of the Equipment or with Lessee's ability to obtain and maintain the
maintenance contract required by Section 5(h) hereof. The manufacturer or other
organization selected by Lessee and approved in writing by Lessor to maintain
the Equipment ("Maintenance Organization") may incorporate engineering changes
or make temporary alterations to the Equipment upon request of Lessee. All such
alterations and attachments shall be and become the property of Lessor or, at
the option of Lessee, shall be removed by Lessee and the Equipment restored, at
Lessee's expense, to its original condition as of the Installation Date thereof,
reasonable wear and tear only excepted, and upon the removal and restoration,
the alteration and/or attachment which was made by Lessee shall become the
property of Lessee.
(f) So long as Lessee is not in default hereunder, neither Lessor nor any
party claiming through or under Lessor shall interfere with Lessee's use or
possession of any Equipment during the term of this Lease.
(g) Lessee shall, during the term of this Lease, at its expense, keep the
Equipment in good working order and condition and make all necessary
adjustments, repairs and replacements and shall not use or permit the
Equipment to be used in any manner or for any purpose for which, in the opinion
of the manufacturer, the Equipment is not designed or reasonably suitable.
(h) Unless otherwise set forth in the applicable Equipment Schedule, Lessee
shall, during the term of this Lease, at its own expense, enter into and
maintain in force a contract with the manufacturer or the Maintenance
Organization covering at least prime shift maintenance of each item of
Equipment. Such contract shaIl commence upon expiration of the manufacturer's
warranty period, if any, relating to such item. Lessee shall furnish Lessor
with a copy of such contract(s).
(i) At the termination of the applicable Equipment Schedule, Lessee at its
expense shall return, if permitted by the applicable Equipment Schedule, not
less than all the Equipment subject thereto to Lessor (at the location
designated by Lessor within the Continental United States) in good operating
order, repair, condition and appearance as on the Installation Date, reasonable
wear and tear only excepted, with all engineering and safety changes prescribed
by the manufacturer or Maintenance Organization incorporated therein. Lessee
shall, prior to such termination, arrange and pay for any repairs, changes and
manufacturer's certifications as are necessary for the manufacturer or
Maintenance Organization to accept the Equipment under contract maintenance at
its then standard rates. Lessee shall return all accessories supplied with the
Equipment, including but not limited to all manuals, cables and software
diskettes. Lessee shall provide within ten days after the effective date of
termination of each Equipment Schedule, certification to Lessor from the
manufacturer or maintenance organization that the Equipment being returned to
Lessor is in good operating order, repair and condition and appearance,
reasonable wear and tear only excepted. In the event such certification is not
provided as set forth in the preceding sentence, or if the certification
discloses any missing items or items requiring repair, Lessee shall promptly
pay, after receipt of an invoice therefore, all costs and expenses pertaining to
the replacement of any missing items and for the repair of any Equipment. Lessee
shall also promptly pay any audit or inspection charges reasonably incurred by
Lessor, or if the certification set forth in this section is not provided as set
forth in this section, Lessee shall also pay any certification charges
reasonably incurred by Lessor in connection with the Equipment.
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6. Leasehold Rights and Inspection:
(a) Lessee shall have no interest in the Equipment other than the rights
acquired as a lessee hereunder and the Equipment shall remain personalty
regardless of the manner in which it may be installed or attached. Lessee shall,
at Lessor's request, affix to the Equipment, tags, decals or plates furnished by
Lessor, indicating Lessor's ownership and Lessee shall not permit their removal
or concealment. Lessee shall replace any such tag, decal or plate which may be
removed or destroyed or become illegible. Lessee shall keep all Equipment free
from any marking or labeling which might be interpreted as a claim of ownership
thereof by Lessee or any party other than Lessor or anyone claiming through
Lessor.
(b) Lessee shall keep the Equipment free and clear of all liens and
encumbrances except liens or encumbrances arising through the actions or
omissions of Lessor. LESSEE SHALL NOT ASSIGN OR OTHERWISE ENCUMBER THIS LEASE OR
ANY OF ITS RIGHTS HEREUNDER OR SUBLEASE THE EQUIPMENT WITHOUT THE PRIOR WRITTEN
CONSENT OF LESSOR except that Lessee may assign this Lease or sublease the
Equipment to its parent or any subsidiary corporation, or to a corporation which
shall have acquired all or substantially all of the property of Lessee by
merger, consolidation or purchase. No permitted assignment or sublease shall
relieve Lessee of any of its obligations hereunder.
(c) Lessor or its agents shall have free access to the Equipment at all
reasonable times upon two (2) days notice for the purpose of inspection and for
any other purpose contemplated by this Lease. No notice shall be required in the
event of emergency or if an Event of Default has occurred. Lessor or its agent
shall not cause any material interference with the normal business operation of
Lessee.
(d) Lessee shall immediately notify Lessor of all details concerning any
material damage to, or material loss of, the Equipment arising out of any event
or occurrence whatsoever, including but not limited to, the alleged or apparent
improper manufacture, functioning or operation of the Equipment.
7. No Warranties By Lessor:
Lessee represents that, at the Installation Date thereof, it shall have (a)
thoroughly inspected the Equipment; and (b) determined for itself that all items
of Equipment are of a size, design, capacity and manufacture selected by it.
Lessee represents that within ten (10) days after the Installation Date thereof,
it shall have satisfied itself that the Equipment is suitable for Lessee's
purposes. LESSOR SUPPLIES THE EQUIPMENT AS IS AND NOT BEING THE MANUFACTURER OF
THE EQUIPMENT, THE MANUFACTURER'S AGENT OR THE SELLER'S AGENT, MAKES NO WARRANTY
OR REPRESENTATION, EITHER EXPRESS OR IMPLIED AS TO THE EQUIPMENT'S
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, DESIGN, CONDITION, QUALITY,
CAPACITY, MATERIAL OR WORKMANSHIP OR AS TO PATENT INFRINGEMENT OR THE LIKE, it
being agreed that all such risks, as between Lessor and Lessee, are to be borne
by Lessee. Lessee agrees to look solely to the manufacturer or to suppliers of
the Equipment for any and all warranty claims and any and all warranties made by
the manufacturer or the supplier of Lessor are, to the extent to which the same
may be assignable, hereby assigned to Lessee for the term of the applicable
Equipment Schedule. To the extent such warranty claims or warranties are not
assignable to Lessee, Lessor shall, at Lessee's request and expense, pursue for
the benefit of Lessee all rights and remedies available to it under such
warranty claim or warranty. Lessee agrees that Lessor shall not be responsible
for the delivery, installation, maintenance, operation or service of the
Equipment or for delay or inadequacy of any or all of the foregoing. Lessor
shall not be responsible for any direct or consequential loss or damage
resulting from the installation, operation or use of the Equipment or otherwise.
Lessee will defend, indemnify and hold Lessor harmless against any and all
claims, demands and liabilities arising out of or in connection with the design,
manufacture, possession or operation of the Equipment.
8. Risk of Loss on Lessee:
(a) Beginning on the Installation Date thereof and continuing until the
Equipment is either returned to Lessor or purchased by Lessee as provided in
this Lease, Lessee relieves Lessor of responsibility for all risks of physical
damage to or loss or destruction of the Equipment, howsoever caused. During the
term of this Lease as to any Equipment Schedule, Lessee shall, at its own
expense, keep in effect "all risk" property insurance and public liability
insurance policies covering the Equipment designated in each Equipment Schedule.
The public liability insurance policy shall be in such amount as is reasonably
acceptable to Lessor. The "all risk" property insurance policy shall be for an
amount not less than the replacement cost of the Equipment. Lessor, its
successors and assigns and/or such other party as may be designated by any
thereof to Lessee, in writing, shall be named as additional insureds and loss
payees on such policies, which shall be written by an insurance company of
recognized responsibility which is reasonably acceptable to Lessor. Evidence of
such insurance coverage shall be furnished to Lessor no later than the
Installation Date set forth in the Equipment Schedule(s) and, from time to time,
thereafter as Lessor may request. Such policies shall provide that no less than
ten days written notice shall be given Lessor and any other party named as loss
payee prior to cancellation of such policies for any reason. To the extent of
Lessor's interest therein, Lessee hereby irrevocably appoints Lessor or any
other party named as loss payee
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as Lessee's attorney-in-fact coupled with an interest to make claim for, receive
payment of, and execute any and all documents that may be required to be
provided to the insurance carrier in substantiation of any such claim for loss
or damage under said insurance policies, and to endorse Lessee's name to any and
all drafts or checks in payment of the loss proceeds.
(b) If any item of Equipment is rendered unusable as a result of any
physical damage to, or destruction of, the Equipment, Lessee shall give to
Lessor prompt notice thereof and this Lease shall continue in full force and
effect without any abatement of rental. Lessee shall determine, within thirty
(30) days after the date of occurrence of such damage or destruction, whether
such item of Equipment can be repaired. In the event Lessee determines that the
item of Equipment cannot be repaired, Lessee shall either, at its expense,
promptly replace such item of Equipment and convey title to such replacement to
Lessor free and clear of all liens and encumbrances, and this Lease shall
continue in full force and effect as though such damage or destruction had not
occurred, or pay Lessor therefor in cash the Stipulated Loss Value (defined
below) within sixty (60) days of such loss or damage at which time all
obligations under this Lease as it relates to such item of Equipment shall
terminate except with respect to any unsatisfied obligations which have accrued
with respect to such item of Equipment prior to such termination. "Stipulated
Loss Value," as used herein, shall be an amount as shown on Exhibit A to the
applicable Equipment Schedule. In the event Lessee determines that such item of
Equipment can be repaired, Lessee shall cause such item of Equipment to be
promptly repaired. All proceeds of insurance received by Lessor, the designated
loss payee or Lessee under the policy referred to in the preceding paragraph of
this Section shall be applied to reimburse Lessee for (i) the cost of any such
repair or replacement as long as Lessee shall not be in default for payment of
any of its obligations hereunder, (ii) the Stipulated Loss Value paid to Lessor
and (iii) any rental installments paid to Lessor for such item of Equipment
during the time Equipment was unusable as a result of such physical damage or
destruction.
9. Events of Default and Remedies:
The occurrence of any one of the following shall constitute an Event of
Default hereunder:
(a) Lessee fails to pay an installment of rent on or before the date when
the same becomes due and payable and such failure continues for a period of ten
days;
(b) Lessee attempts to remove, sell, transfer, encumber, sublet or part
with possession of the Equipment or any items thereof, except as expressly
permitted herein;
(c) Lessee shall fail to observe or perform any of the other obligations
required to be observed or performed by Lessee hereunder and such failure shall
continue uncured for ten (10) days after written notice thereof to Lessee by
Lessor or the then assignee hereof;
(d) Lessee ceases doing business as a going concern, makes an assignment
for the benefit of creditors, admits in writing its inability to pay its debts
as they become due, files a voluntary petition of bankruptcy, is adjudicated a
bankrupt or an insolvent, files a petition seeking for itself any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar arrangement under any present or future statute, law or regulation or
files an answer admitting the material allegations of the petition filed against
it in any such proceeding, consents to or acquiesces in the appointment of a
trustee, receiver, or liquidator of it or of all or any substantial part of its
assets or properties, or if it or its shareholders shall take any action looking
to its dissolution or liquidation;
(e) Within thirty (30) days after the commencement of any proceedings
against Lessee seeking reorganization, arrangement, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, such proceedings shall not have been dismissed, or if within thirty
(30) days after the appointment without Lessee's consent or acquiescence of any
trustee, receiver or liquidator of it or of all or any substantial part of its
assets and properties, such appointment shall not be vacated; and
(f) Lessee defaults in the performance or observation of any material term,
condition or covenant of any loan agreement, indenture, trust agreement, lease
or similar agreement to which Lessee is a party involving an obligation by
Lessee to pay more than $100,000 and such default continues beyond any
applicable cure period; provided however, that if such default should occur and
be cured in accordance with the terms of such similar agreements, or if a waiver
of default is provided with respect to such default, no Event of Default shall
be deemed to have occurred under this Section 9(f).
Upon the occurrence of an Event of Default, Lessor may at its option do any
one or more of the following: (i) by notice to Lessee terminate this Lease as to
any or all Equipment Schedules; (ii) whether or not this Lease is terminated as
to any or all Equipment Schedules, take possession on not less than three (3)
days' notice of any or all of the Equipment listed on any or all Equipment
Schedules, wherever situated, and for such purpose, enter upon any premises
without liability for so doing (except for Lessor's gross negligence or
intentional misconduct) or Lessor may cause Lessee and Lessee hereby agrees, to
return said
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Equipment to Lessor as provided in this Lease; (iii) recover from Lessee, as
liquidated damages for loss of a bargain and not as a penalty, all past due
amounts as well as an amount equal to the present value of all monies to be paid
by Lessee during the remaining Initial Term or any successive period then in
effect, calculated by discounting at the rate of six percent (6%) per annum
compounded monthly, which payment shall become immediately due and payable; and
(iv) sell, dispose of, hold, use or lease any Equipment as Lessor in its sole
discretion may determine (and Lessor shall not be obligated to give preference
to the sale, lease or other disposition of the Equipment over the sale, lease or
other disposition of similar equipment owned or leased by Lessor).
In the event that Lessee shall have first paid to Lessor or its assigns the
liquidated damages referred to in (iii) above, Lessee shall thereafter be
entitled to receive all rentals or proceeds received from any reletting or sale
of the Equipment during the balance of the Initial Term (after deduction of
Lessor's expected residual value of the Equipment at the expiration of the
Initial Term or any extension thereof and of all reasonable expenses incurred in
connection therewith) said amount never to exceed the amount of the liquidated
damages paid by Lessee. Lessee agrees that Lessor shall have no obligation to
sell the Equipment. Lessor shall mitigate damages in accordance with applicable
law. Lessee shall in any event remain fully liable for reasonable damages as
provided by law and for all reasonable costs and expenses incurred by Lessor or
its assigns on account of such default including but not limited to all court
costs and reasonable attorney's fees. Lessee hereby agrees that, in any event,
it will be liable for any deficiency after any lease or other disposition of the
Equipment. The rights afforded Lessor hereunder shall not be deemed to be
exclusive, but shall be in addition to any rights or remedies provided by law.
10. Net Lease:
Except as otherwise specifically provided in this Lease, it is understood
and agreed that this is a net lease, and that, as between Lessor and Lessee,
Lessee shall be responsible for all costs and expenses of every nature
whatsoever arising out of or in connection with or related to this Lease or the
Equipment (including, but not limited to, equipment inspection, tagging,
transportation in and out, rigging, manufacturer's approved packing,
installation, certification costs and disconnect charges). Lessee hereby agrees
that in the event that Lessee fails to pay or perform any obligation under this
Lease, Lessor may, at its option, pay or perform said obligation and any payment
made or expense incurred by Lessor in connection therewith shall become
additional rent which shall be due and payable by Lessee upon demand. Lessee
acknowledges that Lessor may, from time to time, and at Lessee's request,
execute and deliver purchase orders pertaining to the purchase of equipment to
be leased pursuant to this Lease. Lessee agrees that it will indemnify and hold
Lessor harmless from and against any and all loss, cost, liability and expense
that Lessor may incur as a result of the execution and delivery of such purchase
orders.
11. Assignment:
Lessee agrees that Lessor may transfer or assign all or any part of
Lessor's right, title, and interest in, under or to the Equipment and this Lease
and any or all sums due or to become due pursuant to any of the above, to any
third party (the "Assignee") for any reason and that the Assignee may so
re-assign and transfer. Lessee agrees that upon receipt of written notice from
Lessor or Assignee of such assignment, Lessee shall perform all of its
obligations hereunder for the benefit of Assignee and any successor assignee
and, if so directed, shall pay all sums due or to become due thereunder directly
to the Assignee or to any other parry designated by the Assignee. Lessee hereby
covenants, represents and warrants as follows and agrees that the Assignee and
any successor assignee shall be entitled to rely on and shall be considered a
third party beneficiary of the following covenants, representations and
warranties: (i) Lessee's obligations hereunder are absolute and unconditional
and are not subject to any abatement, reduction, recoupment, defense, offset or
counterclaim available to Lessee for any reason whatsoever including operation
of law, defect in the Equipment, failure of Lessor or Assignee to perform any of
its obligations hereunder or for any other cause or reason whatsoever, whether
similar or dissimilar to the foregoing; (ii) Lessee shall not look to Assignee
or any successor assignee to perform any of Lessor's obligations hereunder;
(iii) Lessee will not amend or modify this Agreement without the prior written
consent of the Assignee and any successor assignee; and (iv) Lessee will send a
copy to Assignee and any successor assignee of each notice which Lessee sends to
Lessor. Lessor hereby agrees that the Lease shall not be amended or modified
without Lessee's consent.
12. Representations and Warranties of Lessee and Lessor:
Lessee represents and warrants to Lessor and its assigns, as follows:
1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessee in accordance with its
terms, subject to laws governing creditors' rights;
2. The performance by Lessee will not result in any breach, default or
violation of, Lessee's certificate of incorporation or by-laws or any agreement
to which Lessee is a party;
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3. Lessee is in good standing in its jurisdiction of incorporation and in
any jurisdiction in which any of the Equipment is to be located; and
4. Any and all financial statements or other information with respect to
Lessee heretofore furnished by Lessee to Lessor was, when furnished, and remains
at the time of execution of this Lease, true and complete.
Lessor represents and warrants to Lessee as follows:
1. The execution, delivery and performance of this Lease has been duly
authorized and, upon execution by Lessor and Lessee, will constitute a valid
obligation binding upon and enforceable against Lessor in accordance with its
terms, subject to laws governing creditors' rights; and
2. The performance by Lessor will not result in any breach, default or
violation of, Lessor's certificate of incorporation or by-laws or any agreement
to which Lessor is a party;
The foregoing representations and warranties shall survive the expiration
or termination of this Lease.
13. End of Lease:
Provided (i) no Event of Default has occurred and is continuing and (ii)
Lessee has made all payments in accordance with the Lease, upon written notice
furnished by Lessee no later than four (4) months prior to the expiration of the
Initial Term, Lessee shall, with respect to each Equipment Schedule elect only
such alternatives as may be set forth on the Equipment Schedule.
To the extent that any of such alternatives involves a determination of
Fair Market Value, the Fair Market Value shall be defined and determined by the
provisions of this Section. For purposes hereof, Fair Market Value shall mean
the amount that would obtain in a retail arm's length transaction between an
informed and willing lessee-buyer in possession and an informed and willing
lessor-seller. Rental charges previously paid pursuant to the applicable
Equipment Schedule shall have no effect on the determination of Fair Market
Value. Unless otherwise stated in the Equipment Schedule: the Fair Market Value
for items set forth on the Equipment Schedule which do not have a readily
ascertainable market value, (including but not limited to software, cabling and
certain equipment) shall be determined by multiplying the Lessor's acquisition
cost of such items by a fraction, the numerator of which shall be the Fair
Market Value of the other items and the denominator of which shall be the
Lessor's acquisition cost of such other items; and the determination of Fair
Market Value shall be based upon the assumption that all items set forth on the
Equipment Schedule or included with the Equipment may be transferred to, and
used by, a third party user. In such determination, all alternative uses in the
hands of each buyer or lessee, including, without limitation, the further
leasing of the Equipment shall be taken into account in making such
determination.
Not less than ninety (90) days prior to the end of the Initial Term, Lessee
may provide written notice to Lessor of Lessee's intention to exercise the
purchase or extension option described above. If, on or before a date sixty (60)
days prior to the expiration of the Initial term Lessor and Lessee are unable to
agree upon a determination of the fair market value of the Equipment, such Fair
Market Value shall be determined in accordance with the procedure for appraisal
as described below. After a determination of the Fair Market Value of the
Equipment has been made in accordance with the procedure described below, Lessee
may exercise its option to purchase the Equipment for the Fair Market Value
thereof by delivering written notice to Lessor not more than ten (10) days after
completion of appraisal as described below.
Appraisal shall mean a procedure whereby two independent appraisers,
neither of whom shall be a manufacturer of such Items of Equipment, one chosen
by Lessee and one by Lessor, shall mutually agree upon the amount in question
based upon the definition set forth below. Each party shall deliver a written
notice to the other party appointing its appraiser on or before a date sixty
days prior to the expiration of the Initial Term. If within fifteen (15) days
after appointment of the two appraisers as described above, the two appraisers
are unable to agree upon the amount in question, a third independent appraiser,
who shall not be a manufacturer of such Items of Equipment, shall be chosen
within five (5) business days thereafter by the mutual consent of such first two
appraisers or, if such first two appraisers fail to agree upon the appointment
of a third appraiser, such appointment shall be made by an authorized
representative of the American Arbitration Association or any organization
successor thereof. The decision of the third appraiser so appointed and chosen
shall be given ten (10) business days after the selection of such third
appraiser. The decision of the third appraiser shall solely determine the amount
in question. The costs of such appraisers shall be shared equally by Lessee and
Lessor. The Lease, including the obligation to pay monthly rentals, shall remain
in effect pending the determination of Fair Market Value.
6
<PAGE>
14. Additional Collateral:
In order to secure the prompt and full performance of all of Lessee's
obligations (the "Obligations") arising under the Lease, the Lessee hereby
grants to Lessor a first priority security interest in the assets set forth on
Exhibit A annexed hereto and made a part hereof, as additional collateral (the
"Collateral") for the performance of the Obligations. Lessee agrees to deliver
to Lessor, at any time or times hereafter, any Uniform Commercial Code financing
statements and amendments and all other agreements, documents and instruments
requested by Lessor to perfect and maintain Lessor's security interest in the
Collateral and pay any cost incurred in connection with the filing or recording
of such documents, agreements or instruments. Lessee represents and warrants
that it has title to the equipment, free and clear of all liens, claims or
encumbrances and that the obligations pertaining to the other Equipment subject
to this Lease shall apply to the Collateral, including but not limited to the
obligation to adequately insure and maintain the Collateral and to inform Lessor
of any change in the location of the Collateral. Upon a default under the Lease
in the payment or performance of any of the Obligations which continues beyond
any grace or cure periods, Lessor shall have all of the rights of a secured
party under the Uniform Commercial Code. The lien set forth herein shall be
released by Lessor when Lessee achieves net income in excess of $100,000 in each
of two consecutive calendar quarters.
15. Miscellaneous:
(a) During the term of this Lease, Lessee hereby agrees to deliver to
Lessor or Assignee and any successor assignee a copy of Lessee's monthly
unaudited financial statements, and the annual financial budget for the upcoming
year as soon as available and as it may be adjusted during the year. Lessee
shall also furnish, as soon as available and in any event within ninety (90)
days after the last day of Lessee's fiscal year a copy of Lessee's annual
audited statements and consolidating and consolidated balance sheet, if any, as
of the end of such fiscal year, accompanied by the opinion of an independent
certified public accounting firm of recognized standing. The Lessee shall
furnish such other financial information as may be reasonably requested by
Lessor, including but not limited to any material changes in budgets or
financial reports furnished to the Lessee's Board of Directors or Shareholders.
Notwithstanding the foregoing, after Lessee has completed an initial public
offering of not less than fifteen million dollars ($15,000,000), Lessee shall
only be required to deliver (1) a copy of Lessee's quarterly unaudited financial
statements, (2) a copy of Lessee's annual audited statements and consolidating
and consolidated balance sheet, if any, as of the end of such fiscal year,
accompanied by the opinion of an independent certified public accounting firm of
recognized standing, and (3) all public filings made by Lessee with the
Securities and Exchange Commission.
(b) This Lease constitutes the entire agreement between Lessee and Lessor
with respect to the Equipment, and except as agreed upon in writing no covenant,
condition or other term or provision hereof may be waived or modified orally.
(c) All notices hereunder shall be in writing and shall be delivered in
person or sent by registered or certified mail, postage prepaid, or by facsimile
transmission (confirmed by registered mail as set forth in this section) to the
address of the other party as set forth herein or to such other address as such
party shall have designated by proper notice.
(d) This Lease shall be binding upon and inure to the benefit of Lessor and
Lessee and their respective successors and assigns (including any subsequent
assignee of Assignee).
(e) If any term or provision of this Lease or the application thereof to
any person is, to any extent, invalid or unenforceable, the remainder of this
Lease, or the application of such provision to the person other than those to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
(f) No waiver of any of the terms and conditions hereof shall be effective
unless in writing and signed by the party against whom such waiver is sought to
be enforced. Any waiver of the terms hereof shall be effective only in the
specific instance and for the specific purpose given. The subsequent acceptance
of rental payments hereunder by Lessor shall be deemed a waiver of any prior
existing breach by Lessee relating to the payment of rent, provided (a) Lessor
has knowledge of such prior existing breach at the time of such rental payments
and (b) at the time Lessor accepts such rental payments, Lessee is not then in
default under any other obligations arising under the Lease.
(g) Lessor is hereby authorized by Lessee to cause this Lease or other
instruments, including Uniform Commercial Code Financing Statements to be filed
or recorded for the purpose of showing Lessor's interest in the Equipment and
Lessee agrees that Lessor may execute such instruments for and on behalf of
Lessee. All filing fees reasonably incurred by Lessor in connection therewith
and filing fees incurred by Lessor's assignees in perfecting security interests
shall be paid by Lessee or reimbursed to Lessor by Lessee.
7
<PAGE>
(h) No consent or approval provided for herein shall be binding upon Lessor
unless signed on its behalf by an officer of Lessor. THIS LEASE AND EACH
EQUIPMENT SCHEDULE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF CONNECTICUT
AND SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF SUCH STATE. The Lessee
accepts for itself the non-exclusive jurisdiction of any Federal or State court
of competent jurisdiction in the State of Connecticut in any action, suit or
proceeding of any kind against it which arises out of or by reason of this Lease
or any Equipment Schedule.
(i) Lessee acknowledges that the late payment by Lessee to Lessor of
monthly rental and other sums due hereunder will cause Lessor harm and to incur
costs not contemplated by this Lease, the precise amount and severity of which
will be difficult to ascertain. Such costs include, but are not limited to,
administrative, accounting and legal charges which Lessor may incur due to such
late payment. Accordingly, if any monthly rent or any other sum due from Lessee
shall not be received by Lessor or Lessor's assignee within twenty (20) days
after the same is due, Lessee shall pay to Lessor or Lessor's assignee a late
charge equal to five per cent (5%) of such overdue amount monthly until such
overdue amount is paid. Lessee acknowledges that such late charge represents a
fair and reasonable estimate of the cost Lessor will incur by reason of a late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default, if any, with respect to such overdue
amounts, nor prevent Lessor from exercising any of the other rights and remedies
which Lessor may have pursuant to this Lease.
(j) The obligations which Lessee and Lessor are required to perform during
the term of this Lease shall survive the expiration or other termination of this
Lease.
(k) Notwithstanding anything to the contrary in this Lease, wherever
consent or approval of Lessor or Lessee is required hereunder such consent or
approval shall not be unreasonably withheld or delayed.
(l) Lessee will promptly execute and deliver to Lessor such further
documents and assurances and take such further action as Lessor may reasonably
request in order to effectuate the intent and purpose of this Lease and to
establish and protect the rights, interests and remedies intended to be created
in favor of Lessor hereunder, including without limitation, the execution and
filing of financing statements and continuation statements with respect to this
Lease, the Equipment and any Equipment Schedule. Lessee authorizes Lessor to
effect any such filing and Lessor's reasonable expenses (together with the
reasonable expenses of Lessor's assignees in this regard) shall be payable by
Lessee on demand.
LESSOR: LESSEE:
Leasing Technologies Netstakes, Inc.
International, Inc.
BY: /s/ George A. Parker BY: /s/ Christopher Bragas
--------------------------- ------------------------
NAME: George A. Parker NAME: Christopher Bragas
TITLE: Executive Vice President TITLE: CFO
DATE: 4/8/99 DATE: 3/9/99
8
<PAGE>
EXHIBIT A
TO
MASTER LEASE AGREEMENT DATED OCTOBER 19, 1998 (THE "LEASE")
BETWEEN LEASING TECHNOLOGIES INTERNATIONAL, INC. (THE "LESSOR")
AND NETSTAKES, INC. (THE "LESSEE")
Collateral
Accounts receivable now owned or hereafter acquired and all proceeds
thereof, but in no case exceeding 50% of the Purchase Price of the Equipment
subject to the Lease, but in no case in excess of $500,000. "Accounts
Receivable" means all accounts receivable of Debtor, including but not limited
to (i) all notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or leased, or services rendered,
whether or not earned by performance; (ii) all general intangibles of Debtor
that constitute debts, obligations or liabilities owed to Debtor arising out of
or in connection with such accounts receivable; (iii) all of Debtor's chattel
paper of every kind and description from account debtors including all additions
thereto and substitutions therefor; (iv) all files, records (including, without
limitation computer programs, disks, tapes and related electronic data
processing media) and writings of Debtor or in which Debtor has an interest in
any way relating to the foregoing property and all rights of Debtor to the
retrieval from third parties of electronically processed and recorded
information pertaining to any of such property; (v) all of Debtor's documents
and instruments constituting or evidencing the foregoing and (vi) all guaranties
and securities for, and all proceeds of any of the foregoing.
LESSOR: LESSEE:
Leasing Technologies Netstakes, Inc.
International, Inc.
BY: /s/ George A. Parker BY: /s/ Christopher Bragas
--------------------------- ------------------------
NAME: George A. Parker NAME: Christopher Bragas
TITLE: Executive Vice President TITLE: CFO
DATE: 4/8/99 DATE: 3/9/99
<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
1301 Avenue of the Americas
New York, New York
June 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT INCLUDED IN THIS FORM S-1 REGISTRATION STATEMENT,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 MAR-31-1999
<CASH> 85,365 17,573 2,812,554
<SECURITIES> 0 0 0
<RECEIVABLES> 126,036 740,230 754,981
<ALLOWANCES> 12,700 125,000 175,694
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 201,452 757,977 3,501,167
<PP&E> 277,990 630,406 820,641
<DEPRECIATION> 45,132 192,647 253,272
<TOTAL-ASSETS> 476,018 1,195,736 4,236,527
<CURRENT-LIABILITIES> 350,671 1,948,831 851,757
<BONDS> 0 0 0
0 0 5,000,000
0 0 0
<COMMON> 49,992 57,142 57,142
<OTHER-SE> 75,355 (810,237) (1,672,362)
<TOTAL-LIABILITY-AND-EQUITY> 476,018 1,195,736 4,236,537
<SALES> 1,618,277 4,798,893 1,318,628
<TOTAL-REVENUES> 1,618,277 4,798,893 1,318,628
<CGS> 1,807,944 6,136,589 2,217,056
<TOTAL-COSTS> 1,807,944 6,136,589 2,217,056
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 37,172 76,347 (14,082)
<INCOME-PRETAX> (226,839) (1,414,043) (884,346)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (226,839) (1,414,043) (884,346)
<EPS-BASIC> (.05) (.27) (.15)
<EPS-DILUTED> (.05) (.27) (.15)
</TABLE>
<PAGE>
CONSENT OF LISA Z. CRANE
I, Lisa Z. Crane, hereby accept the nomination to serve as director of
Webstakes.com, Inc., a Delaware corporation (the "Company"), and consent to be
named as a nominee director in the Company's Registration Statement on Form S-1
and all amendments thereto.
/s/ Lisa Z. Crane
------------------------
Lisa Z. Crane
Dated: June 7, 1999
<PAGE>
CONSENT OF KRISTOPHER WOOD
I, Kristopher Wood, 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/ Kristopher Wood
-------------------
Kristopher Wood
Dated: June 9, 1999
