<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 1999
REGISTRATION NO.
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ADSTAR.COM,INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7319 22-3666899
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4553 GLENCOE AVENUE
SUITE 325
MARINA DEL REY, CALIFORNIA 90292
(310) 577-8255
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S EXECUTIVE OFFICES)
------------------
LESLIE BERNHARD
CHIEF EXECUTIVE OFFICER
ADSTAR.COM, INC.
4553 GLENCOE AVENUE
SUITE 325
MARINA DEL REY, CALIFORNIA 90292
(310) 577-8255
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
AGENT FOR SERVICE)
------------------
Copies to:
<TABLE>
<S> <C>
HOWARD L. WEINREICH, ESQ. JOHN HALLE, ESQ.
MORSE, ZELNICK, ROSE & LANDER, LLP STOEL RIVES, LLP
450 PARK AVENUE 900 S.W. FIFTH AVENUE
NEW YORK, NY 10022 PORTLAND, OREGON 97204
(212) 838-4312 (503)294-9233
(212) 838-9190 (FACSIMILE) (503)220-2480 (FACSIMILE)
</TABLE>
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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 registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------
<PAGE> 2
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF PROPOSED
UNITS/SHARES PROPOSED AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, consisting of one share of common stock par value,
$.0001 per share and one redeemable warrant to purchase one
share of common stock (2)................................... 1,150,000 $ 6.00 $ 6,900,000 $ 1,668.00
- -----------------------------------------------------------------------------------------------------------------------------
Shares of common stock underlying the common stock purchase
warrants included in the units (3)........................ 1,150,000 $ 9.00 $10,350,000 $ 2,877.30
- -----------------------------------------------------------------------------------------------------------------------------
Representative's warrants to purchase units................. 100,000 -$- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------
Units issuable upon exercise of the representative's
warrants.................................................. 100,000 $ 7.20 $ 720,000 $ 200.16
- -----------------------------------------------------------------------------------------------------------------------------
Shares of common stock underlying the warrants issuable upon
exercise of the warrants underlying the representative's
warrants (3).............................................. 100,000 $ 9.00 $ 900,000 $ 250.20
- -----------------------------------------------------------------------------------------------------------------------------
Total Registration Fee...................................... $ 4,995.66
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</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 150,000 units issuable upon exercise of underwriters'
over-allotment option.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the antidilution provisions of the warrants.
(4) No registration fee required pursuant to Rule 457(g) under the Securities
Act.
------------------
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 BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion
Dated December 9, 1999
[ADSTAR.COM LOGO]
1,000,000 UNITS
EACH CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE WARRANT TO
PURCHASE ONE SHARE OF COMMON STOCK
ADSTAR.COM, INC.
We are offering units consisting of one share of common stock and one
redeemable warrant to purchase an additional share of common stock. The common
stock and warrants will trade only as a unit for a period of time as determined
by the Company of not more than 30 days following this offering and will then
trade separately.
The redeemable warrants will be exercisable commencing 30 days after this
offering until they expire five years after the date of this prospectus at an
exercise price, per share, of $7.20 during the nine month period following the
date of this prospectus and at $9.00 thereafter. We may redeem some or all of
the warrants at $0.25 per warrant commencing 180 days after the date of this
prospectus, if the closing bid price of our common stock on each of 10
consecutive days is greater than or equal to $12.00 and we provide 30 days prior
written notice of redemption.
Our common stock is not traded on any market. We have applied to list our
units, common stock and warrants on the Nasdaq Small Cap Market under the
symbols "ADSTU," "ADST," and "ADSTW," respectively.
INVESTING IN THE UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
<TABLE>
<CAPTION>
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PER UNIT TOTAL
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<S> <C> <C>
Initial public offering price.......................... $6.00 $6,000,000
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Underwriting discounts and commissions................. .60 600,000
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Proceeds to AdStar..................................... 5.40 $5,400,000
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</TABLE>
We expect total cash expenses in connection with the offering to be
approximately $354,550, which will include a nonaccountable expense allowance of
3% of the gross proceeds of this offering that will be paid to Paulson
Investment Company, Inc., the managing underwriter of this offering. We have
granted to the underwriters a 45-day option to purchase up to 150,000 additional
units to cover over-allotments. We will also grant to the underwriters a
five-year warrant to purchase up to 100,000 additional units.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Paulson Investment Company, Inc. expects to deliver the units on or about
December , 1999 if payment for the units is received by Paulson.
PAULSON INVESTMENT COMPANY, INC.
December , 1999
<PAGE> 4
[INSIDE FRONT COVER WILL FEATURE A CHART WHICH DISPLAYS THE FLOW OVER THE
INTERNET OF A SERIES OF E-COMMERCE TRANSACTIONS BETWEEN ADVERTISERS PURCHASING
CLASSIFIED ADS FOR PUBLICATION BOTH IN PRINT MEDIA AND ON-LINE FROM VARIOUS
POINTS OF AD SUBMISSION: (1) OUR WEB SITE -- ADSTAR.COM; (2) THE WEB SITE OF A
WEB PUBLISHER WHICH IS A DISTRIBUTION PARTNER OF OURS; AND (3) THE WEB SITE OF A
NEWSPAPER AFFILIATE OF ONE OF OUR
DISTRIBUTION PARTNERS.]
2
<PAGE> 5
SUMMARY
You should read the following summary together with the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this prospectus.
OUR BUSINESS
AdStar has developed a one-stop marketplace on the Web for advertisers to
buy classified ads. We enable advertisers by accessing our Web site on their
computers to plan, schedule, compose and purchase classified advertising from a
large number of print and on-line publishers. Our service will permit both
professional and non-professional advertisers, including the general public, to
create and submit to one or many publishers any number of ads, 24 hours a day,
seven days a week, using any recognized Web browser.
This new Web-based service is an outgrowth of our historical business that,
since 1986, has offered professional advertisers the ability to place ads
electronically with a growing number of the largest newspapers in the United
States based on circulation. Using this system, we have become the largest
provider of remote entry for classified ads into newspapers in the United
States. However, because of the high cost of installation, training and on-going
support at advertiser sites, our system has been limited to use by large
advertisers or ad agencies for placement of ads in the largest newspapers in the
United States. We have had losses from operations in each of the last two years.
Our stockholders' deficit was $1,960,124 as of September 30, 1999.
In order to eliminate the cost impediments to the expansion of our
historical remote ad entry business and broaden our market penetration, we have
developed and recently implemented a Web-based service through our Web site,
Advertise123.com. By accessing our Web site using any recognized Web browser,
advertisers can:
- Select publications for ad placement, including both print and on-line
media;
- Compose and format ads using formats supported by each publication;
- Preview the ad as it will appear in each publication;
- Specify editions and scheduled publication dates; and
- Electronically transfer ads to the selected publications.
- Price and pay for each ad using a credit or debit card.
In contrast to our historical business, from which we have earned revenue
from software licensing fees, our Advertise123.com revenues are transaction fee
based; allowing us to earn revenue based on numbers of ads and advertising
dollar volume.
Our principal executive office is located at 4553 Glencoe Avenue, Suite
325, Marina del Rey, California 90292. Our telephone number is (310) 577-8255
and our Web site addresses are www.AdStar.com and www.Advertise123.com.
Information contained on our Web sites is not a part of this prospectus.
3
<PAGE> 6
THE OFFERING
Securities Offered........... 1,000,000 units. Each unit consists of one share
of common stock and a redeemable warrant to
purchase one additional share of common stock.
The common stock and warrants will trade only as
a unit for a period of time as determined by the
Company of not more than 30 days following the
offering. For more information, see "Description
of Securities."
Warrants..................... The redeemable warrants will be exercisable
commencing 30 days after this offering until
they expire on the fifth anniversary of the date
of this Prospectus, at an exercise price per
share of $7.20 during the nine month period
following the date of this prospectus and at
$9.00, thereafter. We may not redeem the
warrants for at least 180 days after the date of
this Prospectus. After that date, if the closing
bid price of our common stock on each of the 10
consecutive trading days preceding our notice of
redemption is greater than or equal to $12.00 we
may redeem some or all of the warrants if we
provide the holders with 30 days' prior written
notice. The redemption price will be $0.25 per
warrant. If we give notice of redemption,
holders of warrants will have 30 days during
which they may elect to exercise the warrants,
or allow the warrants to be redeemed for the
redemption price. Please refer to "Description
of Securities -- Warrants."
Common Stock Outstanding..... 1,669,970 shares of common stock were
outstanding on the date of this prospectus,
excluding up to 275,991 shares issuable on
exercise of outstanding options and warrants.
After this offering, there will be 2,699,970
shares of common stock outstanding, excluding up
to (i) 275,991 shares issuable on exercise of
outstanding options and warrants, (ii) 200,000
shares issuable upon exercise of the
underwriter's warrant and the underlying
redeemable warrant, and (iii) 1,000,000 shares
issuable upon exercise of the redeemable
warrants issued in this offering.
Risk Factors................. An investment in the units involves a high
degree of risk. You should not consider this
offer if you cannot afford to lose your entire
investment. Please refer to "Risk Factors" for
factors you should consider.
Use of Proceeds.............. The net proceeds from the offering, estimated to
be approximately $5,045,450, will be used for
implementing our plan for the development of
Advertise123.com and for debt retirement. For
more information regarding how we will use the
proceeds, please refer to "Use of Proceeds."
4
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table sets forth certain financial data for the company. This
information should be read in conjunction with the Financial Statements and
Notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1997 1998 1998 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues......................... $1,148,233 $1,559,361 $1,209,340 $ 1,212,293
Cost of revenues................. 565,329 800,532 590,271 961,525
---------- ---------- ---------- -----------
Gross profit................... 582,904 758,829 619,069 250,768
Sales, general and administrative
expenses....................... 634,029 820,574 532,294 1,295,096
Abandoned offering costs, net.... -- -- -- 171,854
---------- ---------- ---------- -----------
Income (loss) from operations.... (51,125) (61,745) 86,775 (1,216,182)
Interest expense................. (7,873) (4,518) (3,695) (190,150)
---------- ---------- ---------- -----------
Income (loss) before taxes....... (58,998) (66,263) 83,080 (1,406,332)
Provision for taxes.............. 823 2,760 2,070 2,080
---------- ---------- ---------- -----------
Net income (loss) --historical... $ (59,821) $ (69,023) $ 81,010 $(1,408,412)
========== ========== ========== ===========
Pro forma net income (loss)...... $ (59,798) $ (67,063) $ 82,480 $(1,406,932)
========== ========== ========== ===========
Pro forma earnings (loss) per
share -- basic and diluted..... $ (0.05) $ (0.87)
Pro forma weighted average number
of shares -- basic and
diluted........................ 1,458,393 1,613,675
</TABLE>
- ---------------
Pro forma net income (loss) has been computed on the basis described in Note 1
and Note 2 of Notes to Financial Statements and assumes the pro forma tax
provisions described in those notes.
5
<PAGE> 8
The following table shows actual, pro forma and pro forma as adjusted
balance sheet data.
BALANCE SHEET DATA:
The following pro forma information gives effect to:
- the conversion of $1,050,000 principal amount of convertible notes that
were issued in March and April 1999 plus interest of $53,567 of which
$15,200 will be expensed subsequent to September 30, 1999, into 231,620
shares of our common stock on the closing of this offering; and
- our borrowing from Paulson Capital Corporation, parent of Paulson
Investment Company, Inc., of $1.1 million evidenced by a promissory note
due on October 21, 2001 and bearing interest at 6% per annum payable at
maturity.
The following pro forma as adjusted information gives effect to:
- the foregoing pro forma adjustments;
- the sale of 1,000,000 units offered by us in this prospectus at $6.00 per
unit;
- payment of the underwriting discount and estimated offering expenses
payable by us;
- the repayment of notes payable of $1,589,032 and amortization of debt
issue costs of $67,437; and
- reclassification of redeemable common stock to common stock and
additional paid-in capital on the closing of this offering.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 104,133 $1,204,133 $4,660,551
Working capital........................ 33,548 1,171,915 4,783,746
Total assets........................... 1,592,919 2,692,919 6,149,337
Notes payable, net of current
portion.............................. 2,416,182 2,466,182 1,100,000
Total liabilities...................... 3,415,507 3,427,140 1,905,545
Redeemable common stock................ 137,536 137,536 --
Total stockholders' equity (deficit)... (1,960,124) (871,757) 4,243,792
</TABLE>
------------------------
We were incorporated in New York in 1991 as the successor to a business
that was started in 1986. On August 31, 1999 we reincorporated in Delaware and
issued or, reserved for issuance, an aggregate of 1,666,667 shares of common
stock in exchange for all the outstanding shares of our predecessor including
shares to be issued upon conversion of our convertible notes. Our principal
executive office is located at 4553 Glencoe Avenue, Suite 325, Marina del Rey,
California 90292. Our telephone number is (310) 577-8255 and our Web site
addresses are www.AdStar.com and www.Advertise123.com. Information contained on
our Web sites is not a part of this prospectus.
Unless otherwise indicated, all information in this prospectus assumes
that:
- The underwriters will not exercise their over-allotment option;
6
<PAGE> 9
- Our outstanding convertible notes will be converted to common stock
before this offering is completed; and
- We have adjusted all share numbers to give retroactive effect to a five
for nine reverse stock split in December 1999.
7
<PAGE> 10
RISK FACTORS
This offer involves a high degree of risk. Each prospective investor should
carefully consider the risks described below and other information in this
prospectus before making an investment decision.
GROWTH OF HISTORICAL ADSTAR BUSINESS IS LIMITED
Our historical AdStar remote ad entry business is limited both in current
size and growth potential due principally to the high cost of installation,
training and on-going support at advertiser sites and the requirement that
advertisers separately dial-up each publication in which they intend to buy an
ad. Our ability to achieve sufficient revenues to justify the expectations of
our investors is dependent on the success of our new on-line business which we
believe eliminates these barriers. Our belief that we can successfully expand
our business by migrating to a delivery system over the Internet may not be
correct.
OUR NEW ON-LINE BUSINESS IS UNPROVEN AND MAY NOT BE SUCCESSFUL
We did not begin to offer our remote ad entry services over the Internet
until June 1999. Moreover, we know of no company that accepts classified ads
on-line for publication both on-line and in print. Accordingly, we cannot
guarantee that we will be able to generate the public interest necessary to
sustain our business model. You must particularly consider the risks and
difficulties frequently encountered by an early-stage business in a rapidly
evolving market, which makes our ability to successfully implement our business
plan uncertain. These risks include whether we will be able to:
- convince a large number of print and on-line media publications to be
accessible to our advertisers on our Web sites;
- attract a large number of advertisers to our Web sites;
- develop profitable pricing models for our transaction fees for ad
placements over our Web sites;
- increase awareness of our Advertise123.com brand;
- maintain current and develop new distribution relationships with highly
trafficked sites of Web publishers;
- continue to utilize our current software and effectively develop new
software and systems;
- respond effectively to competitive pressures; and
- attract, retain and motivate qualified personnel.
We may not be able to successfully address these risks. Our failure to do so
will adversely affect our ability to develop an on-line business.
8
<PAGE> 11
OUR UNPROVEN ON-LINE BUSINESS MODEL MAY NOT GENERATE EXPECTED REVENUES
Because we have limited Internet experience, we cannot accurately forecast
the source, magnitude or timing of our future revenues. Current expectations are
that we will receive:
- transaction-based fees for ads processed on our Web sites except where we
agree to waive our fees in transactions between advertisers using our
licensed software with newspapers paying us license fees;
- fixed fees to be paid by on-line media clients;
- fees from media and advertising companies who advertise on our Web sites;
and
- fees from advertisers and newspapers for statistical reports generated by
data assembled from ads processed on our Web sites.
Our expectations with respect to future revenues are principally based on
our ability to attract advertisers and publications to our Web sites and thus
facilitate ad placements on these sites. In particular, our assumption that we
will not encounter any significant resistance by publishers to accepting
Web-based ads obtained by us may be wrong. Publishers might view transactions in
which we deduct a transaction fee as reducing the amounts they would receive if
they obtained the ads directly. No standards exist for measuring the
effectiveness of classified advertising. Many of our existing and potential
classified advertising publishers have only limited experience with acquiring
ads on-line and may not be willing to expend the time and expense to participate
in Web-based ad programs. If because of these factors, the revenues are not
generated in the amounts and within the time periods necessary to sustain our
operations our prospects for our on-line business will be seriously compromised.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT INCREASED LOSSES
For the years ended December 31, 1997 and 1998 we incurred net losses of
approximately $60,000 and $69,000. For the nine months ended September 30, 1999
we incurred a net loss of approximately $1,408,000. Our accumulated deficit as
of September 30, 1999 was approximately $990,800. Our 1999 loss was principally
attributable to expenses incurred in starting our new on-line business and
aborted offering expenses. We expect to continue to incur losses until we are
able to significantly increase our Internet revenues from transaction fees based
on the number of ad purchases transacted on our Web sites. Our operating
expenses are expected to continue to increase significantly in connection with
our proposed expanded activities. Our future profitability will depend on our
ability to increase our on-line advertiser base and transaction revenues while
controlling our costs. We may not be able to achieve profitability.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS
Our ability to grow depends significantly on our ability to substantially
increase our work force. Our operating expenses will increase substantially as
the number of employees increases. We estimate that the costs associated with
the increase of the number of our employees from 26 at November 1, 1999 to 65
over a period of 12 to 18 months will be at least $3,000,000. We expect the net
proceeds from this offering will be sufficient to meet our cash needs for at
least 12 months. However, if the actual costs of our expanded operations are
higher than projected or the revenues from our new operations fall below
9
<PAGE> 12
our current expectations, we may need additional financing before the expiration
of 12 months. In either event if our revenues are insufficient to provide the
necessary cash flow for ongoing operations, we will need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies. We may not be able to raise
needed cash on terms acceptable to us or at all. Financings may be on terms that
are dilutive or potentially dilutive to our stockholders. If sources of
financing are required, but are insufficient or unavailable, we will be required
to modify our growth and operating plans to the extent of available funding,
which would have a material adverse effect on the successful implementation of
our planned business expansion.
OUR NEW ON-LINE SERVICE IS ONLY PARTIALLY IMPLEMENTED
Our Advertise123.com Web-based service is currently available on a limited
basis for the placement of ads with a limited number of publishers. Until our
Web site can display a critical mass of publishers, we do not expect to attract
a significant number of advertisers to our Web site and cannot guarantee its
performance as a commercial sales channel.
OUR INITIAL CO-MARKETING DISTRIBUTION AGREEMENTS, UPON WHICH WE DEPEND TO
FACILITATE THE ADDITION OF NEW PUBLISHERS ON OUR WEB SITE, ARE TERMINABLE ON
SHORT NOTICE
We expect to depend on distribution agreements with republishers of
classified ads on the Web with whom we have co-marketing distribution agreements
to facilitate the addition of new newspapers to our Web site. Our initial
co-marketing distribution agreements have only recently been signed and their
implementation has only recently begun. Even after these arrangements are in
place they may be terminated by our partners on short notice. Early termination
of any of these agreements could seriously affect our ability to achieve a
critical mass of publishers and in turn our ability to attract advertisers,
which is essential to success in our on-line business.
OUR EARLY STAGE AND UNTESTED INTERNET OPERATIONS ARE PARTICULARLY VULNERABLE TO
BREAKDOWNS IN SERVICE
As an early stage Internet business, we are particularly vulnerable to
break downs and interruptions in our service which could disrupt our ability to
provide continued and sustained support to advertisers and publishers. We have
not yet suffered any breakdowns in service. However, our service has not yet
been tested by repeated and continuous use and vulnerability to interruptions in
service should increase as we develop increased traffic on our Web site. If
because of interruptions our customers and prospective customers lose faith in
our ability to service their needs, they may choose more traditional and
dependable means for placing their classified ads. If this were to occur, we
will not be successful in building an on-line business.
THE SUCCESSFUL INTRODUCTION OF OUR NEW ON-LINE BUSINESS MAY DIMINISH THE VALUE
OF OUR HISTORICAL LICENSED SOFTWARE BUSINESS, CAUSING MANY OF OUR NEWSPAPER
CUSTOMERS TO TERMINATE OR NOT RENEW THEIR SOFTWARE LICENSE AGREEMENTS
Once our Web site is fully implemented, its versatility may encourage many
of the more than 1,400 large advertisers currently using our AdStar software, to
process their ad buys on Advertise123.com. This in turn may reduce the value of
our licensed software to our newspaper customers which could discourage them
from renewing their license
10
<PAGE> 13
agreements with us. This would result in reduced revenues from our historical
business which were $1,559,000 in 1998. Our loss of any revenue source would
need to be replaced with transaction fees from ad buys on our Web sites. The
failure to replace license fees with transaction fees will materially and
adversely affect our revenue and cash flow.
OUR ON-LINE BUSINESS COULD FACE COMPETITION FROM MANY SOURCES
We are unaware of any company which provides a centralized on-line sales
channel for the selection, transaction and processing of classified ads in
multiple print and on-line publications. Those publishers which accept and
process ads by traditional means like telephone, facsimile transmission and
printed copy submissions are potential competitors. Advertise123.com seeks to
attract advertisers to its Web site to capture the transaction whereby they will
select and process classified ads before they contact a publisher directly. Our
ability to compete successfully will depend on the cost effectiveness of our
services and whether the transaction fees charged to publishers for ads
processed through Advertise123.com are economical.
In addition, many companies not now in the business of providing on-line
remote ad entry and possessing larger capital resources than we do may seek to
develop their own technology and enter into the business of offering a similar
broad based, centralized on-line classified ad placement services to ours. Many
of these companies will have longer operating histories, greater name
recognition, larger customer bases and significantly greater technical and
marketing resources than we have. As a result, they may be able to respond more
quickly than us to new or emerging technologies and can devote greater resources
than us to development, promotion and sale of their services. Faced with this
type of competition, our ability to compete effectively and operate profitably
cannot be assured.
WE MAY BE UNABLE TO MANAGE OUR GROWTH WHICH CONTEMPLATES NEARLY A THREE-FOLD
INCREASE IN OUR WORK FORCE
Our business plan contemplates an increase in the number of our employees
from 26 to 65 over a period of 12-18 months. The recruitment, training and
integration of these persons into our operations will place a significant strain
on our managerial, operational and financial resources. To handle this influx of
personnel and our projected growth in customer base and operations we must
install and operate new and more complex accounting, bookkeeping and telephone
systems. We cannot guarantee that we will be able to manage effectively the
expansion of our operations or that our personnel, systems, procedures and
controls will be adequate to meet our anticipated future operations. If this
were to occur, it would materially and adversely affect our business and
prospects.
WE MAY NOT BE ABLE TO RETAIN KEY EXISTING EMPLOYEES OR ATTRACT THE LARGE NUMBER
OF ADDITIONAL EMPLOYEES ESSENTIAL TO THE SUCCESS OF OUR NEW ON-LINE BUSINESS
Our performance is substantially dependent on the performance of our senior
management and key technical personnel and on our ability to attract the new
internet oriented employees required in the implementation of our business plan.
Our success depends in the first instance on the continued efforts of our Chief
Executive Officer, Leslie Bernhard, and on our Executive Vice President and
Chief Technical Officer, Eli Rousso. In addition, our future personnel needs
contemplate nearly a three-fold increase in our work force over a period of
12-18 months. The competition for Internet oriented people of
11
<PAGE> 14
the type we will be seeking is intense and we may be hard pressed to find the
personnel needed as fast as we need them. If we are unable to retain our key
existing employees or to rapidly attract, hire and assimilate the qualified
employees we will be seeking, the growth of our on-line business will be
arrested and we will not be able to meet the projected revenue increases within
the time period contemplated in our business plan, if at all.
WE ARE VULNERABLE TO POTENTIAL LAWSUITS REGARDING AD CONTENT OR SYSTEM FAILURE
Because we facilitate the placement of advertisements in print and on-line
publications, potential claims may be asserted against us for negligence,
defamation or personal injury, or based on other theories, due to the nature of
the content of these advertisements. Our technology does not contemplate our
reviewing classified advertisements processed on our Web sites for libelous or
other statements that might give rise to possible liability.
Although we carry general liability insurance, our coverage may not cover
potential claims or may not be adequate to fully indemnify us. Any imposition of
liability or legal defense expenses that are not covered by insurance or that
are in excess of our insurance coverage could place a strain on our available
cash resources, could seriously jeopardize the success of our business plan and
could materially and adversely affect our financial position, results of
operations and cash flows.
OUR LIMITED INTERNET EXPERIENCE MAY AFFECT OUR ABILITY TO DEAL EFFECTIVELY WITH
TECHNOLOGICAL CHANGE
Our new on-line business is characterized by:
- rapidly changing technology;
- evolving industry standards;
- frequent new product and service announcements;
- introductions and enhancements; and
- changing customer demands.
These market characteristics are heightened by the emerging nature of the
Internet and Internet advertising and in particular by our limited experience
and short operating history in this market. For these reasons, our future
success depends on:
- our ability to adapt the rapidly changing technologies to the needs of
our advertising and publishing clients; and
- our ability to continually improve the performance, features and
reliability of our on-line services.
Furthermore, we do not know if we will have the experience and talent to
overcome technical difficulties that may arise from time to time that could
delay or prevent the successful design, development, testing, introduction or
marketing of solutions, or that any new solutions or enhancements to existing
solutions will adequately meet the requirements of our current and prospective
customers and achieve any degree of significant market acceptance. If we are
unable, for technological or any other reasons, to develop and
12
<PAGE> 15
introduce new solutions or enhancements to existing solutions in a timely manner
or in response to changing market conditions or customer requirements, or if our
solutions or enhancements contain errors or do not achieve a significant degree
of market acceptance, our financial position, results of operations and cash
flows could be materially and adversely affected.
WE DO NOT OWN ANY PATENTS AND MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS
We believe that our future success will depend, in part, on our ability to
develop proprietary rights with respect to our systems and services including
domain names, trademarks, trade names, service marks and copyrights. This is
particularly true with respect to our Web-based service technology. Although we
are in the process of determining whether patent protection is available for
certain aspects of our technology, we do not currently own any patents or patent
applications on our technology and we have no assurance that our rights to that
technology are patentable or otherwise protectable. Moreover there is no
assurance that others might not develop alternate technologies that might be
more effective than ours whether or not we obtain patent protection.
We have recently begun to use the trademark and Internet domain name
Advertise123.com but have not yet applied for registration of the trademark. We
cannot guarantee that our application for a registration of this trademark will
be granted and, if granted, that it will not be successfully challenged by
others or invalidated through administrative process or litigation. Further, if
our Advertise123.com trademark application is not granted due to the prior
rights of a third party we may not be able to obtain a license on commercially
reasonable terms to allow us to continue to use this trademark.
Despite our existing trademark rights in the marks AD-STAR, from use and
registration, and Advertise123.com, from use and our proposed expanded federal
protection for these marks, the marks remain susceptible to trademark
infringement due to the frequent illicit use and piracy of trademarks by
"cybersquatters" on the Internet. Although we own the domain names
Advertise123.com and AD-STAR.com, there remains the risk that third parties will
seek to register our marks AD-STAR and Advertise123 in the other "top level"
domains, e.g., .org, .net, and .gov, or that they will register close copies of
our marks that we may be unable to stop.
Furthermore, we cannot guarantee that our business activities will not
infringe upon the proprietary rights of others, or that other parties will not
assert infringement claims against us.
If for any of the above reasons we are deprived of any proprietary rights
to our technology or trade style our prospects for success may be seriously and
adversely affected. See "Business -- Intellectual Property".
OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS
Our operations and services depend on the extent to which our computer
equipment and the telecommunications infrastructure of our third-party network
providers is protected against damage from fire, earthquakes, power loss,
telecommunications failures, and similar events. A significant portion of our
computer equipment, including critical equipment dedicated to our internet
access is located in the Los Angeles area. Despite precautions taken by us and
our third-party network providers, over which we have no control, a
13
<PAGE> 16
natural disaster or other unanticipated problems at our network hub, or a
third-party network provider point of presence could cause interruptions in the
services that we provide. If disruptions occur, we may have no means of
replacing these network elements on a timely basis or at all. We do not
currently maintain back-up Internet services or facilities or other back-up
computing and telecommunications facilities. Extensive or multiple interruptions
in providing users with Internet access are a reason for user decisions to stop
using access services. Accordingly, any disruption of our services due to system
failure could have a material and adverse effect on our business, results of
operations and financial condition. Furthermore, we do not currently have any
business disruption insurance.
CONCENTRATION OF VOTING RIGHTS MAY PREVENT YOU FROM HAVING ANY VOICE IN
CORPORATE AFFAIRS
Upon the successful completion of this offering, Leslie Bernhard and Eli
Rousso will each have voting rights with respect to 27% of our issued and
outstanding shares of common stock. With these holdings, Ms. Bernhard and Mr.
Rousso will be able to control all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing any change in how and by whom we are controlled.
YOUR INVESTMENT IS SUBJECT TO SUBSTANTIAL DILUTION AT THE TIME YOU INVEST AND IN
THE FUTURE UPON OUR ISSUANCE OF ADDITIONAL SHARES.
As an investor purchasing units in this offering you will incur an
immediate $4.48 dilution in net tangible book value for each share of stock
included in the units you purchase. In addition, we have issued options to our
employees to purchase an aggregate of 141,742 shares of common stock at prices
substantially below the cost of the shares that you will acquire in this
offering. To the extent these options are exercised at prices below our net
tangible book value per share at the time of exercise they will dilute the then
net tangible book value of all our outstanding shares, including yours. And if
in the future the Company should issue additional shares for acquisitions or
other corporate purposes at prices below the per share net tangible book value
at the time of issuance you and our other stockholders will suffer a still
further dilution of your and their stock interests. This dilution may adversely
affect the market price of our stock. For a more detailed description please
refer to "Dilution".
OUR CORPORATE DOCUMENTS MAY LIMIT RIGHTS OF STOCKHOLDERS
Following the closing of the offering, our Board of Directors will have the
authority to issue up to 5,000,000 shares of preferred stock without any further
vote or action by our stockholders, and to determine the price, rights,
preferences, privileges and restrictions, including voting rights of these
shares. Since the preferred stock could be issued with voting, liquidation,
dividend and other rights superior to the rights accompanying shares of our
common stock, the rights of the holders of shares of common stock included in
the units, will be subject to, and may be adversely affected by, the superior
rights of the holders of preferred stock.
The issuance of preferred stock could also make it more difficult for a
third party to acquire a majority of our outstanding voting stock. Furthermore,
certain provisions of our Certificate of Incorporation, and certain provisions
of our Bylaws and of Delaware law,
14
<PAGE> 17
could have the effect of delaying or preventing a change in control of the
company which you may deem to be in the best interests of the company.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE MATERIAL ADVERSE EFFECTS ON OUR
BUSINESS
A significant portion of the world's computer hardware and software has
historically used only two digits to identify the year in a date, often meaning
that the computer will fail to distinguish dates in the 21st century from dates
in the 20th century. As a result, various problems may arise from the improper
processing of dates and date-sensitive calculations by computers and other
machinery as the Year 2000 is approached and reached. These problems include
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar business activities.
Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 readiness issues could result in an interruption,
or a failure, of our normal business activities or operations. Based on
discussions with our publishing clients, we believe that all, or substantially
all, of them have taken steps to make themselves Year 2000 compliant. As to
prospective advertisers, we believe most all current PC models that they will be
using to access our Web site will be Year 2000 compliant and that any Year 2000
problems with this group will arise only with the use of older PC models.
Presently, we believe that the primary risks that we face with regard to the
Year 2000 are those arising from other third-party providers of services or
products. If, however, they, we or new publishers to our system encounter Year
2000 problems we in turn may suffer serious interruptions or reduced revenues in
the conduct of our business.
THE UNITS IN THE INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933
In a listing agreement with the managing underwriter of this offering,
IPO.COM was authorized to include AdStar's prospectus on the IPO.COM Web site.
The listing agreement neither authorized nor requested that any additional
information about AdStar be provided. However, IPO.COM provided, on other pages
reachable from its Web site home page, summary material that it extracted from
AdStar's prospectus, relating to AdStar and its initial public offering. Those
pages also provided a direct link to the AdStar Web site. If, the listing
agreement created an agency relationship with the managing underwriter and,
through the managing underwriter, with AdStar, then the summary material
contained on the IPO.COM Web site and the information contained in the AdStar
Web site could be deemed to constitute a prospectus that does not meet the
requirements of the Securities Act of 1933.
If there is a violation of the Securities Act, then for a period of one
year from the date of their purchase of units, investors in this offering could
bring a claim against AdStar and the underwriters. In that action investors
would seek recovery of the consideration they paid for their units or, if these
persons had already sold the units, for damages resulting from their purchase
and sale of these securities. Recovery would be based on the theory that the
summary materials or the materials contained in the AdStar Web site were
offering materials for which AdStar is responsible and which constitute a
violation of the Securities Act. If plaintiffs were to prevail, then damages
could total up to $6,000,000, plus interest, based on the assumed initial public
offering price of $6.00 per unit for 1,000,000
15
<PAGE> 18
units and further assuming investors seek recovery or damages after a loss of
their entire investment and all purchasers in the offering are entitled to this
recovery. AdStar expects that investors would not be inclined to assert a claim
for rescission or damages unless, during the one-year period following the date
of their purchase of securities, the trading prices of the securities fall
significantly below the initial public offering price. If litigation was
instituted and if the plaintiffs were to prevail, AdStar's business, results of
operations and financial condition would be harmed. However, AdStar believes it
has no material liability and would contest any action of this kind vigorously.
No person who reviewed the IPO.COM or AdStar Web sites should rely upon them in
any manner in making a decision whether to purchase units in this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
OUR PRIOR OFFERING WAS NOT SUCCESSFUL
AdStar originally offered units consisting of common stock and warrants in
September 1999. That offering was declared effective by the Securities and
Exchange Commission and resulted in the stock and warrants included in those
units being traded on the American Stock Exchange between September 30 and
October 4. Initial trading in the units resulted in a decline in the unit price
to which AdStar responded by announcing a reduction of the warrant exercise
price. The American Stock Exchange took the position that this reduction caused
AdStar's securities to no longer meet its listing requirements and therefore
stopped trading in the units. As a result of these events, the former offering
was not consummated.
RISK OF LOW-PRICED SECURITIES
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions, including an exception of an equity
security that is quoted on The Nasdaq Stock Market. If the shares of common
stock offered here are removed or delisted from The Nasdaq SmallCap Market, the
security may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell these securities. For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchaser of such securities and have received the
purchaser's written consent to the transactions prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered underwriter, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally among other requirements, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. As such, the "penny stock"
rules, in the event the company's securities are delisted from The Nasdaq
SmallCap Market, may restrict the ability of purchasers in this offering to sell
the common stock and warrants offered hereby in the secondary market.
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<PAGE> 19
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
While the shares of common stock and warrants meet the current Nasdaq
listing requirements and are expected to be included on Nasdaq as of the date of
this prospectus, there can be no assurance that we will meet the criteria for
continued listing. Continued listing on Nasdaq generally requires that (i) we
maintain at least $2,000,000 in net tangible assets, or $35,000,000 in market
capitalization, or $500,000 in net income for either the last fiscal year, or
two out of the last three fiscal years, (ii) the minimum bid price of the common
stock be $1.00 per share, (iii) there be at least 500,000 shares in the public
float valued at $1,000,000 or more, (iv) the common stock have at least two
active market makers, and (v) the Common Stock be held by at least 300 holders.
If we are unable to satisfy Nasdaq's maintenance requirements, our securities
may be delisted from Nasdaq. In that event, trading, if any, in the common stock
and warrants would be conducted in the over the counter market in the so called
"pink sheets" or the NASD's "Electronic Bulletin Board." Consequently the
liquidity of our securities could be impaired, not only in the number of
securities which could be bought and sold, but also through delays in the timing
of transactions, reduction in security analysts and new media coverage of the
company, and lower prices for our securities than might otherwise be obtained.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations about our company and our business. You can identify these
forward-looking statements because they usually contain words like "expect,"
"believe," "plan," "intend," "anticipate" and other similar expressions. These
forward-looking statements involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of the factors described in the "Risk Factors" section
and elsewhere in this prospectus.
RECENT DEVELOPMENTS
In September 1999, a proposed $15.5 million initial public offering of our
securities became effective but did not close. In full settlement of our claims,
if any, against Paulson Investment Company, Inc., the representative of the
underwriters in that offering, we received $500,000 from the representative. In
addition, Paulson Capital Corporation, the parent of the representative lent us
$1.1 million evidenced by a $1.1 million promissory note due on October 21, 2001
and bearing interest at 6% per annum payable at maturity. Paulson Investment
Company, Inc. is the representative of the underwriters in this offering.
17
<PAGE> 20
USE OF PROCEEDS
The net proceeds to us from the sale of units being offered by this
prospectus, are estimated to be $5,045,450 after deducting the underwriting
discounts and estimated offering expenses. The following table sets forth the
principal categories of expense for which the offering proceeds are to be used,
based on our current budget. We expect that our actual allocation of proceeds
will vary, possibly substantially, from our current budget as a result of
unforeseen developments.
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
ALLOCATION OF NET PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
- -------------------------- ------------- ---------------
<S> <C> <C>
Development and expansion of Advertise123.com Web
site................................................. $ 2,000,000 40%
Product development and site maintenance............. 1,456,418 29
Debt retirement...................................... 1,589,032 31
----------- ---
Total................................................ $ 5,045,450 100%
=========== ===
</TABLE>
Development and expansion of our Web site includes gathering necessary
information regarding publishers for installation onto our Web site and
providing software to additional newspapers allowing them to publish data
received from our Web site without data reentry.
Product development and site maintenance includes providing technical
support and creating and updating editorial content.
Debt retirement consists of indebtedness of:
- $739,032 payable in monthly installments of $8,333.33 through March 2013
which includes interest at 10% per annum for the purchase of technology
which we formerly licensed from the seller; and
- $850,000 for a loan from a small business investment company, the
proceeds of which were used as working capital. The loan is payable on or
before July 12, 2004 and bears annual interest at the rate of 14% per
annum.
Both items of indebtedness must be paid on completion of this offering.
In October 1999, we received $1,600,000 from Paulson Investment Company,
Inc. and Paulson Capital Corporation as discussed in "Recent Developments." This
sum increased our working capital and may be used for general corporate purposes
and to supplement the proceeds of this offering in expanding our Web site.
The amounts we actually expend for general corporate purposes may vary
significantly and will depend on a number of factors, including the amount of
our future revenues and the other factors described under "Risk Factors." Our
management will retain broad discretion in the allocation of the net proceeds of
this offering. A portion of the net proceeds may also be used for general
corporate purposes or for strategic partnerships or to acquire or invest in
complementary businesses, technologies or product lines. We have no current
agreements or commitments and we are not currently engaged in any negotiations
with respect to any acquisitions. Pending these uses, the net proceeds of this
offering will be invested in short term, interest-bearing, investment grade
securities.
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<PAGE> 21
DIVIDEND POLICY
Prior to this offering we were a "Sub S" corporation for income tax
purposes, owned by persons active in the business. From time to time we declared
and paid cash dividends on our common stock. We intend to retain future
earnings, if any, to finance the expansion of our business and do not expect to
pay any cash dividends on our common stock in the foreseeable future.
On July 13, 1999 we entered into a loan with InterEquity Capital Partners,
L.P. which prohibits us from paying dividends or making distributions on our
stock while this loan is outstanding. Because we intend to use a portion of the
proceeds from this offering to repay InterEquity, the restriction on dividends
and distributions will cease to apply.
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<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to:
- the conversion of $1,050,000 principal amount of convertible notes
that were issued in March and April 1999 plus interest of $53,567 of
which $15,200 will be expensed subsequent to September 30, 1999, into
231,620 shares of our common stock on the closing of this offering;
and
- our borrowing from Paulson Capital Corporation, parent of Paulson
Investment Company, Inc., of $1.1 million evidenced by a promissory
note due on October 21, 2001 and bearing interest at 6% per annum
payable at maturity.
- on a pro forma as adjusted basis to give effect to:
- the foregoing pro forma adjustments;
- the sale of 1,000,000 units offered by us in this prospectus at $6.00
per unit;
- payment of the underwriting discount and estimated offering expenses
payable by us;
- the repayment of notes payable of $1,589,032 and amortization of debt
issue costs of $67,437; and
- reclassification of redeemable common stock to common stock and
additional paid-in capital on the closing of this offering.
20
<PAGE> 23
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Notes payable, net of current
portion............................. $ 2,416,182 $ 2,466,182 $ 1,100,000
----------- ----------- -----------
Redeemable common stock............... 137,536 $ 137,536 --
----------- ----------- -----------
Stockholders' equity (deficit):
Preferred stock, par value $0.0001;
authorized 5,000,000 shares; none
issued and outstanding........... -- -- --
Common stock, par value $0.0001;
authorized 10,000,000 shares;
shares issued and outstanding:
1,415,816 actual; 1,647,436 pro
forma; 2,669,970 pro forma as
adjusted (1)..................... 142 165 267
Additional paid-in capital.......... (969,453) 134,091 5,316,975
Accumulated deficit................. (990,813) (1,006,013) (1,073,450)
----------- ----------- -----------
Total stockholders' equity
(deficit)...................... (1,960,124) (871,757) 4,243,792
----------- ----------- -----------
Total capitalization........... $ 593,594 $ 1,731,961 $ 5,343,792
=========== =========== ===========
</TABLE>
- -------------------------
(1) Based on the number of shares of common stock outstanding as of September
30, 1999. Excludes:
- 212,101 shares of common stock issuable upon the exercise of stock
options granted in April and July 1999; and
- 63,890 shares of common stock issuable upon the exercise of warrants
granted in July and August 1999
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<PAGE> 24
DILUTION
Our pro forma tangible book deficit of September 30, 1999 was $974,210, or
$0.58 per share of common stock. Pro forma net tangible book value per share is
determined by dividing total tangible assets less total liabilities by the
number of outstanding shares of common stock as of September 30, 1999. In making
this calculation we have given effect to the conversion of $1,050,000 principal
amount of our convertible notes which were issued in March and April 1999 and
interest of $53,567.
After giving effect to the sale of 1,000,000 units at $6.00 per unit and
after deducting estimated underwriting discounts and expenses of this offering,
our pro forma net tangible book value at September 30, 1999 would have been
$4,071,240 or $1.52 per share, representing an immediate increase in net
tangible book value of $2.10 per share to the existing stockholders and an
immediate dilution of $4.48 or 74.6% per share to new investors. For purposes of
the dilution computation and the following tables, we have allocated the full
purchase price of a unit to the share of common stock included in the unit and
nothing to the warrants included in the unit.
The following table illustrates the above information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $6.00
Pro forma net tangible book deficit at September 30, 1999... (0.58)
Increase in pro forma net tangible book value attributable
to new investors....................................... 2.10
------
Pro forma net tangible book value after offering............ 1.52
-----
Dilution to new investors................................... $4.48
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1999, with respect to our existing stockholders and new investors, a comparison
of the number of shares of common stock we issued, the percentage ownership of
those shares, the total consideration paid, the percentage of total
consideration paid and the average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing
stockholders........ 1,669,970 63% $1,078,300 15.23% $ 0.65
New investors......... 1,000,000 37% 6,000,000 84.77% 6.00
--------- --- ---------- ------
Total............ 2,669,970 100% $7,078,300 100.00%
========= === ========== ======
</TABLE>
The above table assumes no exercise of the underwriters' over-allotment
option. If the underwriters' over-allotment option is exercised, the selling
stockholders identified in this prospectus will provide the stock and we will
provide the warrants included in the units covered by the over-allotment option.
We will not receive any of the proceeds from the sale of the stock by the
selling stockholders.
In addition, the above table does not give effect to the shares issuable
upon exercise of outstanding options and warrants which may at the time they are
exercised have a dilutive effect on the stock interest of all stockholders. We
have 212,101 shares which are
22
<PAGE> 25
issuable upon exercise of options held by key employees. of which 141,742 are
exercisable at $4.77 per share and 70,359 are exercisable at $7.20 per share. We
have also granted warrants to purchase 63,890 shares, of which 33,334 are
issuable at an exercise price equivalent to the price of shares in this
offering. The remaining 30,556 shares are issuable only upon completion of this
offering at an exercise price equivalent to 110% of the share price in this
offering and we expect to take a charge of approximately $80,000 at that time
for the vested portion, and may recognize additional charges in future periods
as the amounts vest.
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<PAGE> 26
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for each of the years in the two-year period ended December 31, 1998, and
the balance sheet data at December 31, 1998, are derived from financial
statements of AdStar.com, Inc., which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are included elsewhere
in this prospectus. The statement of operations data for the nine month periods
ended September 30, 1998 and 1999 and the balance sheet data for September 30,
1999 are derived from unaudited financial statements of AdStar.com, Inc. The
unaudited financial statements have been prepared on substantially the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of operations for these
periods. Historical results are not necessarily indicative of the results to be
expected in the future, and the results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................. $1,148,233 $1,559,361 $1,209,340 $ 1,212,293
Cost of revenues......... 565,329 800,532 590,271 961,525
---------- ---------- ---------- -----------
Gross profit........... 582,904 758,829 619,069 250,768
Sales, general and
administrative
expenses............... 634,029 820,574 532,294 1,295,096
Abandoned offering costs,
net.................... -- -- -- 171,854
---------- ---------- ---------- -----------
Income (loss) from
operations............. (51,125) (61,745) 86,775 (1,216,182)
Interest expense......... (7,873) (4,518) (3,695) (190,150)
---------- ---------- ---------- -----------
Income (loss) before
taxes.................. (58,998) (66,263) 83,080 (1,406,332)
Provision for taxes...... 823 2,760 2,070 2,080
---------- ---------- ---------- -----------
Net income (loss) --
historical............. $ (59,821) $ (69,023) $ 81,010 $(1,408,412)
========== ========== ========== ===========
Pro forma net income
(loss)(1).............. $ (59,798) $ (67,063) $ 82,480 $(1,406,932)
Pro forma earnings (loss)
per share -- basic and
diluted (2)............ $ (0.05) $ (0.87)
Pro forma weighted
average number of
shares -- basic and
diluted (2)............ 1,458,393 1,613,675
</TABLE>
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<PAGE> 27
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 90,007 $ 104,133
Working capital............................. (271,804) 33,548
Total assets................................ 339,147 1,592,919
Notes payable, net of current portion....... -- 2,416,182
Total liabilities........................... 535,151 3,415,507
Total stockholders' equity (deficit)........ (196,004) (1,960,124)
</TABLE>
- -------------------------
(1) Computed on the basis described in Note 1 and Note 2 of Notes to financial
statements and assuming the pro forma tax provisions described in Note 2.
(2) See Note 2 of Notes to financial statements for an explanation of the method
used to determine the number of shares used in computation of the pro forma
basic and diluted earnings (loss) per share.
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<PAGE> 28
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 and
related notes to the financial statements included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risk and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Revenues from our traditional business, which account for substantially all
of our historical revenues, consist of licensing fees and fees for advertiser
service and support charged to publishers. We are in the process of implementing
our Web-based service and intend to charge for that service based on a fixed
transaction fee and/or a percentage of the advertising fee charged by the
publisher. We received our first transaction fees from Internet business in June
1999. This change will result in material changes in our financial statements,
including changes in revenue recognition, timing of cash flows and volume of
accounts receivable as a percentage of revenues.
Our level of revenues has been generally sufficient to support our historic
business. In developing our Web-based system we began to incur expenses in 1998
that cannot be offset by the revenues generated by our historic business. These
expenses caused us to be unprofitable in 1998 and 1999. We intend to continue to
make significant financial investments to support publishers on our Web site,
Advertise123.com for content development, technology and infrastructure
development and marketing and advertising expense. As a result, we believe that
we will incur operating losses and negative cash flows from operations before
the build-up in revenues from our Internet business offset anticipated increases
in expense. Because we have limited Internet experience, we cannot accurately
forecast the source, magnitude or timing of our future revenues and therefore
cannot forecast if or when we will return to profitability. In 1999 we received
through the issuance of a note the surrender of an option to acquire 15% of our
stock as part of our purchase of technology we had formerly licensed. The
surrender of this option increased our stockholders' deficit by $447,935 to a
total of $1,960,124 at September 30, 1999 but had no impact on our cash flow
available to fund operations.
Through June 30, 1999, we had elected to be taxed under Subchapter S of the
Internal Revenue Code of 1986. Effective July 1, 1999, we will be taxed as a
Subchapter C corporation, and therefore will pay tax on our income, if any, at
the corporate level. This tax will be recorded as an expense and will affect our
operating results. Because we have historically been a Subchapter S corporation,
we have no accumulated loss or credit carryforwards that would be usable to
offset future income, if any.
As a result of these changes, our historical financial statements are not
necessarily reflective of future operating results.
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<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth the results of operations expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------ --------------
1997 1998 1998 1999
---- ---- ----- -----
<S> <C> <C> <C> <C>
Revenues.......................................... 100% 100% 100% 100%
Cost of revenues.................................. 49% 51% 49% 79%
--- --- --- ----
Gross profit...................................... 51% 49% 51% 21%
Sales, general and administrative expenses........ 55% 53% 44% 107%
Abandoned offering costs, net .................... -- -- -- 14%
Income (loss) from operations..................... (4)% (4)% 7% (100)%
Interest expense.................................. (1)% -- -- (16)%
--- --- --- ----
Income (loss) before taxes........................ (5)% (4)% 7% (116)%
Provision for taxes............................... -- -- -- --
--- --- --- ----
Net income (loss)................................. (5)% (4)% 7% (116)%
</TABLE>
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues for the nine months ended September 30, 1999, were
$1,212,293, compared with $1,209,340 for the nine months ended September 30,
1998. While revenues for these two periods were essentially flat, there were
fluctuations in the components of revenues. Computer hardware sales increased to
$102,295 in 1999 over $53,321 in 1998. We also commenced recording Internet
revenues in June 1999, which through September 30, 1999 totaled $142,384. These
increases were offset by a decrease in license and end-user support revenues
(referred to as "service revenues") to $949,614 in 1999 from $1,138,019 in 1998.
While we expect to continue to recognize service revenues from existing and
potential new software licensing contracts, we expect that Internet transaction
based revenues will increase at a faster rate than service revenues and will
eventually become our principal source of revenues.
COST OF REVENUES. Cost of revenues consists primarily of charges to
configure and install the AdStar software into the publishing systems of
newspapers, to configure end-user software for the newspaper's advertiser
clients, to make payments to publications and credit card companies and
processors for transactions placed on our Internet system, to pay costs of
installing publications on our Internet system, to provide customer training and
end-user support, and to pay costs of hardware sales and royalty fees. These
costs increased to $961,525, as compared to $590,271 in 1998. Personnel costs
associated with cost of revenues increased to $407,585 in 1999 compared with
$243,564 in 1998 as we added technical support and end user support staff.
Hardware expense increased to $88,884 in 1999 from $47,153 in 1998. Cost of
internet transactions was $122,523, representing payments to publications and
credit card companies and processors. These increases were offset in part by a
reduction in royalty expense to $17,416 in 1999 from $74,997 in 1998 due to the
timing of royalties payable on installation of our fax product. Cost of revenues
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<PAGE> 30
increased as a percentage of net revenues due to increases in staff in
anticipation of support requirements for new customers and because of an
increased level of hardware sales and internet transactions at a lower margin
than our service revenues. We view sales of hardware as an accommodation to our
clients coincident to the installation of our software in the front-end
publishing systems of newspapers.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense consists primarily of salaries of business development personnel, sales
and marketing personnel and other marketing, trade show and travel expense.
These personnel costs increased to $1,295,096 in 1999 from $532,294 in 1998,
primarily because of the addition of business development personnel for our
Web-based service. We expect to incur additional sales, general and
administrative expenses as we hire additional personnel and incur additional
expenses related to the development of our Web-based service.
ABANDONED OFFERING EXPENSES. In September 1999, a proposed public offering
of our securities was declared effective but did not close. In connection with
that offering we incurred expenses of $671,854. We also received $500,000 in
reimbursement of expenses from the representative of the underwriters which has
been recorded net of the actual expenses incurred.
INTEREST EXPENSE. Interest expense increased for the nine months ended
September 30, 1999 to $190,150 from $3,695 due to the issuance by us of
$1,050,000 of 12% convertible notes in March and April 1999, a 10% note for
$751,710 to purchase the technology, intellectual property and software rights
for the AdStartechnology and a 14% note for $850,000 issued in July 1999. We
also amortized $70,099 of debt discount related to the issuance of the $850,000
note in the nine month period ended September 30, 1999. Payments on the 10% note
are equivalent to royalty payments we were required to make under the
pre-existing license agreement. The 12% convertible notes will be converted into
common stock concurrently with this offering. We intend to pay the 10% notes
with proceeds from this offering.
YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES. Net revenues increased by approximately 36% to $1,559,361
for 1998 from $1,148,233 for 1997. Service revenues from existing customers were
essentially flat for 1998 ($817,822) when compared with 1997 ($809,045). The
increase in 1998 over 1997 was due primarily to the large volume of installation
work performed in 1998 (for new and existing customers). Three customers
installed the AdStar fax system to complement their pre-existing basic systems
and one additional existing customer upgraded its system. Two new customers were
added in 1998. Hardware sales were $94,285 in 1998 compared with $8,687 in 1997.
Excluding the revenues from hardware sales the increase in net revenues in 1998
over 1997 was 29%.
COST OF REVENUES. Cost of revenues increased by 42% in 1998 to $800,532
from $565,329 in 1997. As a percentage of net revenues, cost of revenues
increased by 2% from 1997 to 1998 as a result of an increase in lower margin
hardware sales.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expense increased by approximately 29% to $820,574 in 1998 compared with
$634,029 in 1997. The primary factors accounting for the increase were
compensation and recruitment costs that increased to $415,220 in 1998 from
$373,646 in 1997. This increase was primarily due to the addition of business
development personnel in the second half of 1998 for our Web-
28
<PAGE> 31
based service. Additionally, travel expense increased by approximately $40,000,
to $110,367 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our business primarily from cash generated by operations
and, more recently, from debt financings. As of September 30, 1999, the Company
had cash and cash equivalents of $104,133 compared with $90,007 at December 31,
1998. At September 30, 1999 we had no material commitments for capital
expenditures. Over the next 12 months we do not expect that our capital
expenditures will exceed $200,000.
Net cash provided by operations was $98,603 for 1998 compared to net cash
used in operations of $12,826 in 1997, primarily because of an increase in
accounts payable and accrued expenses offset by a reduction in deferred revenue
in 1998. Net cash used in investment activities increased to $25,532 in 1998
from $12,902 in 1997. The difference is attributable to an increase in the
purchase of equipment to support additional personnel. Net cash used in
financing activities was $30,552 in 1998 compared with cash provided by
financing activities in 1997 of $1,500. Principally, these activities involved
proceeds from and repayments of capitalized leases or notes payable.
Net cash used in operations was $1,549,304 for the nine months ended
September 30, 1999 compared with net cash provided by operations of $75,840 for
the comparable 1998 period. The difference is due primarily to the net loss from
operations in the nine month period ended September 30, 1999 compared to net
income in the comparable 1998 period and expenditures connected with this
offering. Net cash used in investing activities increased to $335,294 in the
period ended September 30, 1999 compared with $15,730 in the comparable period
of 1998 resulting from the purchase and development of computer equipment and
related infrastructure for our Web-based system. Net cash provided by financing
activities was $1,898,724 during the nine month period ended September 30, 1999
compared to $23,995 used in financing in the comparable period of 1998. The
activity in 1999 primarily reflects the issuance of $1,050,000 of our 12%
convertible notes payable and $850,000 of our 14% notes payable.
In March and April 1999, we sold $1,050,000 of our 12% convertible notes in
a private placement. These notes will automatically convert to common stock upon
consummation of this offering. In July 1999, we borrowed $850,000 from
InterEquity Capital Partners, L.P. a small business investment company. The loan
bears interest at 14% per annum and is repayable in 54 equal installments
commencing six months after the date of issuance. The holder of the note also
received 22,534 shares of our common stock at the time of the financing. The
holder is entitled to increases in the amount of stock issued to it if the note
is not repaid starting nine months after issuance. We expect to repay this note
from the offering proceeds. The proceeds of these financings have been used for
working capital, primarily to support the development of our Web-based service.
Also in March 1999, we purchased the technology, intellectual property and
software rights related to the AdStar technology for $751,710 by the issuance of
a 10% note. This note is payable in monthly installments of $8,333 comprising
principal and interest and is prepayable on the consummation of this offering.
We anticipate that our operating expenses will increase substantially as
the number of our employees increases. Additionally we may evaluate from time to
time possible investments in businesses, products and technologies to build our
business. We expect that the net proceeds from this offering, will be sufficient
to meet our anticipated needs for
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<PAGE> 32
working capital and capital expenditures for at least the next 12 months. We
cannot guarantee, however, that the underlying assumed levels of revenues and
expenses will prove to be accurate. We may need to seek additional funding
through public or private financings or other arrangements prior to the
expiration of the 12 month period. Adequate funds may not be available when
needed or may not be available on terms favorable to us. If additional funds are
raised through the issuance of equity securities, dilution to existing
stockholders may result. If funding is insufficient at any time in the future,
we may be unable to develop or enhance our products or services, take advantage
of business opportunities or respond to competitive pressures, any of which
could have a material adverse effect on our financial position, results of
operations and cash flows.
YEAR 2000 READINESS
Many existing computers and computer programs will malfunction or fail
completely when processing dates past the year 1999 because they use only the
last two digits, for example, "98" or "99", to refer to a year. This means, for
example, that they cannot distinguish between the year 2000 and the year 1900,
both of which would be referred to as "00". Because our current systems and
services and those being developed depend heavily on computers and computer
programs, we have paid careful attention to this potentially disruptive problem.
The computer programs that we use to provide our existing traditional
AdStar services have all been reviewed for year 2000 compliance by our
technology team, and suitable modifications have been made and tested and these
programs appear to be functioning properly with no year 2000 problems. We are
distributing these modified programs to both our advertiser users and our
publishing clients. A large percentage of the update distribution has been
completed. An initiative is in place to have the balance completed prior to
December 1999.
In addition to installing our updated AdStar software, our users
(advertisers and publishers) must use computers for AdStar programs that are
free of year 2000 problems. Also, our publishing clients must have computer
systems to which we connect that function properly. All of our publishing
clients and many of our advertising users have their own company initiatives to
correct year 2000 problems and we have been cooperating with them to assure
proper operation of our computer programs and systems. To the extent that any
third-party product or technology is not year 2000 compliant prior to December
1999 our financial position, results of operations and cash flows may be
adversely affected due to our association with this type product or technology.
The Web-based Advertise123.com service that we are building has been
designed and implemented to be year 2000 ready:
1. The software programs and systems we have built and continue to
build are designed to use coding and algorithms based on the four digit
year representation for handling and processing date and date related
information, and our database structures are designed to provide for the
same standardized four digit representation;
2. Our Web-based technology utilizes newly purchased hardware and 1999
releases of third party software systems from industry leading suppliers
that specify that the systems that we use are year 2000 ready;
3. We have assessed the year 2000 readiness of our Internet service
providers, and have determined that they have taken steps to become year
2000 compliant;
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<PAGE> 33
4. We are conducting both unit and complete system testing for year
2000 readiness, and expect to be able to correct any potential problems
that are uncovered before year 2000 dates are expected to be processed
through our service.
The internal administrative systems currently in use are scheduled to be
replaced, before the end of 1999, in preparation for our expected growth. We are
only considering systems that are specified by their suppliers to be year 2000
ready and we plan to conduct our own year 2000 readiness tests prior to using
any of these systems.
Our internal technology systems consisting of a data network, workstations,
and telephone systems have been assessed for year 2000 readiness. Most of these
items are relatively new and do not exhibit year 2000 problems. Items that we
have determined have problems have been replaced or are in the process of being
updated. We do not anticipate any unexpected internal system year 2000 problems.
The only concern in this area is that some third party providers may possibly
have problems. In any and all events we do not anticipate any significant
interruption or disruption of our business. We believe, the worst case scenario
to be a reduction or interruption in the business that is derived from or
provided by a third party provider that is not Year 2000 compliant.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities that requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe that the implementation of SFAS No. 133 will have any impact on its
financial statements since we do not currently engage in derivative or hedging
activities.
THE UNITS IN THE INITIAL PUBLIC OFFERING MAY HAVE BEEN OFFERED OR SOLD IN
VIOLATION OF THE SECURITIES ACT OF 1933
In a listing agreement with the managing underwriter of this offering,
IPO.COM was authorized to include AdStar's prospectus on the IPO.COM Web site.
The listing agreement neither authorized nor requested that any additional
information about AdStar be provided. However IPO.COM provided, on other pages
reachable from its Web site home page, summary material that it extracted from
AdStar's prospectus, relating to AdStar and its initial public offering. Those
pages also provided a direct link to the AdStar Web site. Although the managing
underwriter did not authorize IPO.COM to do anything other than provide the
AdStar prospectus, and was not aware that it had done so, the listing agreement
may have created an agency relationship with the managing underwriter and,
through the managing underwriter with AdStar. It may further be possible to
argue that the IPO.COM agency so created extended to all of IPO.COM's actions.
If that argument is valid, then the summary material contained on the IPO.COM
Web site and the information contained in the AdStar Web site could be deemed to
constitute a prospectus that does not meet the requirements of the Securities
Act of 1933. However, AdStar and the managing underwriter believe that no agency
was created, or, even if an agency relationship is established, IPO.COM was
acting outside the scope of its agency authority in posting information on its
Web site other than the AdStar Prospectus. They
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<PAGE> 34
also believe that neither the managing underwriter nor AdStar is responsible for
that other material. Additionally, investors in this offering have been
cautioned not to rely on the AdStar Web site as part of this prospectus. Even if
an agency relationship and responsibility for this other material is
established, the other information on the Web site would constitute a violation
of the Securities Act only if it is considered without regard to AdStar's
complete prospectus which also appears on that same Web site. Taken in context
with the prospectus the extracts would, in AdStar's view, still be considered a
preliminary prospectus meeting the requirements of the Securities Act.
If there is a violation of the Securities Act, then for a period of one
year from the date of their purchase of units, investors in this offering could
bring a claim against AdStar and the underwriters. In that action investors
could seek recovery of the consideration they paid for their units or, if these
persons had already sold the units, for damages resulting from their purchase
and sale of securities. Recovery would be based on the theory that the summary
materials or the materials contained in the AdStar Web site were offering
materials for which AdStar is responsible and which constitute a violation of
the Securities Act. If plaintiffs were to prevail, then damages could total up
to $6,000,000, plus interest, based on the assumed initial public offering price
of $6.00 per unit for 1,000,000 units and further assuming investors seek
recovery or damages after a loss of their entire investment and all purchasers
in the offering are entitled to this recovery. AdStar expects that investors
would not be inclined to assert a claim for rescission or damages unless, during
the one-year period following the date of their purchase of securities, the
trading prices of the securities fall significantly below the initial public
offering price. If litigation was instituted and if the plaintiffs were to
prevail, AdStar's business, results of operations and financial condition would
be harmed. However, AdStar believes it has no material liability and would
contest any action of this kind vigorously. Further, AdStar believes that only
persons who purchased securities on the basis of the material on the IPO.COM Web
site, other than AdStar's prospectus, would be able to prevail in those actions
and then only if they could establish that those other materials did not comply
with the Securities Act. No person who reviewed the IPO.COM or AdStar Web sites
should rely upon them in any manner in making a decision whether to purchase
units in this offering (see Risk Factors).
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<PAGE> 35
BUSINESS
Since 1986 we have enabled advertisers to place classified advertisements
in publications by electronic means. Our historic AdStar business, was confined
to permitting some large advertisers to place classified ads in a limited number
of newspapers through the use of our proprietary software. Our new
Advertise123.com service, offers anyone with access to the Internet the
opportunity to create, price, pay for and submit a classified ad for publication
in print or on-line in one or more of an increasing number of publications.
THE CLASSIFIED ADVERTISING MARKET
Classified newspaper advertisements consist of small to full page print and
combined print and graphic or pictorial advertisements that appear in designated
sections and are organized by category. The principal categories of classified
ads are employment, automotive and real estate. Classified ads generated
approximately $18 billion in newspaper revenue in 1998 in the United States.
Classified ads are placed by advertising agencies, large and small businesses
and individuals. Some large volume advertisers enter into contractual
relationships with publishers providing for discounted rates in return for
volume commitments.
Classified advertising in newspapers represents one of the highest margin
revenue sources for newspapers. Although the market for classified advertising
on-line is relatively new, it is growing rapidly.
Most classified ads are placed by the advertiser or its agent directly with
a newspaper either by telephone, fax, email, mail or messenger. The process can
be cumbersome, time consuming and inefficient. Ads placed in this way are
susceptible to error and misunderstanding in the voice or fax transmission or in
re-keying print submissions; they may require multiple phone calls or faxes
especially if ads are being placed in more than one newspaper; they require
familiarization with each newspaper's separate printing and pricing practices;
access both by phone and fax may be available only during limited business hours
and even then access may be difficult in periods of heavy phone activity or
facsimile transmission activity and there is much duplication of work between
the advertiser and the newspaper.
OUR HISTORICAL APPROACH -- THE ADSTAR REMOTE AD ENTRY SOLUTION
Our AdStar business is based on technology we developed that simplifies the
media buying process by providing professional advertisers with software to
compose and submit advertising directly into a newspaper's computer systems. Our
software automatically adapts the ad to the publisher's formatting
specifications. This technology affords the advertiser greater control of the
advertising process, including:
- submission of ads directly into a newspaper's classified ad system;
- ability to work closer to deadlines;
- fewer errors from copy re-keying, elimination of messengers and overnight
delivery;
- simplified resubmission of ads;,
- administrative and reporting functions; and,
- in many cases, more favorable rates.
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<PAGE> 36
One of the principal advantages of this system is that the advertiser using
our software is able to view the computer screen and configure the ad exactly as
it will run in the selected newspapers. Another important advantage is that with
our system the information viewed by the user for all publishers is the same, so
users don't have to learn a different system for each publisher.
In our AdStar business, we collect no fees from advertisers. Our clients
are the newspapers to which we license our technology. These are primarily large
metropolitan newspapers. The benefits of our AdStar system to newspapers are
significant. By automating the ad input process, we reduce the time required of
a publisher's personnel, as well as the publisher's total processing time; we
virtually eliminate credits and give backs associated with re-keying copy
errors; and we enable newspapers to extend ad deadlines to maximize revenues and
permit integration of the automatic remote entry of advertisements into their
computer system with their order entry, advertising and pagination systems. Our
license agreements with newspapers are for terms of three to ten years. We
charge fixed license and maintenance fees and installation charges, all of which
are unrelated to the amount of advertising revenue generated by our licensed
technology. While one or two single customers may account for more than 10% of
our revenue in a single year, no customer has accounted for more than 10% in
successive years. In 1997 the L.A. Times accounted for 13% of our revenues, and
in 1998 the Chicago Tribune accounted for 12% of our revenues.
Our license and support fees are circulation based. License fees range from
$25,000 to $100,000 for the first year and from $6,000 to $18,000 for years two
through ten. User support fees generally range between $6,000 to $30,000 per
year during the life of a contract. Implementation fees usually are between
$15,000 and $30,000, excluding hardware costs.
We also offer a fax management system. Under this system faxed ads are
received, logged, stored and converted into text files at the newspaper. They
are then routed to special workstations designed for split screen editing. This
is a two way system allowing for manipulation of ads in various ways and
interactive discourse between the newspaper and the advertiser for both interim
and final fax-back acknowledgements of acceptance by the advertiser.
Fax management license fees are circulation based. License fees range from
$20,000 to $80,000 for the first year and from $6,000 to $16,500 for years two
through ten. Implementation fees generally range from $15,000 to $30,000,
excluding hardware costs.
Our 43 current newspaper customers account for approximately 25% of the
total 1998 Sunday newspaper circulation in the United States. These newspapers
include major metropolitan newspapers including The Chicago Tribune, The
Washington Post, The (Newark) Star Ledger, The Los Angeles Times, The Denver
Post, The Miami Herald, The Philadelphia Inquirer, The (New York) Daily News and
The (Atlanta) Journal-Constitution as well as smaller suburban and regional
newspapers like the Ventura County (CA) Star, The (Lancaster PA) Reporter and
(NJ) Courier Post. In 1998, more than 1,400 advertiser locations, including
advertising agencies like Bernard Hodes Advertising, TMP Worldwide, Shaker
Advertising, Nationwide Advertising, and Austin Knight Advertising and large
direct advertisers like Century 21, Coldwell Banker, Ford and General Cinema,
placed, by our estimate, classified advertising valued at more than $150 million
in newspaper revenue with our newspaper customers through our AdStar system.
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<PAGE> 37
However, this volume represents less than 1% of the $18 billion in newspaper
classified advertising sold in 1998.
The use of our AdStar remote ad entry system has been limited to connecting
large metropolitan newspapers with their highest volume commercial classified
advertisers. Most classified advertisers are small and medium sized businesses
which have been excluded from participating in the AdStar system, as has anyone
seeking to place an ad with any of the approximately 1,500 daily and 7,200
weekly newspapers in the United States which are not among the 43 AdStar
licensees. Additionally, the AdStar system does not provide for the placement of
classified advertising in on-line publications. In order to overcome the
limitations of our AdStar business and reach virtually the entire classified ad
market, including the growing market for Internet publications, we commenced our
Web-based classified ad service.
OUR NEW WEB-BASED CLASSIFIED AD MARKETPLACE -- ADVERTISE123.COM
THE CONCEPT. Our new Advertise123.com Web site that we launched on a
limited basis in June 1999 will permit any prospective advertiser, individual or
commercial, with Internet access, to:
- select print and on-line publications for ad placement;
- compose and format ads;
- preview ads;
- schedule publication dates;
- price and pay for ads at standard rates, or, alternatively, for high
volume customers, enter a publisher authorized contract ID and obtain
special contract rates and direct billing from the publisher; and
- electronically submit ads to publications
In order to use our Advertise123.com system, the advertiser accesses our
Web site and composes and formats the ad for each selected publication. We also
support proprietary Web sites maintained by us for our publisher customers. The
system incorporates the particular style, format and data parameters unique to
each publication's advertising or ad posting system. For print ads this feature
enables the user to preview the ad as it will appear in the publication,
allowing an accurate sizing usually measured in lines or inches, of the ad which
in turn usually determines the price of the print ad. On-line publications
usually place a limit on ad size based upon text size and have a fixed price for
a given publication schedule. All these variables can be obtained from the
publication and entered into our system so as to give anyone that qualifies the
published rate. Ads submitted under publisher authorized contracts can be sized
but are not priced: they are priced by the publisher's computer system and
billed directly to the advertiser.
If the advertiser pays for the ad by credit card or debit card we access a
separate third-party on-line service that processes credit card and debit card
payments on the Web. In these cases, the total price of the ad less credit or
debit card processing charges is remitted to us. We in turn deduct our
transaction fee and remit the balance to the publisher. If the advertiser has a
volume contract with the publisher and is billed directly by the publisher, we
collect our transaction fee from the publisher by sending an invoice.
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Once the ad has been composed and formatted, the ad is transferred to the
publication selected. If it is directed to a newspaper that is an AdStar
licensee, the ad is transferred directly into that newspaper's computer
publishing system. If the ad is directed to a publication which is not an AdStar
licensee or which is an on-line publisher, then Advertise123.com transfers it by
e-mail, fax or by means of an Internet file transfer protocol known as an FTP,
as instructed by the publisher. We are encouraging more print publishers to
acquire the necessary AdStar software to enable them to receive ads directly
into their computer publishing systems from Advertise123.com; most online
publishers that can accept FTP transfer of ads will be able to use their own
software to accept Advertise123.com ad feeds.
OUR EVOLUTION.
We believe that our Web-based ad-taking services represents a major
improvement, with benefits to the advertiser and the publisher, not only over
the way most classified ads are being placed today but even over those placed by
our own remote entry process. Most classified ads are still manually placed in a
person-to-person exchange by an individual, advertising agency or commercial
entity with each publication in which the advertiser seeks to place an ad. This
process is time consuming and expensive both for the advertiser and the
publisher, particularly for advertisers not familiar with the procedures and
cost schedules of a particular publication. In these cases, the placing of an ad
may involve long telephone or repeat phone calls or fax transmissions or other
communications before an ad is actually placed. The likelihood for error
resulting in costly refunds or credits is high. We believe our AdStar remote
entry process expedites the process and reduces the likelihood of these
problems. But, it is available only for large advertisers, and then only with
respect to their placing ads in print in any of our 43 newspaper customers. Our
new Web-based ad taking process improves on this business model in the following
respects:
- It is accessible for use by any individual, small business or
professional advertiser with access to a computer.
- Classified ads may be placed by any of the above parties not only in our
43 remote entry newspaper customers but in many other print publications
that we plan to enable on our site.
- Ads may be placed for dissemination on-line on any one of several web
sites engaged in the on-line distribution of classified ad postings.
- Classified ads from non-contract advertisers can be priced and paid for
in real time; ads from contract advertisers can be submitted directly to
the publisher for invoicing to the advertiser.
- A classified ad can be placed in multiple publications in one
transaction.
- While some of these features are available with various services
currently being offered by others, we believe that we will be the only
company offering all of these features in one service.
MARKETING ADVERTISE123
Our first goal in building Advertise123.com into a marketplace for
purchasing classified ads is to attract a critical mass of newspapers and Web
publishers who agree to be accessible on our site as ad recipients. The more
publishers accessible on
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Advertise123.com, the more attractive our service will be to prospective
advertisers. We do not anticipate any significant resistance from publishers to
their being listed on our Web site. It is necessary however to add to our data
base certain information about each publisher before it can become a named
participant on our Advertise123.com Web site. This information can be obtained
either from the publisher or from public records. The input of this information
into our Web site, however, is time consuming and restricts our ability to add
new publishers to our Web site as fast as we would like.
Once we have a critical mass of publishers, our marketing efforts can shift
to bringing advertisers to our site. We expect that all of our 43 newspapers
will agree to be accessible on Advertise123.com. These 43 newspaper customers
have a readership of approximately 45 million and have a circulation which
covers eight of the top 10 designated market areas in the United States. To add
additional newspapers, as well as Web publishers, we will emphasize in our
marketing the e-commerce opportunities of on-line ad placement in building
advertising revenues. We will also market our service on the basis of the proven
advantages of remote ad entry over traditional manual methods of classified ad
placement.
DISTRIBUTION AGREEMENTS. There are six major sites on the Web which
aggregate and republish classified ads which appear in newspapers. None of these
Web publishers originates ads on-line -- whether for publication on-line or in
print. We are focusing our initial marketing efforts on promoting the e-commerce
opportunity of Advertise123 to these Web publishers and through them to the
participating newspapers whose classified ads are republished on-line by these
publishers. We have entered into distribution agreements with two of these Web
publishers: AdOne, LLC (AdOne.com) and PowerAdz, LLC (PowerAdz.com), which
enable them to offer versions of Advertise123 to their participating newspapers
so that these newspapers can obtain ads through Advertise123.com for publication
either on-line or in print. AdOne.com and PowerAdz.com provide on-line
republication of the classified ads from approximately 1,200 newspapers. Under
our distribution agreements, in order for anyone coming to one of our
distribution partners' sites or the site of one of their participating
newspapers added to our system -- to place an ad for publication in print or
on-line -- the prospective advertiser will click-on a "place an ad" button which
will link such party to a co-branded version of Advertise123.com hosted by us.
As we implement this ad taking service for our distribution partners and their
participating newspapers, each of these publications becomes accessible on
Advertise123.com which enhances our value to advertisers.
Each of our distribution agreements grants us the right to provide our
distribution partners and their participating newspapers with the the ability to
enable advertisers to select, transact and process ads for print and on-line
publication from their Web sites and from Advertise123.com. For any
advertisement entered on a Web site of a distribution partner or one of its
participating newspapers -- which we call partnered sites -- and for any ad
entered on Advertise123.com for placement on a partnered site or in a
participating newspaper of one of our distribution partners, a percentage of the
publisher's charges for this advertisement is divided among us and the other
party or parties in the distribution chain to the transaction. Our agreements
with AdOne and PowerAdz are for three years but may be terminated on short
notice by either party. Our Advertise123.com service is being made available to
users of the AdOne and PowerAdz Web sites. We have begun installing our ad entry
software on the Web sites of their participating newspapers -- and these
newspapers will join our Advertise123.com marketplace as their publications are
also accessible on our Web site.
In addition, AdStar.com has recently entered into a distribution agreement
with Recruitment Marketplace, a division of Landon Media Group, a major
newspaper
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representative firm which represents over two thirds of the nations newspapers.
The Recruitment Marketplace division is dedicated to increasing newspaper
exposure to recruitment advertising buyers and their agents. AdStar will provide
Recruitment Marketplace's on-line channel for buying and selling print
recruitment advertising. Recruitment Marketplace will drive increased
recruitment advertising to the publications it represents via its soon to be
released RecruitmentMarketPlace Web site. Advertisers who are solicited by
Recruitment Marketplace will be able to go to its RecruitmentMarketplace.com Web
site to create, schedule and submit their recruitment advertising directly to
the newspaper. AdStar's Advertise123.com service will power the Recruitment
Marketplace Web site.
SERVICE AGREEMENT. We have also entered into three year agreements with
Web publishers, CareerPath.com and CareerEngine, which aggregate and republish
job recruitment advertisements on-line. These agreements grant us the right to
provide our Advertise123.com ad entry services on these Web sites, the
co-branded Web sites of CareerPath.com's participating newspapers, and on
CareerEngine's 23 category specific Web sites. This will enable prospective
employers to place job related ads on these sites.
CareerPath.com sources its listings from the help wanted ads of more than
90 daily newspapers and from employer Web sites. We have installed a "Post A Job
On-line" button on CareerPath.com and on the sites of its more than 90
participating newspapers which takes a prospective advertiser to a private label
version of Advertise123.com.
CareerEngine sponsors the: ITClassifieds.com, SalesClassifieds.com and
AccountingClassifieds.com Web sites. CareerEngine job counselors and recruiters
help prospective candidates define, locate and secure career opportunities
and/or consulting assignments. CareerEngine offers e-recruiting services to
Fortune 1000 companies and has distribution partnerships with leading recruiting
firms, which sell the services of CareerEngine's sites.
In addition to making the Advertise123.com service available directly from
the respective Web sites of CareerPath.com and CareerEngine, advertising
opportunities of both will be available directly from the Advertise123.com Web
site. Pursuant to our service agreements, we receive installation fees and a
percentage of revenues generated by the service. Our service with CareerPath.com
is fully operational and our service agreement with CareerEngine is expected to
be operational in December 1999.
OUR STRATEGY
We have now expanded our business to make remote ad entry available to
virtually all newspapers and advertisers by utilizing the Internet. We believe
this expansion is a natural extension of our business.
In working to establish Advertise123.com as a leading on-line e-commerce
marketplace for publishers and classified advertisers to transact business, we
intend to:
- leverage our knowledge and experience in classified advertisements to
establish our credibility in the Web-based ad taking business;
- quickly build an on-line business with our established newspaper customer
base and commercial advertiser relationships;
- expand the number of publications accessible on Advertise123.com and
therefore its attractiveness to advertisers by emphasizing the e-commerce
opportunities of our site for building ad revenues as well as the many
proven advantages of remote ad entry over traditional manual methods of
classified ad placement to both advertisers and publishers;
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- convert our revenue and pricing model from fixed software license fees to
transaction fees for each ad purchased on Advertise123.com and the
private label and co-branded sites which we host;
- expand our ad placement distribution channels through private label and
co-branded relationships with leading Web publishers which aggregate and
republish print media classified ads but do not provide for ad entry; and
- develop revenue sources for reporting trends and statistical information
of interest to print and on-line publishers and advertisers assembled
from data collected from our Web sites.
REVENUE
Our historical revenues have been derived principally from our license fees
and installation charges billed to our newspaper customers for our AdStar remote
ad entry service. We expect this revenue to continue in accordance with our
outstanding license agreements.
Our revenue sources from Advertise123.com are expected to fall into the
following categories:
(1) TRANSACTION FEES. These fees will be charged for placing
classified ads on our Web site or on a partnered site. The charge for each
advertisement by the on-line or print publication will be prepaid by the
advertiser by credit card payment through third party facilities accessible
on-line or in cases involving large volume purchases, in separate
arrangements which we may establish with the advertiser. We will receive
the full payment from the credit card facility, less its processing charge,
from which we will deduct our fee, as agreed to with the publisher, before
forwarding the balance to the publisher. Fees for ads placed in print
publications paid for by credit cards will generally be 10% of the cost of
the ad, but may change as a result of changing market conditions. We expect
those paid for by advertisers under contracts with publishers will carry a
per ad charge of $.25. For those ads placed in existing AdStar newspapers
there is no charge to the publisher for use of Advertise123.com by contract
advertisers. We expect that fees on ads which originate on the publisher's
Web site which flow through our system will be subject to annual caps
ranging from $6,000 to $33,000 per publisher. There are no caps for
revenues on ads originating on Advertise123.com. Existing fees for on-line
publications will range between 5% to 10% of the cost of the ad if
originated on their Web site and 10% to 35% of the cost of the ad if
originated on Advertise123.com. In our distribution arrangements, we share
this fee with our partners. We expect our sharing arrangements to be
separately negotiated for each distribution arrangement.
(2) CARRIAGE FEES. In co-marketing or co-branding situations in which
we carry or display the brand of another company on our Web site, we will
in certain circumstances charge a fixed fee, known in the trade as a
carriage fee.
(3) MARKET RESEARCH REPORTS. We expect to be able to derive a
separate revenue stream for providing market research and reporting
services to both advertisers and newspapers based on data we are able to
assemble from the operation of our Web-based market place.
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(4) FEES FROM ADVERTISEMENTS ON OUR WEB SITE. Additional revenues
should be provided by premium positioning and promotional advertising sold
to media and advertising companies and carried on our Web site. Initially
we may provide an opportunity to these prospective advertisers to advertise
on our Web site without fee. As we develop activity on our site, we will
adopt a rate schedule for these advertisers based on the number of "hits"
each advertiser receives from visitors to our site.
COMPETITION
We expect to provide a "marketplace" or "one-stop-shop" Internet location
for publishers and advertisers. We will be competing with all traditional
methods of ad origination and entry -- as conducted by newspapers and Web
publishers.
Our ability to compete will also depend upon the timing and market
acceptance of our new Web-based ad taking service, the enhancements developed by
us, the quality of our customer service, and the ease of use, performance, price
and reliability of our services.
We also have to expect that other companies may enter our market and
compete with us for ad origination business. Many of these potential new
competitors may have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than us. We cannot guarantee that we will be able to compete
successfully against current or future competitors or that competitive pressures
will not have a material and adverse effect on our financial position, results
of operations and cash flows.
INTELLECTUAL PROPERTY
We regard our intellectual property as critical to our success, and we rely
upon trademark, copyright and trade secret laws in the United States to protect
our proprietary rights. We do not currently own any patents. We have established
trademark rights in the mark AD-STAR, based on our use of this mark since 1985
and our ownership of the incontestible United States trademark registration No.
1,497,387 for AD-STAR issued in 1988. While this registration covers computer
programs for preparation, editing and electronic transmission of classified
advertisements, we have expanded our use of the trademark AD-STAR to
Internet-related advertising services and we will be filing a new trademark
application to cover these services. Our trademark search, along with our
longstanding use of the mark AD-STAR and our ownership of the U.S. Registration
for AD-STAR, should entitle us to further registration, although we cannot
guarantee how the Trademark Office will view our proposed application or whether
our expanded use of the mark will encounter any opposition in the marketplace.
We have also recently begun to use the trademark and Internet domain name
Advertise123.com but have not yet applied for registration.
We seek to protect our proprietary rights through the use of
confidentiality agreements with employees, consultants, advisors and others. We
cannot guarantee that these agreements will provide adequate protection for our
proprietary rights in the event of any unauthorized use or disclosure, that our
employees, consultants, advisors or others will maintain the confidentiality of
proprietary information, or that proprietary information will not otherwise
become known, or be independently developed, by competitors.
We have licensed in the past, and expect that we may license in the future,
elements of our trademarks, trade dress and similar proprietary rights to third
parties. While we
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attempt to ensure that the quality of our name and brand are maintained by our
business partners, we cannot guarantee that these partners will not take actions
that could materially and adversely affect the value of our proprietary rights
or the reputation of our solutions and technologies.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and we cannot make any guarantees as to the future
viability or value of any of our proprietary rights or those of other companies
within the industry. We cannot guarantee that the steps taken by us to protect
our proprietary rights will be adequate or that third parties will not infringe
or misappropriate our proprietary rights. Any infringement or misappropriation,
should it occur, could have a material adverse effect on our business, our
results of operations of our financial condition. Furthermore, we cannot
guarantee that our business activities will not infringe upon the proprietary
rights of others, or that other parties will not assert infringement claims
against us.
EMPLOYEES
As of November 1, 1999, we had 26 full-time employees, including two in
sales and marketing, two in business development, 11 in technical staff and
product development, 10 in operations and customer support, and one in clerical
and administration. We are not subject to any collective bargaining agreements
and we believe that our relations with our employees are good. In order to
implement our business plan for building our Web based service we expect over a
relatively short period of time beginning with the completion of this offering
to significantly increase our work force. We will be looking to add
approximately 39 people to our staff during the next 12-18 months as follows:
4 persons to our administrative staff
17 persons to assemble and input information about publishers into our
data base
2 persons to staff our "Help Desk" to provide support and assistance
at our Web site to prospective advertisers
13 persons for marketing
3 persons for product development
LEGAL PROCEEDINGS
We are not currently a party to any legal proceeding.
FACILITIES
Our principal offices are currently located in two separate facilities. One
in Marina del Rey, California consisting of an aggregate of approximately 3,000
square feet and one in Syosset, New York consisting of approximately 1,400
square feet. The leases for these premises expire on February 15, 2001 and March
31, 2002. The aggregate monthly rent is approximately $7,000. We believe that if
these leases are not renewed, satisfactory alternative space will be available.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their respective ages as of July
31, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Leslie Bernhard...................... 55 President, Chief Executive Officer and
director
Eli Rousso........................... 62 Executive Vice President, Chief Technology
Officer and director
Michael Kline........................ 33 Senior Vice President -- Strategy and
Products
Adam Leff............................ 33 Senior Vice President -- Business
Development and Corporate Communications
Benjamin J. Douek.................... 49 Senior Vice President, Chief Financial
Officer and director
Richard Bassler...................... 40 Vice President -- Operations
Ronald S. Posner..................... 57 Director nominee
Chris A. Karkenny.................... 31 Director nominee
</TABLE>
- ---------------
Messrs. Posner and Karkenny will take office upon the earlier of 45 days
from the date of this prospectus or the closing of the sale of units subject to
the over-allotment option. Ms. Bernhard and Mr. Rousso have served as directors
since the Company was formed in 1991. Mr. Douek was elected director in July
1999. All directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are elected
to serve subject to the discretion of the Board of Directors. Set forth below is
a brief description of the background and business experience of the executive
officers and directors of AdStar for the past 5 years:
LESLIE BERNHARD is one of our co-founders and has served as our President
and Chief Executive Officer since the organization of our predecessor in 1986.
ELI ROUSSO is our other co-founder and has served as our Executive Vice
President and Chief Technology Officer since the organization of our predecessor
in 1986.
MICHAEL KLINE joined us in January 1999 first as a consultant and then in
April as a Senior Vice President-Strategy and Products. Prior to joining us, Mr.
Kline was associated with Recycler.com, a popular online classifieds publisher,
as a consultant from July 1998 to January 1999 and General Manager from March
1996 through July 1998. From October 1995 to March 1996 Mr. Kline worked as a
consultant for Recycler Classifieds, a newspaper company based in Los Angeles,
California. From August 1994 to October 1995 Mr. Kline was Assistant
Director-Strategic Development for the Times Mirror, Inc., a leading media
company.
ADAM LEFF joined us in August 1998 and is Senior Vice President-Business
Development and Corporate Communications. Prior to joining us Mr. Leff served as
Vice President-Product Development and Marketing and Vice President-Business
Development of AdOne Classified Network since June 1996. From 1993 to May 1996
he held various positions within the classified and new media departments of the
LA Times as well as positions with a joint venture in which the LA Times was a
co-venturer with PacBell.
BENJAMIN J. DOUEK joined us in April 1999 as Senior Vice President and
Chief Financial Officer. Mr. Douek has been a consultant and private investor
for more than the
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last five years during which period he also served as Director of Investment
Banking for Ladenberg Thalmann & Co., Inc. (1997-1998), Vice Chairman for
Coleman & Company (1996-1997) and Managing Director for Bankers Trust Company
(1992-1994).
RICHARD BASSLER joined us in April 1999 as Vice President/Operations.
Prior to his joining us he was Vice President-General Manager of AdOne
Classified Network from June 1998 to March 1999, and Vice President-Affiliate
Relations from May 1997 to June 1998. Previously he served as Director of New
Media with Packet Publications and News Director of Princeton Packet from May
1994 to May 1997.
RONALD S. POSNER has been Co-Chief Executive Officer of GlobalNet
Financial.Com, Inc., a provider of online financial news and information
services since July 1999. For more than five years Mr. Posner has also served as
Chairman of the Board of P S Capital, a venture capital firm which he founded
that focuses on the Internet, software and technology markets. Mr. Posner is a
director of Beyond.com, a software superstore, Asymetrix Learning Systems, Inc.,
a provider of Internet-based learning solutions and Smallworld, a seller of
new-era GIS applications to the energy industry.
CHRIS A. KARKENNY has been Chief Executive Officer of Technologz.com LLC,
an incubator and venture catalyst company, since January 1999. Prior to January
1999 and since February 1998 Mr. Karkenny was a private consultant in corporate
finance. From September 1995 to February 1998 he was Treasurer of Quarterdeck
Corporation, a technology and software company and prior to September 1995 Mr.
Karkenny was a consultant for CDK Industries, a consulting firm specializing in
mergers and acquisitions.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established Compensation and Audit committees,
whose initial members will be Messrs. Posner and Karkenny. The Compensation
Committee reviews and recommends to the Board of Directors the compensation and
benefits of all our officers, reviews general policy matters relating to
compensation and benefits of our employees and administers the issuance of stock
options and discretionary cash bonuses to our officers, employees, directors and
consultants. The Audit Committee meets with management and our independent
public accountants to determine the adequacy of internal controls and other
financial reporting matters. It is our intention to appoint only independent
directors to the Audit and Compensation Committees.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to our Chief Executive Officer and our other two most highly compensated
executive officers whose annual compensation exceeded $100,000 in 1998 for all
services rendered in all capacities to us during 1998, 1997 and 1996.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------
NAME AND PRINCIPAL POSITION YEAR SALARY
- --------------------------- ---- --------
<S> <C> <C>
Leslie Bernhard............................................. 1998 $150,131
President and Chief Executive Officer 1997 $150,131
1996 $150,131
Eli Rousso.................................................. 1998 $145,662
Executive Vice President and Chief Technical Officer 1997 $145,357
1996 $145,357
Jeffrey Diamond............................................. 1998 $100,626
Vice President-Technical Services 1997 $100,626
1996 $100,626
</TABLE>
Mr. Diamond resigned as an officer and director of the Company in July
1999. There was no other compensation including stock options granted to any of
the officers mentioned above for the periods indicated.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements dated as of July 1, 1999
with Leslie Bernhard and with Eli Rousso. These agreements provide for terms of
employment which expire on June 30, 2002 and annual salaries of $200,000
commencing the first day of the month following the closing of the offering.
Each agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement, separation and disability
plans for employees or executives and for participation in other employee
benefits applicable to employees and executives of our company. Each agreement
further provides for the use of an automobile and other fringe benefits
commensurate with the executive's duties and responsibilities.
Under each agreement, employment may be terminated by us with cause or by
the executive with good reason. Termination by the Company without cause, or by
the executive for good reason, would subject us to liability for liquidated
damages in an amount equal to the terminated executive's base salary for the
remaining term of his or her employment agreement or 12 months, whichever is
higher.
STOCK OPTION PLANS
In July 1999, the board of directors and stockholders adopted our 1999
Stock Option Plan. We have reserved 500,000 shares of common stock for issuance
upon exercise of options granted from time to time under the option plan. The
stock option plan is intended to assist us in securing and retaining key
employees, directors and consultants by allowing them to participate in our
ownership and growth through the grant of incentive and non-qualified options.
Under our stock option plan, we may grant incentive and non-qualified
options to our officers, employees, directors, consultants, agents and
independent contractors. The stock option plan is to be administered by a
committee, appointed by our board of directors, consisting of from one to three
directors.
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Subject to the provisions of the stock option plan, the committee will
determine who shall receive options, the number of shares of common stock that
may be purchased under the options, the time, manner of exercise and exercise
price of options. The term of options granted under the stock option plan may
not exceed ten years or five years for an incentive stock option granted to an
optionee owning more than 10% of our voting stock. The exercise price for
incentive stock options shall be equal to or greater than 100% of the fair
market value of the shares of the common stock at the date of grant; provided
that incentive stock options granted to a 10% holder of our voting stock shall
be exercisable at a price equal to or greater than 110% of the fair market value
of the common stock on the date of the grant. The exercise price for
non-qualified options will be set by the committee, in its discretion, but in no
event shall the exercise price be less than the fair market value of shares of
common stock on the date of grant. Shares of common stock received upon exercise
of options granted under the plan will be subject to restrictions on sale or
transfer.
As of the date of this prospectus, we have granted stock options to
purchase 212,101 shares of common stock under our option plan at a weighted
average price of $5.58. Of these options, options to purchase 171,183 shares
have been granted to our officers and directors. All of the options granted to
such officers and directors terminate five years from the date of grant.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for:
- Any breach of the director's duty of loyalty to us or our stockholders;
- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- Unlawful payments of dividends or unlawful stock redemptions or
repurchases; or
- Any transaction from which the director derived an improper personal
benefit.
This provision limits our rights and the rights of our stockholders to recover
monetary damages against a director for breach of the fiduciary duty of care
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care.
Our certificate of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent, to
the fullest extent permitted under the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
We intend to obtain a policy of insurance under which our directors and
officers will be insured, subject to the limits of the policy, against certain
losses arising from claims made against our directors and officers by reason of
any acts or omissions covered under this policy in their capacities as directors
or officers, including liabilities under the Securities Act.
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CERTAIN TRANSACTIONS
In July 1999 Jeffrey Diamond, an employee and former director and officer,
sold 281,144 shares of our common stock to some of the holders of our
convertible notes for $500,000 pursuant to an agreement among Jeffrey Diamond, a
representative of the purchasers and us under which Diamond agreed to provide
technical services for us for a year at his current compensation of $100,000 a
year. In connection with this transaction the purchasers transferred 63,848
shares of our common stock to us. In July, 1999 we issued to Ronald S. Posner, a
director nominee of the Company, three year warrants to purchase 16,667 shares
of common stock at the initial public offering price of the shares in this
offering. Each of the above transactions was approved by the Board of Directors,
in which at least two members were disinterested.
In September 1999, a proposed $15.5 million initial public offering of our
securities became effective but did not close. AdStar originally offered units
consisting of common stock and warrants in September 1999. That offering was
declared effective by the Securities and Exchange Commission and resulted in the
stock and warrants included in those units being traded on the American Stock
Exchange between September 30 and October 4. Initial trading in the units
resulted in a decline in the unit price to which AdStar responded by announcing
a reduction of the warrant exercise price. The American Stock Exchange took the
position that this reduction caused AdStar's securities to no longer meet its
listing requirements and therefore stopped trading in the units. As a result of
these events, the former offering was not consummated. In full settlement of our
claims, if any, against Paulson Investment Company, Inc., the representative of
the underwriters in that offering, we received $500,000 from the representative.
In addition, Paulson Capital Corporation, the parent of the representative lent
us $1.1 million evidenced by a promissory note due on October 21, 2001 and
bearing interest at 6% per annum payable at maturity. Paulson Investment
Company, Inc. is the representative of the underwriters in this offering.
All future transactions between the Company and its officers, directors or
five percent shareholders, and their respective affiliates, will be on terms no
less favorable than could be obtained from unaffiliated third parties and will
be approved by a majority of the independent, disinterested directors of the
Company.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of November 30, 1999 and as adjusted to
reflect the sale by us of our common stock in this offering, for each person
known by us to beneficially own more than 5% of our common stock; each of our
directors; and all our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.
The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options or warrants held by person that are exercisable within 60 days of
November 30, 1999 but excludes shares of common stock underlying options or
warrants held by any other person. Percentage of shares beneficially owned is
based on:
- prior to the offering, 1,669,970 shares of common stock outstanding,
after giving effect to the issuance of 22,534 shares of stock to a small
business investment company in connection with a $850,000 loan, the
acquisition on July 28, 1999 by certain stockholders and us of an
aggregate of 281,144 shares from a former officer and director of the
Company, the conversion of all convertible notes and interest into
231,620 shares of stock, the issuance of shares in connection with our
reincorporation in Delaware, and the 5-for-9 reverse split of our common
stock in November 1999;
- after the offering, 2,669,970 shares of common stock outstanding.
The address of each party named in the table is Ms. Bernhard and Mr.
Rousso, c/o AdStar, 4553 Glencoe Avenue, Suite 325, Marina del Rey, California
90292; Mr. Douek, 450 Park Avenue, New York, New York 10022; Mr. Posner, 820
Stony Hill Road, Tiburon, California 94920; Mr. Karkenny, 11670 Chenault St.,
Los Angeles, California 90049; William Harris Profit Sharing Trust and Couderay
Partners 2 North La Salle, suite 400, Chicago, Illinois 60602, Rolling Oaks
Enterprises, LLC, 1501 Main St. Venice California 90291 and Paulson Capital
Corporation, 811 S.W. Naito Parkway, Suite 200, Portland Oregon 97204,
Attention:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ------------ --------- ---------
<S> <C> <C> <C>
Leslie Bernhard............................... 731,667(1)(2) 44% 27%
Eli Rousso.................................... 731,667(1)(2) 44% 27%
Benjamin J. Douek............................. 17,226(1)(3) 1% *
Ronald S. Posner.............................. 16,667(1)(4) 1% *
Chris A. Karkenny............................. --(1) -- --
William Harris Employee Profit Sharing
Trust....................................... 110,054(6) 7% 4%
Couderay Partners............................. 88,251(7) 5% 3%
Rolling Oaks Enterprises, LLC................. 114,312(8) 7% 4%
All directors and officers as a group (eight
persons).................................... 1,418,656(2)(5) 85% 53%
</TABLE>
47
<PAGE> 50
- -------------------------
* Less than 1%.
(1) Denotes a director of the Company or, in the case of Messrs. Posner and
Karkenny, a director nominee.
(2) Includes an aggregate of 203,830 shares, as to which Ms. Bernhard and Mr.
Rousso have voting power.
(3) Consists of shares of common stock that could be purchased by exercise of
options currently exercisable.
(4) Consists of shares of common stock that could be purchased by exercise of
warrants currently exercisable.
(5) Includes shares of common stock that could be purchased by exercise of
options and warrants as of July 15, 1999 or within 60 days after this date.
(6) A trust for the benefit of several persons including Irving Harris who has
a beneficial economic interest in the trust in excess of 50%. The trustees
are Jerome Kahn and Wesley Saul.
(7) A partnership consisting of grandchildren, great grandchildren and trusts
for their benefit in which Jerome Kahn and Michael S. Resnick are managing
agents.
(8) A private investment firm in which Brian Sullivan, its chief executive
officer, holds a beneficial interest in excess of 75%.
48
<PAGE> 51
DESCRIPTION OF SECURITIES
Upon the closing of our offering, our authorized capital stock will consist
of 10,000,000 shares of common stock, $.0001 par value per share, and 5,000,000
shares of preferred stock, $.0001 par value per share, whose rights and
designation have not yet been established. We will not have any shares of our
preferred stock outstanding immediately after the closing of our offering.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a stockholder vote. Holders of common stock do not have
cumulative voting rights. Therefore, holders of a majority of the shares of
common stock voting for the election of directors can elect all of the
directors. Holders of common stock are entitled to share in all dividends that
the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, each
outstanding share entitles its holder to participate pro rata in all assets that
remain after payment of liabilities and after providing for each class of stock,
if any, having preference over our common stock.
Holders of our common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to our
common stock. The rights of the holders of common stock are subject to any
rights that may be fixed for holders of preferred stock, when and if any
preferred stock is issued. All outstanding shares of common stock are, and the
shares underlying all options and warrants will be, duly authorized, validly
issued, fully paid and non-assessable upon our issuance of these shares.
PREFERRED STOCK
Under our certificate of incorporation, our board of directors is
authorized, subject to limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of 5,000,000
shares of our preferred stock. The preferred stock may be issued in one or more
series. Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the stockholders. These rights,
designations and preferences include:
- number of shares to be issued;
- dividend rights;
- dividend rates;
- right to convert the preferred stock into a different type of security;
- voting rights attributable to the preferred stock;
- right to set aside a certain amount of assets for payments relating to
the preferred stock; and
- prices to be paid upon redemption of the preferred stock or a bankruptcy
type event.
49
<PAGE> 52
If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
AdStar. This is because the terms of the preferred stock could be designed to
make it prohibitively expensive for any unwanted third party to make a bid for
our shares of common stock. We have no present plans to issue any shares of
preferred stock.
WARRANTS
GENERAL. Our warrants may be exercised at any time during the period
commencing 30 days after this offering and ending on the fifth anniversary date
of the date of this prospectus, the expiration date. Each redeemable warrant
entitles the holder to purchase one share of our common stock at an exercise
price during the nine month period after the date of this prospectus for $7.20
per share and $9.00 thereafter, subject to adjustment upon the occurrence of
certain events as provided in the warrant certificate and summarized below. A
warrant holder will not be deemed to be a holder of the underlying common stock
for any purpose until the warrant has been exercised.
SEPARATE TRANSFERABILITY. Our redeemable warrants are detachable and
separately transferable commencing on a date determined by the Company within 30
days of the effective date of this offering.
REDEMPTION. We have the right, commencing six months after the date of
this prospectus, to redeem the warrants issued in the offering at a redemption
price of $.25 per warrant after providing 30 days' prior written notice to the
warrant holders, if the average closing bid price of the common stock equals or
exceeds $12.00 for ten consecutive trading days ending within 15 days prior to
the date of the notice of redemption. We will send the written notice of
redemption by first class mail to warrant holders at their last known addresses
appearing on the registration records maintained by the transfer agent for our
warrants. No other form of notice or publication or otherwise will be required.
If we call the warrants for redemption, they will be exercisable until the close
of business on the business day next preceding the specified redemption date or
the right to exercise will lapse.
EXERCISE. A warrant holder may exercise our warrants only if an
appropriate registration statement is then in effect with the Securities and
Exchange Commission and if the shares of common stock underlying our warrants
are qualified for sale under the securities laws of the state in which the
holder resides.
Our warrants may be exercised by delivering to our transfer agent the
applicable warrant certificate on or prior to the expiration date or the
redemption date, as applicable, with the form on the reverse side of the
certificate executed as indicated, accompanied by payment of the full exercise
price for the number of warrants being exercised. Fractional shares of common
stock will not be issued upon exercise of our redeemable warrants.
ADJUSTMENTS OF EXERCISE PRICE. The exercise price is subject to adjustment
if we declare any stock dividend to stockholders, or effect any split or share
combination with respect to our common stock. Therefore, if we effect any stock
split or stock combination with respect to our common stock, the exercise price
in effect immediately prior to this stock split or combination will be
proportionately reduced or increased, as the case may be. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
purchasable upon exercise of a warrant or, if we elect, an adjustment of the
number of warrants outstanding.
50
<PAGE> 53
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BY-LAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or his affiliate or associate who is an owner of 15% or more of the
outstanding voting stock of the corporation for a period of three years from the
date that this person became an interested stockholder.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our common stock and warrants is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
51
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there was no public market for our common stock. We
cannot predict the effect, if any, that sales of, or the availability for sale
of, our common stock will have on the market price of our common stock
prevailing from time to time. Future sales of substantial amounts of common
stock in the public market, including shares issuable upon the exercise of
warrants being issued in this offering or options granted or to be granted under
our stock option plans, could adversely affect the prevailing market price of
our common stock and could impair our ability to raise capital in the future
through the sale of securities.
Upon completion of this offering, we will have outstanding an aggregate of
2,669,970 shares of our common stock assuming no exercise of outstanding options
or warrants. 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 these shares are purchased by "affiliates" as that term is defined
in Rule 144 under the Securities Act. The remaining 1,669,970 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 701 under the Securities Act, which rules are
summarized below.
We have the following shares subject to issuance upon exercise of options
and warrants and conversion of convertible notes:
212,101 shares subject to options held by key employees
63,890 shares subject to warrants granted to two investors and one
consultant
231,620 shares issuable upon conversion on the consummation of this
offering of $1,050,000 of our 12% convertible notes
There are 14 holders of record of our outstanding common stock not
including three holders of our 12% convertible notes who are not currently
stockholders but will become stockholders when their notes automatically convert
to shares upon the consummation of this offering.
There are eight holders of our 12% convertible notes.
LOCK-UP AGREEMENTS
All of our officers, directors and stockholders have signed lock-up
agreements under which they agreed, not to transfer or dispose of, directly or
indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of one year
after the date of this prospectus. Transfer or dispositions can be made sooner:
- with the prior written consent of Paulson Investment Company, Inc.;
- in the case of certain transfers to affiliates;
- as a bona fide gift; or
- to any trust for the benefit of the transferring stockholders or members
of their families.
52
<PAGE> 55
Upon expiration of the lock-up period, one year after the date of this
prospectus, 2,183,000 shares will be available for resale to the public in
accordance with the volume and trading limitations of Rule 144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding which will
equal approximately 26,700 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the American
Stock Exchange 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 current 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 three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
some of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement may be
eligible to resell these shares. Resales under Rule 701 must be effected 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with many of the restrictions, including the holding period,
contained in Rule 144.
REGISTRATION RIGHTS
We have granted registration rights to Paulson Investment Company, Inc. and
its transferees with respect to an aggregate of 200,000 restricted shares
issuable upon exercise of Paulson's warrants to purchase units and upon exercise
of warrants included in the units. We have also granted certain limited
registration rights to the holders of $1,050,000 of convertible notes with
respect to an aggregate of 231,620 shares into which these notes are
convertible. These rights are exercisable only after the expiration of the
lock-up agreements which these holders have entered into with Paulson, and only
with respect to shares not otherwise saleable under rule 144. In addition, two
of our consultants have been granted piggy-back registration rights with respect
to an aggregate of 33,334 shares subject to warrants held by them.
53
<PAGE> 56
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the units being offered. Subject to conditions
customary in agreements of this kind, each underwriter has severally agreed to
purchase the number of units indicated in the following table. Paulson
Investment Company, Inc. is the representative of the underwriters.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
------------ ---------------
<S> <C>
Paulson Investment Company, Inc ................
---------
Total........................................... 1,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are committed to
purchase all the units offered by this prospectus if any units are purchased.
This commitment does not apply to 150,000 units subject to the over-allotment
option granted to the underwriters to purchase additional units in this
offering.
We have granted the underwriters an option, expiring 45 days after the date
of this prospectus, to purchase up to 150,000 additional units on the same terms
as set forth in this prospectus. The underwriters may exercise this option, in
whole or in part, only to cover over-allotments, if any, incurred in the sale of
the units offered by this prospectus.
The underwriters have advised us that they propose to offer our units
offered by this prospectus to the public at the initial public offering price
set forth on the cover page of this prospectus, and to selected dealers at that
price less a concession within their discretion and that the underwriters and
selected dealers may reallow a concession to other dealers, including the
underwriters, within the discretion of the underwriters. After completion of the
initial public distribution of the units offered by this prospectus, the public
offering price, the concessions to selected dealers and the reallowance to their
dealers may be changed by the underwriters.
The underwriters have informed us that they do not expect to confirm sales
of our units offered by this prospectus on a discretionary basis.
Until the distribution of the units offered by this prospectus is
completed, rules of the Securities and Exchange Commission may limit the ability
of the underwriters to bid for and purchase units. As an exception to these
rules, the underwriters may engage in transactions that stabilize the price of
the units. These transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the units. If the underwriters
create a short position in connection with the offering, that is, if they sell
more units than are set forth on the cover page of this prospectus, the
underwriters may reduce that short position by purchasing units in the open
market. The underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment option to purchase additional units
described above.
In general, the purchase of a security to stabilize or to reduce a short
position could cause the price of the security to be higher than it might be
otherwise. Neither we nor the underwriters can predict the direction or
magnitude of any effect that the transactions described above may have on the
price of the units. In addition, neither we nor the underwriters can represent
that the underwriters will engage in these types of transactions or that these
types of transactions, once commenced, will not be discontinued without notice.
54
<PAGE> 57
The underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The underwriters will purchase the units at a discount of 10% from the
initial public offering price of the units. The difference between the price
payable to us by the underwriters and the price at which the underwriters resell
the units to the public will constitute compensation to the underwriters.
We have agreed to pay the underwriters' representative an expense allowance
equal to three percent of the aggregate initial public offering price of the
units offered by this prospectus. The amount of the expense allowance is not
dependent on the representative's actual out-of-pocket expense and the
representative will not provide an accounting for these expenses to us.
We have agreed to issue warrants to the underwriters to purchase from us up
to 100,000 units at an exercise price per unit equal to $7.20 per unit. These
warrants are exercisable during the four-year period beginning one year from the
date this registration statement becomes effective. These Underwriter's warrants
may not be sold, transferred, pledged or hypothecated for one year from the date
of issuance, except by transfer to an individual who is either a partner or an
officer of an underwriter, by will or by the laws of descent and distribution
and are not redeemable. These warrants will have registration rights.
In summary, compensation payable by us to the underwriters consists of:
- The underwriting discount
- The representative's expense allowance
- The underwriters' warrants
Our officers, directors and the stockholders also have agreed that, for a
period of one year from the date this registration statement becomes effective,
they will not sell, contract to sell, grant any option for the sale or otherwise
dispose of any of our equity securities without the consent of Paulson, as
representative of the underwriters, which consent will not be unreasonably
withheld. Intra-family transfers or transfers to trusts for estate planning
purposes are exempt from these restrictions. They have also agreed that for the
two-year period beginning on the date this registration statement becomes
effective that they will notify the representative before they sell any of our
equity securities under Rule 144.
Before this offering, there has been no public market for the units and our
common stock and warrants contained in the units. Accordingly, the initial
public offering price of the units offered by this prospectus was determined by
negotiations between us and the underwriters. Among the factors considered in
determining the initial public offering price of the units offered by this
prospectus were:
- our history and our prospects,
- the industry in which we operate,
- the status and development prospects for our proposed products and
services,
55
<PAGE> 58
- our past and present operating results,
- the previous experience of our executive officers, and
- the general condition of the securities markets at the time of this
offering.
The offering price stated on the cover page of this prospectus should not
be considered an indication of the actual value of the units. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the units, or our common stock and warrants contained in
the units, can be resold at or above the initial public offering price.
We are seeking a limited offering qualification in California for this
Offering and will conform to the following suitability standards: California
investors will be required to have had during the last tax year, or to
reasonably estimate that he or she will have during the current tax year, gross
annual income of $65,000 and a minimum net worth of not less than $250,000
(exclusive of home, automobile, and home furnishings), or (ii) a minimum net
worth (exclusive of home, automobile, and home furnishings) of at least
$500,000.
In a listing agreement with the managing underwriter of this offering,
IPO.COM was authorized to include AdStar's prospectus on the IPO.COM Web site.
Although the listing agreement neither authorized nor requested that any
additional information about AdStar be provided, IPO.COM provided on other pages
reachable from its Web site home page, summary material that it extracted from
AdStar's prospectus, relating to AdStar and its initial public offering. Those
pages also provided a direct link to the AdStar Web site. That listing agreement
has been terminated and any information and reference to AdStar has been deleted
from the IPO.COM web site (See also Risk Factors).
56
<PAGE> 59
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon on
our behalf by Morse Zelnick Rose & Lander, LLP, 450 Park Avenue, New York, New
York 10022-2605. Partners of Morse Zelnick Rose & Lander LLP own, in the
aggregate, 82,371 shares of our common stock. Legal matters relating to this
offering will be passed upon for the underwriters by Stoel Rives LLP, Portland,
Oregon 97204.
EXPERTS
The financial statements as of December 31, 1998 and for the years ended
December 31, 1997 and 1998, included in this prospectus have been included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act with the Securities and Exchange Commission with respect to the units
offered hereby. This prospectus filed as a part of the registration statement
does not contain all of the information contained in the registration statements
and exhibits and reference is hereby made to such omitted information.
Statements made in this registration statement are summaries of the terms of
these referenced contracts, agreements or documents and are not necessarily
complete. Reference is made to each exhibit for a more complete description of
the matters involved and these statements shall be deemed qualified in their
entirety by the reference. The registration statement and the exhibits and
schedules filed with the Securities and Exchange Commission may be inspected by
you at the Securities and Exchange Commission's principal office in Washington,
D.C. Copies of all or any part of the registration statement may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the commission's regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 11400,
Chicago, Illinois 60661. The commission also maintains a website
(http://www.sec.gov) that contains reports, proxy statements and information
statements and other information regarding registrants that file electronically
with the Commission. For further information pertaining to us and the units
offered by this prospectus, reference is made to the registration statement.
We intend to furnish our stockholders with annual reports containing
financial statements audited by its independent accountants.
57
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and September 30,
1999................................................... F-3
Statements of Operations for each of the two years in the
period ended December 31, 1998 and the nine-month
periods ended September 30, 1998 and 1999.............. F-4
Statements of Stockholders' Deficit for each of the two
years in the period ended December 31, 1998 and the
nine-month period ended September 30, 1999............. F-5
Statements of Cash Flows for each of the two years in the
period ended December 31, 1998 and the nine-month
periods ended September 30, 1998 and 1999.............. F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 61
The following report is in the form that will be signed upon the completion
of the Company's proposed 5-for-9 stock split as described in Note 9 to the
financial statements.
PricewaterhouseCoopers LLP
Woodland Hills, California
, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of AdStar.com, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of AdStar.com, Inc. (the
"Company") as of December 31, 1998, and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997, 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
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
Woodland Hills, California
July 21, 1999 except for the effects
of the reincorporation in Delaware
described in Note 1, as to which the date
is September 1, 1999 and the
effects of the stock split and
settlement agreement as described in Note 9,
as to which the date is , 1999
F-2
<PAGE> 62
ADSTAR.COM, INC.
BALANCE SHEETS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, 1999
1998 1999 (PRO FORMA)
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 90,007 $ 104,133
Accounts receivable............................ 125,313 363,664
Receivable from the sale of stock.............. 26,300 --
Other current assets........................... 16,763 565,076
--------- ----------
Total current assets........................ 258,383 1,032,873
Property and equipment, net...................... 77,561 378,116
Intangible assets, net........................... -- 172,552
Other assets..................................... 3,203 9,378
--------- ----------
Total assets................................ $ 339,147 $1,592,919
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ 177,929 $ 698,484
Accrued expenses............................... 275,019 102,244
Deferred revenue............................... 34,656 5,762
Dividends payable.............................. 20,750 15,750
Notes payable.................................. 15,000 170,413
Capital lease obligations...................... 6,833 6,672
--------- ----------
Total current liabilities................... 530,187 999,325
Notes payable.................................... -- 2,416,182
Capital lease obligations........................ 4,964 --
--------- ----------
Total liabilities........................... 535,151 3,415,507
--------- ----------
Commitments and contingencies (note 8)
Redeemable common stock;
22,534 shares issued and outstanding........... -- 137,536 --
Stockholders' equity (deficit)
Preferred stock, par value $0.0001; authorized
5,000,000 shares; none issued and
outstanding................................. -- -- --
Common stock, par value $0.0001; authorized
10,000,000 shares; Issued and outstanding
1,415,816 at December 31, 1998 and September
30, 1999 and 1,644,246 at September 30, 1999
on a pro forma basis........................ 28,300 142 164
Additional paid-in capital..................... -- (969,453) 118,892
Accumulated deficit............................ (224,304) (990,813) (990,813)
--------- ---------- --------
Total stockholders' deficit................. (196,004) (1,960,124) (871,757)
--------- ---------- --------
Total liabilities and stockholders'
deficit................................... $ 339,147 $1,592,919
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 63
ADSTAR.COM, INC.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ -------------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues............................ $1,148,233 $1,559,361 $1,209,340 $ 1,212,293
Cost of revenues.................... 565,329 800,532 590,271 961,525
---------- ---------- ---------- -----------
Gross profit...................... 582,904 758,829 619,069 250,768
Sales, general and administrative
expenses.......................... 634,029 820,574 532,294 1,295,096
Abandoned offering expenses,
net............................ -- -- -- 171,854
---------- ---------- ---------- -----------
Income (loss) from operations..... (51,125) (61,745) 86,775 (1,216,182)
Interest expense.................... (7,873) (4,518) (3,695) (190,150)
---------- ---------- ---------- -----------
Income (loss) before taxes........ (58,998) (66,263) 83,080 (1,406,332)
Provision for taxes................. 823 2,760 2,070 2,080
---------- ---------- ---------- -----------
Net income (loss)................. $ (59,821) $ (69,023) $ 81,010 $(1,408,412)
========== ========== ========== ===========
Pro forma information (unaudited)
Historical income (loss) before
income taxes................... $ (58,998) $ (66,263) $ 83,080 $(1,406,332)
Pro forma income tax expense...... 800 800 600 600
---------- ---------- ---------- -----------
Pro forma net income (loss)....... $ (59,798) $ (67,063) $ 82,480 $(1,406,932)
========== ========== ========== ===========
Pro forma earnings (loss) per
share -- basic and diluted........ $ (0.05) $ (0.87)
Pro forma weighted average number of
shares -- basic and diluted....... 1,458,393 1,613,675
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 64
ADSTAR.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996... 1,405,723 $ 2,000 $ -- $ (68,861) $ (66,861)
Net loss..................... -- -- -- (59,821) (59,821)
Dividends.................... -- -- -- (1,000) (1,000)
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1997... 1,405,723 2,000 -- (129,682) (127,682)
Net loss..................... -- -- -- (69,023) (69,023)
Sale of common stock......... 73,941 26,300 -- 26,300
Dividends.................... -- -- -- (25,599) (25,599)
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1998... 1,479,664 28,300 -- (224,304) (196,004)
Net loss..................... -- -- -- (1,408,412) (1,408,412)
Repurchase of option......... -- -- -- (447,935) (447,935)
Reclassification of deficit
due to termination of S
Corporation election....... -- -- (1,094,611) 1,094,611 --
Warrants issued for
services................... -- -- 97,000 -- 97,000
Contribution of common
stock...................... (63,848) (6) 6 -- --
Reincorporation in Delaware
and change in par value.... -- (28,152) 28,152 -- --
Dividends.................... -- -- -- (4,773) (4,773)
--------- ----------- ----------- ----------- -----------
Balance, September 30,
1999....................... 1,415,816 142 (969,453) (990,813) (1,960,124)
Conversion of convertible
notes and accrued
interest................... 228,430 22 1,088,345 -- 1,088,367
--------- ----------- ----------- ----------- -----------
Balance, September 30, 1999
(pro forma)................ 1,644,246 164 $ 118,892 $ (990,813) $ (871,757)
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 65
ADSTAR.COM, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
AND THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1999
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED NINE-MONTH PERIOD
DECEMBER 31, ENDED SEPTEMBER 30,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss)....................................... $(59,821) $(69,023) $ 81,010 $(1,408,412)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 23,523 21,032 16,223 57,530
Amortization of debt discount......................... -- -- -- 70,099
Warrants issued for services.......................... -- -- -- 97,000
Changes in assets and liabilities
Accounts receivable................................. (25,567) (20,913) (47,581) (238,351)
Other assets........................................ 612 1,522 (3,691) (554,488)
Accounts payable.................................... 20,505 104,371 59,784 520,555
Accrued expenses.................................... (21,578) 78,248 12,450 (64,343)
Deferred revenue.................................... 49,500 (16,634) (42,355) (28,894)
-------- -------- -------- -----------
Net cash provided by (used in) operating activities..... (12,826) 98,603 75,840 (1,549,304)
-------- -------- -------- -----------
Cash flows from investing activities
Purchase of property and equipment.................... (12,902) (25,532) (15,730) (335,294)
-------- -------- -------- -----------
Net cash used in investing activities................... (12,902) (25,532) (15,730) (335,294)
-------- -------- -------- -----------
Cash flows from financing activities
Proceeds from issuance from convertible notes
payable............................................. -- -- -- 1,050,000
Proceeds from issuance of notes payable............... 2,500 -- -- 850,000
Proceeds from sales of stock.......................... -- -- -- 26,300
Repayment of note payable............................. -- (22,500) (22,500) (12,678)
Principal repayments on capital leases................ -- (3,203) (1,495) (5,125)
Dividends paid........................................ (1,000) (4,849) -- (9,773)
-------- -------- -------- -----------
Net cash from (used in) financing activities............ 1,500 (30,552) (23,995) 1,898,724
-------- -------- -------- -----------
Net increase (decrease) in cash and cash equivalents.... (24,228) 42,519 36,115 14,126
Cash and cash equivalents at beginning of the period.... 71,716 47,488 47,488 90,007
-------- -------- -------- -----------
Cash and cash equivalents at end of period.............. $ 47,488 $ 90,007 $ 83,603 $ 104,133
======== ======== ======== ===========
Supplemental cash flow disclosure:
Taxes paid............................................ $ 9,138 $ 6,052 $ 6,052 $ 2,563
Interest paid......................................... $ 7,873 $ 4,518 $ 3,695 $ 65,285
Non-cash investing and financing activities:
Purchase of intangible assets, cancellation of an
option and repayment of accrued liability by
issuance of note payable............................ -- -- -- $ 751,710
Issuance of redeemable shares in connection with note
payable............................................. -- -- -- 137,536
Issuance of common stock for note receivable.......... -- $ 26,300 $ 26,300 --
Property and equipment leases......................... -- 15,000 15,000 --
Dividends declared.................................... -- 20,750 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 66
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND BUSINESS:
AdStar.com, Inc. (the "Company") (formerly Ad-Star Services Inc.) was
incorporated in the State of New York on June 29, 1991 as an S-Corporation under
the Internal Revenue Code. On August 31, 1999 the Company reincorporated in
Delaware by merging the New York predecessor corporation into the Delaware
corporation and issuing to each stockholder of the New York corporation, 25,303
shares of the Delaware corporation with a par value of $0.0001 per share for
each issued and outstanding share, no par value, of the New York corporation.
Effective July 1, 1999 the Company converted from an S-Corporation to a
C-Corporation. The accompanying statements of operations reflect a pro forma tax
provision for all periods presented, based upon pre tax income (loss), as if the
Company has been subject to C-Corporation federal and state income taxes.
The Company's principal business is the provision of software services
which allow for the direct entry of classified advertisements by large
commercial advertisers, on a dial up basis through modems directly into the
publishing systems of the Company's customers. The Company's customers are
principally located in the United States.
The Company is now offering a one-stop market place on the World Wide Web
for advertisers to buy classified ads. This service enables advertisers to plan,
schedule, compose and purchase classified advertising from many print and
on-line publishers, using one interface.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INITIAL PUBLIC OFFERING AND UNAUDITED PRO FORMA BALANCE SHEET
In July 1999, the Company authorized the filing of a registration statement
with the Securities and Exchange Commission ("SEC") that would permit the
Company to sell shares of the Company's common stock in connection with its
proposed initial public offering ("IPO").
The conversion of $1,050,000 of convertible notes outstanding at September
30, 1999 upon the completion of the Company's IPO, has been reflected in the
accompanying pro forma balance sheet at September 30, 1999.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements of the Company for the nine months ended
September 30, 1999 and 1998 included herein, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of the Company as of September 30, 1999
and the results of its operations and its cash flows for the nine-month periods
ended September 30, 1998 and 1999.
F-7
<PAGE> 67
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an initial maturity of
three months or less to be cash equivalents. Cash and cash equivalents are
carried at cost, which approximates fair value. At times, cash balances held at
financial institutions are in excess of FDIC insurance limits.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk are principally comprised of trade accounts
receivable.
For the year ended December 31, 1997 one customer accounted for 13% of the
Company's revenues and for the year ended December 31, 1998, two different
customers accounted for 9% and 12% of the Company's revenues, respectively. As
of December 31, 1998 three customers accounted for 53% of the Company's accounts
receivable.
The majority of the Company's customers consist of newspapers and
publishers of classified advertisements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. When such items are retired or otherwise disposed, the cost and
related accumulated depreciation and amortization are relieved from the accounts
and the resulting gain or loss is reflected in operations. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the assets. The depreciation and amortization periods by asset
category are as follows:
<TABLE>
<S> <C>
Furniture and fixtures................. 7 years
Computer equipment..................... 5 years
Leasehold improvements................. Shorter of useful life or lease term
</TABLE>
Maintenance and minor replacements are charged to expense as incurred while
renewals and improvements are capitalized.
INTANGIBLE ASSETS
Intangible assets comprise trademarks, license agreements and proprietary
technology and are carried at cost less accumulated amortization. Amortization
is calculated on a straight-line basis over the estimated useful lives of the
intangible assets of 5 years.
F-8
<PAGE> 68
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
LONG-LIVED ASSETS
The carrying value of long-lived assets is periodically reviewed by
management and impairment losses, if any are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value. To date no such impairment has been recorded.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, other assets, accounts
payable, deferred revenue, notes payable and accrued expenses are carried at
cost which approximates their fair value because of the short term maturity of
these instruments.
SOFTWARE COSTS
Costs incurred to establish technological feasibility of software developed
by the Company are charged to expense as incurred. Costs incurred subsequent to
the achievement of technological feasibility are capitalized and amortized over
the estimated useful life of the software. Amortization of such costs commences
when the software is available for general release to customers. Through
December 31, 1998, no such costs have been capitalized, as costs incurred by the
Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its software upon delivery
and customer acceptance and when collection of the resulting receivable is
probable. Maintenance, license fees and user support fees are recognized ratably
over the period to which they relate. The extent that customers make advance
payments for installation fees, license fees, user support or maintenance fees,
the amount received is deferred until the revenue has been earned. Revenues are
recorded net of any discounts.
The Company also sells hardware to certain customers to support the
installation of its Ad-Star technology. The Company charges the customer a small
mark-up on the cost of the hardware and recognizes revenue on delivery to the
customer. For the years ended December 31, 1997 and 1998 sales of hardware
totaled approximately $8,700 and $94,300, respectively, and for the nine-month
periods ended September 30, 1998 and 1999 totaled approximately $53,300 and
$102,300, respectively.
In June 1999 the Company introduced a Web-based product which permits
advertisers to plan, schedule, compose and purchase advertising from many print
and on-line publishers. The Company recognizes revenues on a per transaction
basis. The manner in which these transaction revenues are recognized depends on
the service sold. With respect to ads composed directly on the Company's
web-site, and where the advertiser does not have a contract with the publisher,
the amount billed to the customer by the Company is recognized if, and when, the
Company accepts the customer's ad and charges the customer's credit card. In
these transactions, the Company is responsible for the resulting credit risk.
Credit card and debit card processing fees and amount remitted to the
F-9
<PAGE> 69
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
publisher on these transactions are recognized as a cost of sale. With respect
to ads placed through the Company's Web site, where the customer has a contract
with the publisher, the publisher collects the revenues and remits the
transaction fee to the Company. In these instances, these transaction fees are
recognized when the ad is placed through the Company's system and the collection
from a publisher of the resulting receivable is probable.
The Company also recognizes revenue from banner advertising as the
impressions are displayed; carriage revenues are recognized as the services are
performed. To date, revenues from these services have been immaterial.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the research and development of products are expensed as
incurred. To date research and development costs have been immaterial.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce the deferred tax assets to the amounts expected to be
realized.
Effective July 1, 1999 the Company is taxed as a C-Corporation.
The Company had elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code through June 30, 1999. As such, the Company was not
subject to income taxes at the corporate level and was subject to reduced
franchise tax; either based on a percentage of income or gross payroll costs,
which is provided for in the financial statements. The Company's income is
included in the tax return of its stockholders and any resultant liability
thereon is the individual responsibility of the stockholder.
ADVERTISING COSTS
The Company expenses the costs of advertising in the periods in which those
costs are incurred. Advertising expense was approximately $24,400 and $58,800
for the years ended December 31, 1997 and 1998, respectively.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) per share is computed by dividing the
net income (loss) by the weighted average number of common shares outstanding
plus the number of additional common shares that would have been outstanding if
all dilutive potential common shares had been issued, using the treasury stock
method. Potential common shares are excluded from the computation when their
effect is antidilutive.
F-10
<PAGE> 70
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
Pro forma earnings (loss) per share reflects adjustments for income taxes
had the Company been a C-Corporation for all periods presented. The income tax
provision represents the minimum state tax payable.
For the nine-month periods ended September 30, 1998 and 1999, diluted
earnings (loss) per share does not include 0 and 228,430 shares issuable upon
conversion of the convertible debt and accrued interest on an "as-if-converted"
basis, and 0 and 212,101 options to purchase common stock, as their inclusion is
antidilutive.
Pro forma earnings (loss) per share for the year ended December 31, 1998
and the nine-month period September 30, 1999, assumes that the common stock
issuable on the conversion of the outstanding convertible note payable had been
outstanding during the period or from the date of issuance.
COMPREHENSIVE INCOME
In January 1998, the Company adopted the provisions of Statement Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and disclosure of comprehensive
income and its components in a full set of general-purpose financial statements.
Comprehensive income generally represents all changes in stockholders' equity
(deficit) during the period except those resulting from investments by, or
distributions to, stockholders. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires restatement of earlier periods
presented. SFAS No. 130 defines comprehensive income as net income plus all
other changes in equity from non-owner sources. The Company has no other
comprehensive income items and accordingly net income equals comprehensive
income for all periods presented.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for the year ended December 31, 1998. SFAS
No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of a company's reportable segments. SFAS No. 131 also requires
disclosures about products or services, geographic areas and major customers.
The Company's management reporting structure provides for only one reportable
segment and accordingly, no separate segment information is presented.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and has elected the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant,
F-11
<PAGE> 71
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
between the fair value of the Company's stock and the exercise price of the
option. The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") 96-18.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
hedging activities that requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial position and measures
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management does not
believe that the implementation of SFAS No. 133 will have any impact on its
financial statements since the Company does not currently engage in derivative
or hedging activities.
3. RECEIVABLE ON THE SALE OF STOCK
In April 1998, the Company sold 73,941 shares of common stock for aggregate
consideration of $26,300 by issuance of a note receivable bearing interest at
5.6% per annum. In April 1999, the Company received the proceeds in full on the
note receivable plus the then outstanding interest.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1998 and
September 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer equipment and software..................... $ 164,752 $ 495,581
Furniture and fixtures.............................. 26,752 34,071
Leasehold improvements.............................. 2,854 --
--------- ---------
194,358 529,652
Less: Accumulated depreciation and amortization..... (116,797) (151,536)
--------- ---------
Net property and equipment........................ $ 77,561 $ 378,116
========= =========
</TABLE>
Computer equipment includes $15,000 of equipment held under capital leases.
Depreciation and amortization expense for the year ended December 31, 1998 was
$21,032. Accumulated depreciation and amortization, includes amortization of
computer equipment held under capital leases of $3,203.
F-12
<PAGE> 72
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
5. INTANGIBLE ASSETS
At September 30, 1999, intangible assets are comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Cost...................................................... $195,343
Less: Accumulated amortization............................ (22,791)
--------
$172,552
========
</TABLE>
In March 1999, the Company purchased the technology, related intellectual
property and software rights related to the AdStar technology for $751,710 which
includes amounts owed to the seller of $108,432. The Company formerly licensed
these assets from the seller. As part of the transaction, the seller also sold
its option to purchase 15% of the Company's common stock back to the Company.
The net purchase price of $643,278 has been allocated to the technology, related
intellectual property and software rights and the option based on their relative
fair values. The amount ascribed to the option of $447,935 has been recorded as
an increase to stockholders' deficit. The amount ascribed to the technology,
related intellectual property and software rights of $195,343 is being amortized
over the estimated useful economic life of 5 years. The purchase was financed
through the issuance of a 10% note payable repayable in equal monthly
installments of $8,333.
6. NOTES PAYABLE:
At December 31, 1998 and September 30, 1999, notes payable consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Notes payable to two individuals bearing interest at
10% per annum, payable semi-annually.............. $ 15,000 $ 15,000
Note payable to an individual bearing interest at
10% per annum, repayable in monthly installments of
$8,333 comprising principal and interest............ -- 739,032
Convertible unsecured notes payable issued in March
and April 1999, bearing interest at 12% per
annum............................................. -- 1,050,000
Note payable issued to small business investment
company in July 1999 bearing interest at 14% per
annum, net of unamortized debt discount of
$67,437........................................... -- 782,563
-------- ----------
15,000 2,586,595
Less: short term portion............................ (15,000) (170,413)
-------- ----------
Notes payable, net of current portion............... $ -- $2,416,182
======== ==========
</TABLE>
F-13
<PAGE> 73
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
Convertible unsecured notes payable
Convertible unsecured notes payable issued in March and April 1999, to
certain individuals and corporations, bear interest at 12% per annum payable
annually in arrears. If on or before March 31, 2000, the Company receives net
proceeds of $2,000,000 in aggregate from one or more public or private offerings
of the Company's debt or equity securities (a "Qualified Financing"), then the
holder, may elect on written notice any time after March 31, 2000 but before May
15, 2000 to receive the outstanding principal and interest on the notes payable
in 47 equal monthly installments commencing June 1, 2000. If on or before March
31, 2001, the Company completes a Qualified Financing, the holder may elect to
receive the outstanding principal and interest on the notes payable in 35 equal
monthly installments commencing June 1, 2001. The unpaid balance on the
convertible notes payable is repayable in full on April 1, 2004. The convertible
note will automatically convert on the closing of a qualified public offering,
as defined, of not less than $5,000,000 or at the option of the holder, at any
time into shares of common stock at a conversion price of $4.77 per share. The
convertible unsecured notes payable agreement also requires certain
non-financial covenants including restriction on principal payments of other
debt, delivery of financial statements and maintenance of insurance coverage.
Note payable issued to small business investment company
In July 1999, the Company entered into an $850,000 Loan Agreement with a
small business investment company. The note issued under the Loan Agreement
bears interest at 14% per annum, and is repayable in 54 equal monthly
installments commencing six months after the date of issuance. Pursuant to the
Loan Agreement, the small business investment company received 22,534 shares of
common stock for an aggregate consideration of $1,000. In accordance with APB
Opinion No. 14 "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants" the amount ascribed to the relative value of the stock of
$137,536 has been recorded as a discount to the note payable and is amortized
over the expected term of the note. The Company has amortized $70,099 of the
debt discount during the nine-month period ended September 30, 1999. As of
September 30, 1999, the unamortized debt discount totaled $67,437.
The Loan Agreement also provides for additional grants of common stock to
the note holder if the note is not repaid within nine months, 12 months, 18
months and each six month interval thereafter. The agreement also contains
certain financial covenants relating to minimum revenues, profitability,
interest coverage, cash flow coverage and minimum net worth. The agreement also
contains restrictions on the payment of dividends. The note is collateralized by
the patents and trademarks of the Company.
If at the maturity date of the note, or at any time thereafter, the Company
has not completed a qualified public offering raising gross proceeds of at least
$8,000,000, the small business investment company may sell its shares to the
Company for a purchase price equal to the value of such shares pro rata to the
total value of the Company as determined based on the higher of (i) ten times
EBITDA as calculated based on most recent year end financial statements or (ii)
an independent valuation. Accordingly, these shares will be recorded as
redeemable common stock on the balance sheet.
F-14
<PAGE> 74
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
7. CAPITALIZATION:
PREFERRED STOCK
Under the Company's certificate of incorporation, the Board of Directors is
authorized, subject to certain limitations, to issue up to an aggregate of
5,000,000 shares of preferred stock. The preferred stock may be issued in one or
more series, with each series having different rights, preferences and
designations relating to dividends, conversion, voting, redemption and other
features. No shares of preferred stock have been issued at December 31, 1998 and
September 30, 1999.
STOCK OPTIONS
In 1999, the Board of Directors adopted the 1999 Stock Option Plan (the
"Plan") in order to attract and retain officers, other key employees,
consultants and non-employee directors of the Company. An aggregate of 500,000
shares of common stock has been authorized for issuance under the Plan.
The Plan provides for issuance of nonqualified and incentive stock options
to officers, key employees, consultants and non-employee directors to the
Company. Each nonqualified stock option shall have an exercise price not less
than 100% of the fair value of the common stock on the date of grant, unless as
otherwise determined by the committee that administers the Plan. Incentive stock
options shall have an exercise price equal to or greater than the fair value of
the common stock on the date of grant provided that incentive stock options
granted to a 10% holder of the Company's voting stock shall have an exercise
price equal to or greater than 110% of the fair market value of the common stock
on the date of grant. Each option has a term of ten years from the date of grant
unless otherwise determined by the committee that administers the Plan. The Plan
also provides that no option may be exercised prior to the consummation of an
underwritten public offering where the gross proceeds from such an offering are
in excess of $5,000,000.
Upon the occurrence of a change in control, as defined, each option granted
under the Plan shall thereupon become fully vested and exercisable.
As of December 31, 1998 no stock options to purchase shares of the
Company's common stock have been granted.
In April 1999, the Company granted, at fair value, 141,742 options to
purchase common stock to officers and key employees at an exercise price of
$4.77 per share. The fair value was determined by management based on the
conversion price of the convertible notes issued in March/April 1999. These
options have a term of 5 years and generally vest one-third on date of grant and
one-third on each anniversary thereafter.
In July 1999, the Company granted 70,359 options to purchase common stock
to employees at an exercise price of $7.20 per share. These options have a term
of 5 years and generally vest one-third on the first anniversary of the date of
grant and one-third on each anniversary thereafter.
F-15
<PAGE> 75
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
WARRANTS
In July 1999, the Company granted to two individuals warrants to purchase
an aggregate of 33,334 shares of common stock at an exercise price equivalent to
the IPO price for a consideration of $3,000. The warrants expire on June 30,
2002 and are exercisable from the date of grant. The Company recorded a non-cash
charge of $97,000, representing the deemed value of the warrants using the
Black-Scholes option pricing model. One of the individuals became a
director-nominee of the Company in July 1999.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING AND CAPITAL LEASE COMMITMENTS
The Company has certain non-cancelable operating lease obligations for
office space and capital lease obligations for computer equipment. The operating
leases are for office space located in New York and in California and expire
through March 2002. The leases contain certain escalation clauses based on
certain charges that the landlord of the properties may incur over the base
year, as defined in the lease agreements. Future minimum lease payments under
the non-cancelable operating and capital leases as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
- ------------------------- --------- -------
<S> <C> <C>
1999...................................................... $ 71,805 $ 8,229
2000...................................................... 71,202 5,354
2001...................................................... 37,831 712
2002...................................................... 10,611 --
-------- -------
Total minimum obligations............................ $191,449 14,295
========
Less amounts representing interest........................ (2,498)
-------
Present value of minimum obligations...................... 11,797
Less current portion...................................... 6,833
-------
Non-current portion....................................... $ 4,964
=======
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 was
approximately $49,700 and $50,600, respectively, including month-to month
rentals. Through June 1999, the Company subleased a portion of its office space
to a third party on a month-to-month basis. For the years ended December 31,
1998 and 1997, the Company received $15,880 and $17,466, respectively, of
sub-lease income.
EMPLOYMENT AGREEMENTS:
In July 1999, the Company entered into two employment agreements with two
officers of the Company. The agreements provide for base salaries of $200,000
per annum effective upon the closing of a qualified initial public offering and
certain fringe benefits and are effective through June 30, 2002. The agreements
provided that on termination of
F-16
<PAGE> 76
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
employment by the Company without cause, or by the employee for good reason, the
Company is obligated to pay severance costs based on the higher of the remaining
term of the agreement or 12 months.
LICENSE AGREEMENT
In April 1996, the Company entered into an exclusive license agreement with
a software company that developed the facsimile technology. This agreement
provides that the Company pays royalties of up to 50% of net revenues generated
by the Company on license fees, implementation fees and maintenance fees. This
agreement is for an initial term of 20 years, though it can be terminated by the
Company upon six months notice or by the software Company in certain
circumstances. For the year ended December 31, 1997 and 1998 and for the
nine-month period ended September 30, 1999, the Company paid royalties of
approximately $50,000, $140,000 and $9,000, respectively.
DISTRIBUTION AGREEMENTS
In November 1998 and February 1999, the Company entered into two
distribution agreements whereby the Company has agreed to pay the other parties
a percentage of the transaction fees generated from the other parties' Web site.
These agreements expire after three years and will automatically be renewed for
successive one-year periods unless terminated by either party. Through September
30, 1999 approximately $300 has been paid under these agreements.
9. SUBSEQUENT EVENTS:
In July 1999, a stockholder of the Company sold his entire stockholding of
281,144 shares of common stock to a third party for $500,000. The third party
contributed 63,848 of the 281,144 shares of common stock to the company's
capitalization. Pursuant to this agreement, the stockholder agreed to provide
technical services to the Company for one year for $100,000.
In September 1999, a proposed public offering of the Company's securities
was declared effective but did not close. On October 21, 1999, in full
settlement of the Company's claims, if any, against Paulson Investment Company,
the representative of the underwriters in that offering, the Company received
$500,000 for the reimbursement of expenses incurred in connection with the
offering. In the nine-month period ended September 30, 1999, the Company
incurred $671,854 of expenses related to the aborted offering. As of September
30, 1999, the Company recorded a receivable for the $500,000 reimbursement from
Paulson Investment Company, which was received in October 1999. The actual
expenses incurred have been recorded net of the reimbursement in the statement
of operations for the nine-month period ended September 30, 1999.
Also on October 21, 1999, the parent company of Paulson Investment Company,
Paulson Capital Corporation, lent the Company $1,100,000 evidenced by a
promissory note due on October 21, 2001 bearing interest at 6% per annum payable
at maturity.
F-17
<PAGE> 77
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
On , 1999, the Company authorized and implemented a
five-for-nine stock split. The share information in the accompanying financial
statements has been retroactively restated to reflect the effect of the stock
split.
In a listing agreement with the managing underwriter of the Company's
initial public offering, IPO.COM was authorized to include the Company's
prospectus on the IPO.COM Web site. The listing agreement neither authorized nor
requested that any additional information about the Company be provided.
However, IPO.COM provided, on other pages reachable from its Web site home page,
summary material that it extracted from the Company's prospectus, relating to
the Company and its initial public offering. Those pages also provided a direct
link to the Company's Web site. Although the managing underwriter did not
authorize IPO.COM to do anything other than provide the Company's prospectus,
and was not aware that it had done so, the listing agreement may have created an
agency relationship with the managing underwriter and, through the managing
underwriter with the Company. It may further be possible to argue that the
IPO.com agency so created extended to all of IPO.COM's actions. If that argument
is valid, then the summary material contained on the IPO.COM Web site and the
information contained in the Company's Web site could be deemed to constitute a
prospectus that does not meet the requirements of the Securities Act of 1933.
However, the Company and the managing underwriter believe that no agency was
created, or, even if an agency relationship is established, IPO.COM was acting
outside the scope of its agency authority in posting information on its Web site
other than the Company's Prospectus. They also believe that neither the managing
underwriter nor the Company is responsible for that other material.
Additionally, investors in this offering have been cautioned not to rely on the
Company's Web site as part of this prospectus. Even if an agency relationship
and responsibility for this other material is established, the other information
on the Web site would constitute a violation of the Securities Act only if it is
considered without regard to the Company's complete prospectus which also
appears on that same Web site. Taken in context with the prospectus the extracts
would, in the Company's view, still be considered a preliminary prospectus
meeting the requirements of the Securities Act.
If there is a violation of the Securities Act, then for a period of one
year from the date of their purchase of units, investors in this offering could
bring a claim against the Company and the underwriters to obtain recovery of the
consideration they paid for their units or, if these persons had already sold
the units, for damages resulting from their purchase and sale of securities.
Recovery would be based on the theory that the summary materials or the
materials contained in the Company's Web site were offering materials for which
the Company is responsible and which constitute a violation of the Securities
Act. If plaintiffs were to prevail, then damages could total up to $6,000,000,
plus interest, based on the assumed initial public offering price of $6.00 per
unit for 1,000,000 units and further assuming investors seek recovery or damages
after a loss of their entire investment and all purchasers in the offering are
entitled to this recovery. The Company expects that investors would not be
inclined to assert a claim for rescission or damages unless, during the one-year
period following the date of their purchase of securities, the trading prices of
the securities fall significantly below the initial public offering price. If
litigation was instituted and if the plaintiffs were to prevail, the Company's
business, results of operations and financial condition would be harmed.
However, upon the advice of counsel, the
F-18
<PAGE> 78
ADSTAR.COM, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION WITH RESPECT TO SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
Company believes it has no material liability and would contest any action of
this kind vigorously. Further, upon the advice of counsel, the Company believes
that only persons who purchased securities on the basis of the material on the
IPO.COM Web site, other than the Company's prospectus, would be able to prevail
in those actions and then only if they could establish that those other
materials did not comply with the Securities Act. Although the Company can not
be certain of the ultimate disposition of this matter it is the opinion of the
Company's management, based upon the advice of Counsel and the information
available to it that in the event of an assertion of a claim, if any, for
violation of the Securities Act of 1933 related to the IPO.COM Web site or the
materials contained in the Company's Web Site based on the agency theory above,
the likelihood of a recovery is remote. Consequently, based on the advice of
Counsel, the Company's management believes that the expected outcome of this
matter will not significantly affect the results of operations and financial
condition of the Company.
F-19
<PAGE> 79
- ---------------------------------------------------
- ---------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF THE
UNITS MEANS THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER
THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE UNITS IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 8
Forward-Looking Statements.......... 17
Recent Developments................. 17
Use of Proceeds..................... 18
Dividend Policy..................... 19
Capitalization...................... 20
Dilution............................ 22
Selected Financial Data............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 26
Business............................ 33
Management.......................... 42
Certain Transactions................ 46
Principal Stockholders.............. 47
Description of Securities........... 49
Shares Eligible for Future Sale..... 52
Underwriting........................ 54
Legal Matters....................... 57
Experts............................. 57
Available Information............... 57
Index to Financial Statements....... F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
BROKER-DEALERS THAT EFFECT THE TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
1,000,000 UNITS
ADSTAR.COM, INC.
-------------------------
PROSPECTUS
-------------------------
PAULSON INVESTMENT
COMPANY, INC.
DECEMBER , 1999
- ---------------------------------------------------
- ---------------------------------------------------
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes a Delaware corporation to indemnify its officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving these persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that this limitation of liability may not
affect a director's liability with respect to any of the following: (i) breaches
of the director's duty of loyalty to the corporation or its stockholders; (ii)
acts or omissions not made in good faith or which involve intentional misconduct
of knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the company or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article [EIGHTH] of the Registrant's Certificate of Incorporation provides
that the personal liability of the directors of the Registrant be eliminated to
the fullest extent permitted under Section 102(b) of the Delaware General
Corporation law.
Article [NINTH] of the Registrant's Certificate of Incorporation and the
Registrant's By-laws provides that all persons whom the Registrant is empowered
to indemnify pursuant to the provisions of Section 145 of the Delaware General
Corporation law (or any similar provision or provisions of applicable law at the
time in effect), shall be indemnified by the Registrant to the full extent
permitted. The foregoing right of indemnification shall not be deemed to be
exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission, this type of
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than the underwriting
discounts and commissions and the representative's non-accountable expense
allowance) expected to be incurred in connection with the issuance and
distribution of the securities being registered. All
II-1
<PAGE> 81
of these expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee............. $ 4,995.66
National Association of Securities Dealers, Inc. Filing
Fee....................................................... 2,297.00
Nasdaq Listing Fee........................................ 48,750.00
Accounting Fees........................................... 40,000.00
Legal Fees................................................ 50,000.00
Printing and Engraving Expenses........................... 15,000.00
Blue Sky Fees and Expenses................................ 10,000.00
Transfer and Warrant Agent fees........................... 3,000.00
Miscellaneous Expenses.................................... 507.34
-----------
Total................................................ $174,550.00
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since May 1996, the Registrant has issued securities without registration
under the Securities Act in the following transactions:
1. In March 1999 we purchased the technology, intellectual property
and software rights related to the AdStar technology for $751,710 by the
issuance of our 10% note payable in monthly installments of $8,333 and
prepayable on the consummation of this offering.
2. During the period from March 1998 through April 30, 1999 the
Registrant issued convertible notes in the aggregate principal amount of
$1,050,000 to eight investors entitling the holders to purchase an
aggregate of 231,620 shares of Common Stock. The notes will convert on the
effective date of the offering.
3. On April 15, 1998 Registrant issued 73,941 shares to Adam Leff, an
officer of the Company, for a purchase price of $26,300.
4. In July 1999 the Registrant issued 22,534 shares to a small
business investment company in connection with an $850,000 loan by it to
the Registrant.
5. On July 15, 1999 the Registrant issued three year warrants to
Jonathan Cohen and Ronald Posner to purchase an aggregate of 33,334 shares
of Common Stock at the initial public offering price per share.
6. In October 1999 the Registrant issued a $1.1 million 6% promissory
note due October 2001 to Paulson Capital Corporation.
The sales and issuances of the common stock, warrants, promissory note and
convertible notes described above were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) and 4(6) as transactions
not involving a public offering. In addition, we also relied on Regulation 701
as exempting the issuance of shares described in Item 3 above, from
registration. The Registrant made a determination that each of the purchasers
was a sophisticated investor. The purchasers in these private offerings
represented their intention to acquire the securities for investment only and
not with a view to their distribution. Appropriate legends were affixed to the
stock certificates and warrants issued in these transactions. All purchasers had
adequate access, to sufficient information about the Registrant to make an
informed investment decision. None of the securities was sold through an
underwriter and, accordingly, there were no underwriting discounts or
commissions involved.
II-2
<PAGE> 82
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.1a Proposed Amendment to Certificate of Incorporation*
3.2 By-Laws of the Company*
3.3 Agreement and Plan of Merger*
4.1 Specimen Stock Certificate*
4.2 Form of Public Warrant*
4.3 Form of Underwriter's Warrant*
4.4 Form of Warrant Agreement*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1999 Stock Option Plan*
10.4 Employment Agreement between the Company and Leslie
Bernhard*
10.5 Employment Agreement between the Company and Eli Rousso*
10.6 Memorandum of Agreement between the Company and
CareerPath.com LLC dated March 11, 1999*
10.7 Distribution and Service Agreement dated February 9, 1999 by
and between the Company and PowerAdz*
10.8 Distribution and Service Agreement dated November 19, 1998
by and between the Company and AdOne Classified Network,
Inc.*
10.9 Agreement dated March 16, 1999 by and between James E. Mann
and the Company*
10.10 Form of warrant to purchase 16,667 shares of Common Stock
issued to Jonathan Cohen and Ronald Posner*
10.12 Loan and Subscription Agreement dated July 13, 1999 by and
between the Company and Interequity Capital Partners L.P.*
10.13 Form of Subscription Agreement for 12% Convertible
Subordinated Unsecured Promissory Note*
10.14 Form of 12% Convertible Subordinated Unsecured Promissory
Note*
10.15 Form of Shareholders' Agreement by and among the Company,
its principal stockholders and certain investors*
10.16 Employment Agreement dated July 20, 1998 between Adam Leff
and the Company and amendment dated July 15, 1999*
10.17 Employment Agreement dated as of April 12, 1999 between
Michael Kline and the Company*
10.18 Promissory Note issued to Paulson Capital Corporation*
10.19 Distribution and Service Agreement dated as of September 3,
1999 by and between the Company and Landon Media Group, Inc.
10.20 Distribution and Service Agreement dated as of August 30,
1999 by and between the Company and Career Engine
10.21 Distribution and Service Agreement dated as of August 27,
1999 by and between the Company and CareerPath.com
10.22 Engagement Agreement dated August 24, 1999 by and between
the Company and RCG Capital Markets Group, Inc.
</TABLE>
II-3
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1).
23.3 Consent of Chris Karkenny, Director Nominee
23.4 Consent of Ronald S. Posner, Director Nominee
24. Power of Attorney (included in signature page).
</TABLE>
- -------------------------
* Filed as an exhibit with the same number to Registration Statement No.
333-84209, and incorporated herein by reference.
** To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) include any additional or changed material information on the
plan of distribution;
(2) for determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement relating to the
securities then being offered, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering of such
securities.
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
The undersigned Registrant hereby undertakes (1) 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; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration
II-4
<PAGE> 84
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 as part of this Registration Statement as of the time the
Securities and Exchange Commission declares it effective; and (3) that for the
purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement
herein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-5
<PAGE> 85
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of New York, State of New York on December 9, 1999.
ADSTAR.COM, INC.
By: /s/ LESLIE BERNHARD
-----------------------------------
Leslie Bernhard, President
ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Leslie Bernhard and Howard L. Weinreich, or any one of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all pre- or post-effective amendments to
this Registration Statement, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any one of them, or
their or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities indicated on December 9, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ LESLIE BERNHARD President, Chief Executive Officer
- --------------------------------------------------- and Director
Leslie Bernhard
* Executive Vice President and
- --------------------------------------------------- Director
Eli Rousso
* Senior Vice President, Chief
- --------------------------------------------------- Financial Officer and Director
Benjamin J. Douek
*By /s/ LESLIE BERNHARD
- ---------------------------------------------------
Leslie Bernhard,
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.1a Proposed Amendment to Certificate of Incorporation*
3.2 By-Laws of the Company*
3.3 Agreement and Plan of Merger*
4.1 Specimen Stock Certificate*
4.2 Form of Public Warrant*
4.3 Form of Underwriter's Warrant*
4.4 Form of Warrant Agreement*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1999 Stock Option Plan*
10.4 Employment Agreement between the Company and Leslie
Bernhard*
10.5 Employment Agreement between the Company and Eli Rousso*
10.6 Memorandum of Agreement between the Company and
CareerPath.com LLC dated March 11, 1999*
10.7 Distribution and Service Agreement dated February 9, 1999 by
and between the Company and PowerAdz*
10.8 Distribution and Service Agreement dated November 19, 1998
by and between the Company and AdOne Classified Network,
Inc.*
10.9 Agreement dated March 16, 1999 by and between James E. Mann
and the Company*
10.10 Form of warrant to purchase 16,667 shares of Common Stock
issued to Jonathan Cohen and Ronald Posner*
10.12 Loan and Subscription Agreement dated July 13, 1999 by and
between the Company and Interequity Capital Partners L.P.*
10.13 Form of Subscription Agreement for 12% Convertible
Subordinated Unsecured Promissory Note*
10.14 Form of 12% Convertible Subordinated Unsecured Promissory
Note*
10.15 Form of Shareholders' Agreement by and among the Company,
its principal stockholders and certain investors*
10.16 Employment Agreement dated July 20, 1998 between Adam Leff
and the Company and amendment dated July 15, 1999*
10.17 Employment Agreement dated as of April 12, 1999 between
Michael Kline and the Company*
10.18 Promissory Note issued to Paulson Capital Corporation*
10.19 Distribution and Service Agreement dated as of September 3,
1999 by and between the Company and Landon Media Group, Inc.
10.20 Distribution and Service Agreement dated as of August 30,
1999 by and between the Company and Career Engine
10.21 Distribution and Service Agreement dated as of August 27,
1999 by and between the Company and CareerPath.com
10.22 Engagement Agreement dated August 24, 1999 by and between
the Company and RCG Capital Markets Group, Inc.
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1).
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
23.3 Consent of Chris Karkenny, Director Nominee
23.4 Consent of Ronald S. Posner, Director Nominee
24. Power of Attorney (included in signature page).
</TABLE>
- -------------------------
* Filed as an exhibit with the same number to Registration Statement No.
333-84209, and incorporated herein by reference.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
1,000,000 UNITS
AdStar.com, Inc.
UNDERWRITING AGREEMENT
December _, 1999
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
811 SW Naito Parkway, Suite 200
Portland, Oregon 97204
Gentlemen:
AdStar.com, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as Representative (the "Representative") an aggregate of
1,000,000 Units (the "Firm Units"). Each Unit will consist of one share of the
Company's Common Stock ("Common Stock") and one Purchase Warrant, substantially
in the form filed as an exhibit to the Registration Statement (hereinafter
defined.) The Purchase Warrants included in the Units are herein referred to,
collectively, as the "Warrants". The respective number of the Firm Units to be
so purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto. The Company also proposes to grant to the Representative an
option to purchase in aggregate up to 150,000 additional Units, identical to the
Firm Units (the "Option Units"), as set forth below.
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as Representative and on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
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<PAGE> 2
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No. 333-90649)
with respect to the Units has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. The Company
does not own and never has owned a controlling interest in any other corporation
or other business entity that has or ever has had any material assets,
liabilities or operations. The Company is duly qualified to transact business in
all jurisdictions in which the conduct of its business requires such
qualification.
(c) The outstanding shares of each class or series of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and non-assessable and, except as disclosed in the Registration Statement,
have been issued and sold by the Company in compliance in all material respects
with applicable securities laws; the issuance and sale of the Units have been
duly authorized by all necessary corporate action and, when issued and paid for
as contemplated herein, the Units will be validly issued, fully paid and
non-assessable; and no preemptive rights of shareholders exist with respect to
any security of the Company or the issue and sale thereof. Except as set forth
in the Registration Statement, neither the filing of the Registration Statement
nor the offering or sale of the Units as contemplated by this Agreement gives
rise to any rights, other than
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<PAGE> 3
those which have been waived or satisfied, for or relating to the registration
of any shares of Common Stock or other securities of the Company.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. The Common Stock
conforms and the Warrants and the Representative's Warrant will conform to the
description thereof contained in the Registration Statement. The forms of
certificates for the securities comprising the Units conform to the requirements
of the corporate law of Delaware.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Units nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any amendments
and supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter through the Representative, specifically for use in
the preparation thereof.
(f) The financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows of
the Company at the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the periods
involved, except as disclosed herein and in the Registration Statement, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and statistical data of the Company included in
the Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company.
(g) Pricewaterhouse Coopers LLP, who have certified certain of
the financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise
3
<PAGE> 4
which if determined adversely to the Company might result in any material
adverse change in the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company or prevent the consummation of the transactions contemplated hereby,
except as set forth in the Registration Statement.
(i) The Company has good and marketable title to all
properties and assets, tangible and intangible, reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material. The Company's ownership
rights in its patents, patent licenses and other material technology is
consistent with (i) the description thereof in the Registration Statement, and
(ii) the business needs of the Company. All of the leases and subleases under
which the Company holds properties are in full force and effect (with only such
exceptions as are commonly accepted by prudent companies engaged in the
Company's business) and the Company has not received notice of any claim that is
materially adverse to the rights of the Company under any of such leases or
subleases.
(j) The Company has filed all federal, state, local and
foreign income tax returns which have been required to be filed and has paid all
taxes indicated by said returns and all assessments received by it to the extent
that such taxes have become due and are not being contested in good faith. All
tax liabilities have been adequately provided for in the financial statements of
the Company.
(k) Since the respective dates as of which information is
given in the Registration Statement, as it may have been amended or
supplemented, there has not been any material adverse change or any development
involving a prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise), or prospects of the Company, whether or not occurring
in the ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable of being
entered into by the Company, other than transactions in the ordinary course of
business and changes and transactions described in the Registration Statement,
as it may be amended or supplemented. The Company has no material contingent
obligations which are not disclosed in the Company's financial statements or
elsewhere in the Prospectus which are included in the Registration Statement.
(l) The Company is not, nor, with the giving of notice or
lapse of time or both, will it be, in violation of or in default under its
Articles of Incorporation or Bylaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise of the Company
or the business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company. The execution and delivery
of this Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or result in a
breach of
4
<PAGE> 5
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which any member of
the Company is a party, or of the Articles of Incorporation or Bylaws of the
Company or any order, rule or regulation applicable to the Company of any court
or of any regulatory body or administrative agency or other governmental body
having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Units for public offering by
the Underwriters under state securities or Blue Sky laws) has been obtained or
made and is in full force and effect.
(n) The Company holds all material patents, patent rights
trademarks, trade names, copyrights, trade secrets and licenses of any of the
foregoing (collectively, "Intellectual Property Rights") that are necessary to
the conduct of its businesses; there is no claim pending or, to the best
knowledge of the Company, threatened against the Company or any of its officers,
directors or employees, in their capacities as such, alleging any infringement
of Intellectual Property Rights, or any violation of the terms of any license
relating to Intellectual Property Rights, nor does the Company know of any basis
for any such claim. The Company knows of no material infringement by others of
Intellectual Property Rights owned by or licensed to the Company. The Company
has obtained, is in compliance in all material respect with and maintains in
full force and effect all material licenses, certificates, permits, orders or
other, similar authorizations granted or issued by any governmental agency
(collectively "Government Permits") required to conduct its business as it is
presently conducted. No proceeding to revoke, limit or otherwise materially
change any Government Permit has been commenced or, to the Company's best
knowledge, is threatened against the Company, and the Company has no reason to
anticipate that any such proceeding will be commenced against the Company.
Except as disclosed or contemplated in the Prospectus, the Company has no reason
to believe that any pending application for a Government Permit will be denied
or limited in a manner inconsistent with the Company's business plan as
described in the Prospectus.
(o) The Company is in all material respects in compliance with
all applicable Environmental Laws. The Company has no knowledge of any past,
present or, as anticipated by the Company, future events, conditions,
activities, investigation, studies, plans or proposals that (i) would interfere
with or prevent compliance with any Environmental Law by the Company or (ii)
could reasonably be expected to give rise to any common law or other liability,
or otherwise form the basis of a claim, action, suit, proceeding, hearing or
investigation, involving the Company and related to Hazardous Substances or
Environmental Laws. Except for the prudent and safe use and management of
Hazardous Substances in the ordinary course of the Company's business, (i) no
Hazardous Substance is or has been used, treated, stored, generated,
manufactured or otherwise handled on or at any Facility and (ii) to the
Company's best knowledge, no Hazardous Substance has
5
<PAGE> 6
otherwise come to be located in, on or under any Facility. No Hazardous
Substances are stored at any Facility except in quantities necessary to satisfy
the reasonably anticipated use or consumption by the Company. No litigation,
claim, proceeding or governmental investigation is pending regarding any
environmental matter for which the Company has been served or otherwise notified
or, to the knowledge of the Company, threatened or asserted against the Company,
or the officers or directors of the Company in their capacities as such, or any
Facility or the Company's business. There are no orders, judgments or decrees of
any court or of any governmental agency or instrumentality under any
Environmental Law which specifically apply to the Company, any Facility or any
of the Company's operations. The Company has not received from a governmental
authority or other person (i) any notice that it is a potentially responsible
person for any Contaminated site or (ii) any request for information about a
site alleged to be Contaminated or regarding the disposal of Hazardous
Substances. There is no litigation or proceeding against any other person by the
Company regarding any environmental matter. The Company has disclosed in the
Prospectus or made available to the Underwriters and their counsel true,
complete and correct copies of any reports, studies, investigations, audits,
analyses, tests or monitoring in the possession of or initiated by the Company
pertaining to any environmental matter relating to the Company, its past or
present operations or any Facility.
For the purposes of the foregoing paragraph, "Environmental Laws" means
any applicable federal, state or local statute, regulation, code, rule,
ordinance, order, judgment, decree, injunction or common law pertaining in any
way to the protection of human health or the environment, including without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic Substances
Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any
similar or comparable state or local law; "Hazardous Substance" means any
hazardous, toxic, radioactive or infectious substance, material or waste as
defined, listed or regulated under any Environmental Law; "Contaminated" means
the actual existence on or under any real property of Hazardous Substances, if
the existence of such Hazardous Substances triggers a requirement to perform any
investigatory, remedial, removal or other response action under any
Environmental Laws or if such response action legally could be required by any
governmental authority; "Facility" means any property currently owned, leased or
occupied by the Company.
(p) Neither the Company, nor to the Company's best knowledge,
any of its affiliates, has taken or intends to take, directly or indirectly, any
action which is designed to cause or result in, or which constitutes or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Units.
(q) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's
6
<PAGE> 7
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(s) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and as is
customary for companies engaged in similar industries.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401(a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter 92-198,
An Act Relating to Disclosure of Doing Business with Cuba, and the Company
further agrees that if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba after the date the
Registration Statement becomes or has become effective with the Commission or
with the Florida Department of Banking and Finance (the "Department"), whichever
date is later, or if the information reported or incorporated by reference in
the Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(v) The Company is in material compliance with all laws,
rules, regulations, orders of any court or administrative agency, operating
licenses or other requirements imposed by any governmental body applicable to
it, including, without limitation, all applicable laws, rules, regulations,
licenses or other governmental standards applicable to the its business; and the
conduct of the business of the Company, as described in the Prospectus, will not
cause the Company to be in violation of any such requirements.
(w) Each of the Warrants and the Representative's Warrants (as
defined in Paragraph (d) of Section 2 hereof) have been authorized for issuance
to the purchasers thereof or to the Representative or its designees, as the case
may be, and will, when issued, possess rights, privileges,
7
<PAGE> 8
and characteristics as represented in the most recent form of Warrants or
Representative's Warrants, as the case may be, filed as an exhibit to the
Registration Statement; the securities to be issued upon exercise of the
Warrants and the Representative's Warrants, when issued and delivered against
payment therefor in accordance with the terms thereof, will be duly and validly
issued, fully paid, nonassessable and free of preemptive rights, and all
corporate action required to be taken for the authorization and issuance of the
Warrants and the Representative's Warrants, and the securities to be issued upon
their exercise, have been validly and sufficiently taken.
(x) Except as disclosed in the Prospectus, neither the Company
nor any of its officers, directors or affiliates have caused any person, other
than the Underwriters, to be entitled to reimbursement of any kind, including,
without limitation, any compensation that would be includable as underwriter
compensation under the NASD's Corporate Financing Rule with respect to the
offering of the Units, as a result of the consummation of such offering based on
any activity of such person as a finder, agent, broker, investment adviser or
other financial service provider.
(y) Except as described in the Prospectus, the Company does
not directly or indirectly control or have a material interest in any other
business entity.
(z) The Common Stock and the Warrants have been approved for
listing on the NASDAQ Small-cap Market ("NASDAQ") upon the effectiveness of the
Registration Statement and the Company has satisfied all of the requirements of
NASDAQ for such listing and for the trading of its Common Stock and Warrants on
NASDAQ.
2. Purchase, Sale and Delivery of the Units.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set forth, the
Company agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_____ per Unit, the
number of Firm Units set forth opposite the name of each Underwriter in Schedule
I hereof, subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Units to be sold hereunder is to be
made in New York Clearing House funds and, at the option of the Representative,
by bank wire to an account specified by the Company, certified or bank cashier's
checks drawn to the order of the Company, against either uncertificated delivery
of Firm Units or of certificates therefor (which delivery, if certificated,
shall take place in such location in New York, New York as may be specified by
the Representative) to the Representative for the several accounts of the
Underwriters. Such payment is to be made at the offices of the Representative at
the address set forth on the first page of this agreement, at 7:00 a.m., Pacific
time, on the third business day after the date of this Agreement or at such
other time and date not later than five business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
8
<PAGE> 9
for business and not permitted by law or executive order to be closed.) Except
to the extent uncertificated Firm Units are delivered at closing, the
certificates for the Firm Units will be delivered in such denominations and in
such registrations as the Representative requests in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representative at least one business day prior to the
Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the Underwriters to purchase the
Option Units at the price per Unit as set forth in the first paragraph of this
Section 2. The Company may assign the obligation to deliver the Common Stock
component of the Option Units to certain shareholders of the Company as more
fully described in the Prospectus; however, no such assignment shall affect the
obligation of the Company to deliver or cause to be delivered securities
representing the Option Units as to which the option is exercised upon such
exercise. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 45 days after the date of this Agreement, by the
Representative to the Company setting forth the number of Option Units as to
which the Underwriters are exercising the option, the names and denominations in
which the Option Units are to be registered and the time and date at which
certificates representing such Units are to be delivered. The time and date at
which certificates for Option Units are to be delivered shall be determined by
the Representative but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The option with respect to the Option Units granted hereunder may
be exercised only to cover over-allotments in the sale of the Firm Units by the
Underwriters. The Representative may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the Company. To the
extent, if any, that the option is exercised, payment for the Option Units shall
be made on the Option Closing Date in New York Clearing House funds and, at the
option of the Representative, by bank wire to an account specified by the
Company, or certified or bank cashier's check drawn to the order of the Company
for the Option Units to be sold by the Company in consideration either of
uncertificated delivery of Option Units or delivery of certificates therefor
(which delivery, if certificated, shall take place in such location in New York,
New York as may be specified by the Representative) to the Representative for
the several accounts of the Underwriters. Except to the extent uncertificated
Option Units are delivered at closing, the certificates for the Option Units
will be delivered in such denominations and in such registrations as the
Representative requests in writing not later than the second full business day
prior to the Option Closing Date, and will be made available for inspection by
the Representative at least one business day prior to the Option Closing Date.
(d) In addition to the sums payable to the Representative as
provided elsewhere herein, the Representative shall be entitled to receive at
the Closing, for itself alone and not as Representative of the Underwriters, as
additional compensation for its services, purchase warrants (the
"Representative's Warrants") for the purchase of up to 100,000 Units at a price
of $7.20 per
9
<PAGE> 10
Unit, upon the terms and subject to adjustment and conversion as described in
the form of Representative's Warrants filed as an exhibit to the Registration
Statement.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a
public offering of the Firm Units as soon as the Representative deems it
advisable to do so. The Firm Units are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representative may from time to time thereafter change the public offering price
and other selling terms. To the extent, if at all, that any Option Units are
purchased pursuant to Section 2 hereof, the Representative will offer them to
the public on the foregoing terms.
It is further understood that you will act as the
Representative for the Underwriters in the offering and sale of the Units in
accordance with an Agreement Among Underwriters entered into by you and the
several other Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representative containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representative shall not
previously have been advised and furnished with a copy or to which the
Representative shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (A)
when the Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and (D) of
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the institution of
any proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Units for sale under the securities laws of such
jurisdictions as the Representative may reasonably
10
<PAGE> 11
have designated in writing and will make such applications, file such documents,
and furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company will,
from time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in effect
for so long a period as the Representative may reasonably request for
distribution of the Units.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will deliver to
the Representative such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that may
reasonably be requested), and of all amendments thereto, as the Representative
may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Units as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances existing at the time
the Prospectus is so delivered, be misleading, or so that the Prospectus will
comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Representative copies of annual reports and copies
of all other documents, reports and information
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furnished by the Company to its stockholders or filed with any securities
exchange pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the Exchange Act. The Company will deliver to the
Representative similar reports with respect to significant subsidiaries, as that
term is defined in the Rules and Regulations, which are not consolidated in the
Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivatives of Common
Stock (or agreement therefor) will be made for a period of one year after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder, or pursuant to contractual obligations existing on the date hereof or
pursuant to employee benefit plans in effect on the date hereof, or with the
prior written consent of the Representative, which consent will not be
unreasonably withheld.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Common Stock and Warrants on NASDAQ and to cause such
listing to remain in effect with respect to each such security unless and until
(i) such security expires; (ii) such security is listed on another exchange of
at least comparable reputation; or (iii) the Company is no longer required to
file reports under Section 12 of the Exchange Act.
(j) The Company has caused each officer and director and each
person who owns, beneficially or of record, 5% or more of the shares of the
Common Stock outstanding immediately prior to the date hereof to furnish to you,
on or prior to the date of this agreement, a letter or letters, in form and
substance satisfactory to the Underwriters ("Lockup Agreements"), pursuant to
which each such person shall agree (A) not to offer, sell, sell short or
otherwise dispose of any shares of Common Stock or other capital stock of the
Company, or any other securities convertible, exchangeable or exercisable for
Common Stock or derivatives of Common Stock owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which such
person has the right to direct the disposition) for a period of one year after
the date of this Agreement, directly or indirectly, except with the prior
written consent of the Representative; and (B) to give prior written notice to
the Representative for a period of two years from the effective date of the
Registration Statement, with respect to any sales of Common Stock of the Company
pursuant to Rule 144 under the Securities Act or any similar rule.
(k) The Company shall apply the net proceeds of its sale of
the Units as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Units and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Units in such a manner as
would require the Company to register as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
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<PAGE> 13
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
for the Common Stock and a Warrant Agent for the Warrants.
(n) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. Costs and Expenses.
(a) The Representative shall be entitled to reimbursement from
the Company, for itself alone and not as Representative of the Underwriters, to
a non-accountable expense allowance equal to 3% of the aggregate initial public
offering price of the Firm Units and any Option Units purchased by the
Underwriters. The Representative shall be entitled to withhold this allowance on
the Closing Date related to the purchase of the Firm Units or the Option Units,
as the case may be.
(b) In addition to the payment described in Paragraph (a) of
this Section 5, the Company will pay all costs, expenses and fees incident to
the performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for the
Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the NASDAQ listing application, the costs of due
diligence investigation of the principals of the Company, the Blue Sky Survey
and any supplements or amendments thereto; the filing fees of the Commission;
the filing fees and expenses (including any fees and disbursements) incident to
securing the required review by the NASD Regulation, Inc.) of the underwriting
terms and arrangements; the NASDAQ listing fee; and the expenses, including the
fees and disbursements of counsel for the Underwriters, incurred in connection
with the qualification of the Units under state securities or Blue Sky laws. Any
transfer taxes imposed on the sale of the Units to the several Underwriters will
be paid by the Company. The Company agrees to pay all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of directed Units by the
Underwriters to employees and persons having business relationships with the
Company. The Company shall not, however, be required to pay for any of the
Underwriters' expenses (other than those related to qualification under NASD
regulation and state securities or Blue Sky laws) except that, if this Agreement
shall not be consummated, then the Company shall reimburse the several
Underwriters for accountable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Units or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Units.
6. Conditions of Obligations of the Underwriters.
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<PAGE> 14
The several obligations of the Underwriters to purchase the
Firm Units on the Closing Date and the Option Units, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company contained herein, and to the performance by the Company of their
covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings required
by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and
any request of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representative and complied with to their reasonable satisfaction. No stop order
suspending the effectiveness of the Registration Statement, as amended from time
to time, shall have been issued and no proceedings for that purpose shall have
been taken or, to the knowledge of the Company, shall be contemplated by the
Commission and no injunction, restraining order, or order of any nature by a
Federal or state court of competent jurisdiction shall have been issued as of
the Closing Date which would prevent the issuance of the Units.
(b) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of Morse, Zelnick,
Rose & Lander, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its properties
and conduct its business as described in the Registration Statement; the Company
is duly qualified to transact business in all jurisdictions in which the
conduct of its business requires such qualification, or in which the failure
to qualify would have a material adverse effect upon the business of the
Company.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; the outstanding shares of Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable; all of the
securities of the Company conform to the description thereof contained in
the Prospectus; the certificates for the Common Stock and Warrants are in
due and proper form; the shares of Common Stock to be sold by the Company
pursuant to this Agreement, including shares of Common Stock to be sold as a
part of the Option Units, have been duly authorized and, upon issuance and
delivery thereof as contemplated in this Agreement and the Registration
Statement, will be validly issued, fully paid and non-assessable; no preemptive
rights of shareholders exist with respect to any of the Common Stock or the
issuance or sale thereof pursuant to any applicable statute or the provisions of
the Company's Articles of Incorporation or Bylaws or, to such counsel's best
knowledge, pursuant to any contractual obligation. The Warrants and the
Representative's Warrants have been authorized for issuance to the purchasers of
Units or the Representative, as the case may be, and will, when issued, possess
rights, privileges, and characteristics as represented in the most recent form
of Warrants or
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<PAGE> 15
Representative's Warrants, as the case may be, filed as an exhibit to the
Registration Statement; the securities to be issued upon exercise of the
Warrants and the Representative's Warrants, as the case may be, when issued and
delivered against payment therefor in accordance with the terms of the
Representative's Warrants, will be duly and validly issued, fully paid,
nonassessable and free of preemptive rights, and all corporate action required
to be taken for the authorization and issuance of the Warrants, the
Representative's Warrants, and the securities to be issued upon their exercise,
has been validly and sufficiently taken.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Units or the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations thereunder
(except that such counsel need express no opinion as to the financial statements
and related schedules therein).
(vi) The statements under the captions "Shares
Eligible for Future Sale" and "Description of Securities" in the Prospectus and
in Items 24 and 26 of the Registration Statement, insofar as such statements
constitute a summary of documents referred to therein or matters of law, fairly
summarize in all material respects the information called for with respect to
such documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are not so filed
or described as required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly summarized in all
material respects.
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<PAGE> 16
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the Company.
(ix) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Articles of Incorporation or Bylaws of the
Company, or any agreement or instrument known to such counsel to which the
Company is a party or by which the Company may be bound.
(x) Each of this Agreement and the Warrant Agreement
by and among the Company, the Warrantholders (defined therein) and American
Stock Transfer & Trust Company, as Warrant Agent, has been duly authorized,
executed and delivered by the Company.
(xi) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the NASD, as to which such
counsel need express no opinion) except such as have been obtained or made,
specifying the same.
(xii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the Prospectus,
required to register as an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of states other than California, the Delaware General
Corporation Law or Federal laws on local counsel in such jurisdictions, provided
that in each case such counsel shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, the opinion of Morse, Zelnick, Rose and Lander LLP
shall also include a statement to the effect that nothing has come to the
attention of such counsel that has caused them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein).
(c) The Representative shall have received from Stoel Rives
LLP, counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be,
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<PAGE> 17
substantially to the effect specified in subparagraphs (i), (iv) and (v) of
Paragraph (b) of this Section 6. In rendering such opinion Stoel Rives LLP may
rely as to all matters governed other than by the laws of the State of
California, the Delaware General Corporation Law or Federal laws on the opinion
of counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel that has caused
them to believe that (i) the Registration Statement, or any amendment thereto,
as of the time it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements, schedules and statistical information therein). With respect to such
statement, Stoel Rives LLP may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(d) The Representative shall have received at or prior to the
Closing Date from Stoel Rives LLP a memorandum or summary, in form and substance
satisfactory to the Representative, with respect to the qualification for
offering and sale by the Underwriters of the Units under the state securities or
Blue Sky laws of such jurisdictions as the Representative may reasonably have
designated to the Company.
(e) The Representative, on behalf of the several Underwriters,
shall have received, on each of the dates hereof, the Closing Date and the
Option Closing Date, as the case may be, a letter dated the date hereof, the
Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to the Representative, of Pricewaterhouse Coopers LLP
confirming that they are independent public accountants within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations and containing such other statements and
information as is ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
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<PAGE> 18
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been taken
or are, to his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the effective
date of the Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and Prospectus
did not omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or otherwise,
of the Company or the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company, whether or not arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative
such further certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related matters as the
Representative may reasonably have requested.
(h) The Common Stock and Warrants have been approved for
listing upon notice of issuance on NASDAQ.
(i) The Lockup Agreements described in Section 4(j) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects satisfactory to the Representative and to Stoel Rives
LLP, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representative by notifying the Company of such termination
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<PAGE> 19
in writing or by telegram at or prior to the Closing Date or the Option Closing
Date, as the case may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion
of the Units required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Units, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
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<PAGE> 20
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was materially prejudiced by the failure to give
such notice, but the failure to give such notice shall not relieve the
indemnifying party or parties from any liability which it or they may have to
the indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties
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indemnified pursuant to Section 8(a) and by the Company in the case of parties
indemnified pursuant to Section 8(b). The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Units. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions
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of this subsection (d), (i) no Underwriter shall be required to contribute any
amount in excess of the underwriting discounts and commissions applicable to the
Units purchased by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this Section 8
hereby consents to the jurisdiction of any court having jurisdiction over any
other contributing party, agrees that process issuing from such court may be
served upon him or it by any other contributing party and consents to the
service of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Units and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Units which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use reasonable efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from the Company such amounts as may be agreed upon and upon the
terms set forth herein, the Firm Units or Option Units, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representative, shall not have procured such other
Underwriters, or any others, to purchase the Firm Units or Option Units, as the
case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Units with respect to which
such default shall occur does not exceed 10% of the Firm Units or Option Units,
as the case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Units or Option
Units, as the case may be,
22
<PAGE> 23
which they are obligated to purchase hereunder, to purchase the Firm Units or
Option Units, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of Firm Units or
Option Units, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Units or Option Units, as the case may be, covered
hereby, the Company or you as the Representative of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company except to the extent provided
in Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option Closing
Date, as the case may be, may be postponed for such period, not exceeding seven
days, as you, as Representative, may determine in order that the required
changes in the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter" includes any
person substituted for a defaulting Underwriter. Any action taken under this
Section 9 shall not relieve any defaulting Underwriter from liability in respect
of any default of such Underwriter under this Agreement.
10. Notices.
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Paulson
Investment Company, Inc., 811 SW Naito Parkway, Portland, Oregon 97204,
Attention: Chester L.F. Paulson; with a copy to Stoel Rives LLP, 900 SW Fifth
Avenue, Suite 2300, Portland, Oregon 97204, Attention: John J. Halle; if to the
Company, to AdStar.com., Inc., at 4553 Glencoe Avenue, Suite 325, Marina del
Rey, California 90292, Attention: Benjamin J. Douek; with copy to Morse Zelnick
Rose & Lander, LLP, 450 Park Avenue, New York, New York 10022-2605, Attention:
Stephen A. Zelnick.
11. Termination.
This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the Units
are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company, the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company, whether or not arising in
the ordinary course of business, (ii) any outbreak
23
<PAGE> 24
or escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make it impracticable to market the
Units or to enforce contracts for the sale of the Units, (iii) the Dow Jones
Industrial Average shall have fallen by 15 percent or more from its closing
price on the day immediately preceding the date that the Registration Statement
is declared effective by the Commission, (iv) suspension of trading in
securities generally on the New York Stock Exchange or the American Stock
Exchange or limitation on prices (other than limitations on hours or numbers of
days of trading) for securities on either such Exchange, (v) the enactment,
publication, decree or other promulgation of any statute, regulation, rule or
order of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect the
business or operations of the Company, (vi) declaration of a banking moratorium
by United States or New York State authorities, (vii) any downgrading in the
rating of the Company's debt securities by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule 436(g) under
the Exchange Act); (viii) the suspension of trading of the Common Stock or the
Warrants by the Commission or NASDAQ, or (ix) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal affairs which
in your reasonable opinion has a material adverse effect on the securities
markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Units from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided by Underwriters.
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to the
Company for inclusion in the Prospectus or the Registration Statement consists
of the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required by
Item 502(b) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. Miscellaneous.
24
<PAGE> 25
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Units under
this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
AdStar.com, Inc.
By: ________________________________
Leslie Bernhard, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule I
By: ________________________________
Authorized Officer
25
<PAGE> 26
SCHEDULE I
Schedule of Underwriters
<TABLE>
<CAPTION>
Number of Firm Units
Underwriter to be Purchased
----------- ---------------
<S> <C>
Paulson Investment Company, Inc.
Total 1,000,000
=========
</TABLE>
26
<PAGE> 1
EXHIBIT 3.1A
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
ADSTAR.COM, INC.
The undersigned, being the President of AdStar.com, Inc. (the
"Corporation") hereby certifies that:
FIRST: The name of the Corporation is AdStar.com, Inc.
SECOND: The Certificate of Incorporation was filed with the Secretary
of State on July 14, 1999.
THIRD: The Certificate of Incorporation is hereby amended to effect a
5-for-9 reverse stock-split of the issued and outstanding shares of the
Corporation's Common Stock, par value $.0001 per share.
FOURTH: To accomplish the foregoing amendment, Article FOURTH is hereby
amended to add the following language at the end thereof:
"(c) At 9:00 a.m. Eastern Standard Time on the date this
Amendment to the Certificate of Incorporation of the corporation is filed with
the Secretary of the State of Delaware and becomes effective, each nine (9)
shares of common stock $0.0001 par value per share of the corporation (the "Old
Common Stock"), issued and outstanding or held in the treasury of the
corporation immediately prior to the effectiveness of such filing, shall be
combined, reclassified and changed into five (5) fully paid and nonassessable
share of common stock $0.0001 par value per share ("Common Stock").
Each holder of record of a certificate or certificates for one
or more shares of the Old Common Stock shall be entitled to receive as soon as
practicable, upon surrender of such certificate or certificates, a certificate
or certificates representing shares of Common Stock to which such holder shall
be entitled pursuant to the provisions of the immediately preceding paragraph.
Any certificate for one or more shares of the Old Common Stock not so
surrendered shall be deemed to represent five (5) shares of the Common Stock for
each nine (9) shares of the Old Common Stock previously represented by such
certificate.
<PAGE> 2
No fractional share of Common Stock or scrip representing
fractional shares shall be issued upon such combination and reclassification of
the Old Common Stock into shares of Common Stock. Instead of there being issued
any fractional shares of Common Stock which would otherwise be issuable upon
such combination and reclassification, the corporation shall round the number of
shares to be received up to the nearest whole number of shares."
FIFTH: The foregoing amendment was adopted by the Board of Directors of
the Corporation at a special meeting held on November 8, 1999; and pursuant to
Section 228 of the General Corporation Law by the written consent of a majority
of the shares of Old Common Stock entitled to vote thereon, held in accordance
with the provisions of Section 242 of the General Corporation Law.
IN WITNESS WHEREOF, this Certificate is subscribed as of this ___ day
of December, 1999 by the undersigned who affirms under penalties of perjury that
the statements contained herein are true and correct.
------------------------------------
Leslie Bernhard, President
2
<PAGE> 3
EXHIBIT 1.1
1,000,000 UNITS
AdStar.com, Inc.
UNDERWRITING AGREEMENT
December _, 1999
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
811 SW Naito Parkway, Suite 200
Portland, Oregon 97204
Gentlemen:
AdStar.com, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as Representative (the "Representative") an aggregate of
1,000,000 Units (the "Firm Units"). Each Unit will consist of one share of the
Company's Common Stock ("Common Stock") and one Purchase Warrant, substantially
in the form filed as an exhibit to the Registration Statement (hereinafter
defined.) The Purchase Warrants included in the Units are herein referred to,
collectively, as the "Warrants". The respective number of the Firm Units to be
so purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto. The Company also proposes to grant to the Representative an
option to purchase in aggregate up to 150,000 additional Units, identical to the
Firm Units (the "Option Units"), as set forth below.
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as Representative and on
behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm Units
set forth opposite their respective names in Schedule I. The Firm Units and the
Option Units (to the extent the aforementioned option is exercised) are herein
collectively called the "Units."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1
<PAGE> 4
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters as
follows:
(a) A registration statement on Form SB-2 (File No. 333-90649)
with respect to the Units has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement, including any amendments
thereto, the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Units, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement. The Company
does not own and never has owned a controlling interest in any other corporation
or other business entity that has or ever has had any material assets,
liabilities or operations. The Company is duly qualified to transact business in
all jurisdictions in which the conduct of its business requires such
qualification.
(c) The outstanding shares of each class or series of capital
stock of the Company have been duly authorized and validly issued and are fully
paid and non-assessable and, except as disclosed in the Registration Statement,
have been issued and sold by the Company in compliance in all material respects
with applicable securities laws; the issuance and sale of the Units have been
duly authorized by all necessary corporate action and, when issued and paid for
as contemplated herein, the Units will be validly issued, fully paid and
non-assessable; and no preemptive rights of shareholders exist with respect to
any security of the Company or the issue and sale thereof. Except as set forth
in the Registration Statement, neither the filing of the Registration Statement
nor the offering or sale of the Units as contemplated by this Agreement gives
rise to any rights, other than
2
<PAGE> 5
those which have been waived or satisfied, for or relating to the registration
of any shares of Common Stock or other securities of the Company.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. The Common Stock
conforms and the Warrants and the Representative's Warrant will conform to the
description thereof contained in the Registration Statement. The forms of
certificates for the securities comprising the Units conform to the requirements
of the corporate law of Delaware.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering of the
Units nor instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and will
conform to, the requirements of the Act and the Rules and Regulations. The
Registration Statement and any amendment thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and will not
omit, to state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any amendments
and supplements thereto do not contain, and will not contain, any untrue
statement of material fact; and do not omit, and will not omit, to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representations or
warranties as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in reliance
upon, and in conformity with, written information furnished to the Company by or
on behalf of any Underwriter through the Representative, specifically for use in
the preparation thereof.
(f) The financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement, present
fairly the financial position and the results of operations and cash flows of
the Company at the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the periods
involved, except as disclosed herein and in the Registration Statement, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and statistical data of the Company included in
the Registration Statement presents fairly the information shown therein and
such data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company.
(g) Pricewaterhouse Coopers LLP, who have certified certain of
the financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened against the Company before any court
or administrative agency or otherwise
3
<PAGE> 1
EXHIBIT 4.1
ADSTAR.COM, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP: 00737P104
This certifies that
is the owner of
Fully paid and non-assessable shares of Common Stock of the par
value of $.0001 per share of AdStar.com, Inc., transferable on the books of the
Corporation by the holder hereof in person or by duly authorized Attorney, upon
surrender of this Certificate, properly endorsed. This certificate is not valid
until countersigned and registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
Secretary:
President:
<PAGE> 1
EXHIBIT 4.3
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
ADSTAR.COM, INC.
PURCHASE WARRANT
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
100,000 Units
of
ADSTAR.COM, INC.
Void after December __, 2004
<PAGE> 2
This is to certify that, for value received and subject to the terms
and conditions set forth below, the Warrantholder (hereinafter defined) is
entitled to purchase, and the Company promises and agrees to sell and issue to
the Warrantholder, at any time on or after December __, 2000 and on or before
December __, 2004, up to 100,000 Units (hereinafter defined) at the Exercise
Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Cashless Exercise" means an exercise of Warrants in which, in lieu
of payment of the Exercise Price, the Holder elects to receive a lesser number
of Securities such that the value of the Securities that such Holder would
otherwise have been entitled to receive but has agreed not to receive, as
determined by the closing price of such Securities on the date of exercise or,
if such date is not a trading day, on the next prior trading day, is equal to
the Exercise Price with respect to such exercise. A Holder may only elect a
Cashless Exercise if the Securities issuable by the Company on such exercise are
publicly traded securities.
(c) "Closing Date" means the date on which the Offering is closed.
(d) "Commission" means the Securities and Exchange Commission.
(e) "Common Stock" means the common stock, no par value, of the
Company.
(f) "Company" means AdStar.com, Inc., a Delaware corporation.
(g) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(h) "Effective Date" means the date on which the Registration Statement
is declared effective by the Commission.
(i) "Exercise Price" means the price at which the Warrantholder may
purchase one Unit upon exercise of Warrants as determined from time to time
pursuant to the provisions hereof. The initial Exercise Price is $7.20 per Unit.
(j) "Offering" means the public offering of Units made pursuant to the
Registration Statement.
2
<PAGE> 3
(k) "Participating Underwriter" means any underwriter participating in
the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(l) "Registration Statement" means the Company's registration statement
(File No. 333-90649) as amended on the Closing Date.
(m) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(n) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(o) "Stock Derivative Securities" means the Common Stock included in
the Units issuable on exercise of Warrants or any Securities issuable in lieu of
such Common Stock pursuant to the provisions of Section 3.
(p) "Unit" means one shares of Common Stock and one Unit Warrant.
(q) "Unit Warrant" means a warrant to purchase one share of Common
Stock issued pursuant to the Warrant Agreement.
(r) "Warrant Agreement" means that certain Warrant Agreement, dated as
of December __, 1999, by and between the Company and American Stock Transfer
&Trust Company.
(s) "Warrant Certificate" means a certificate evidencing the Warrant.
(t) "Warrantholder" means a record holder of the Warrant or Securities.
The initial Warrantholder is Paulson Investment Company, Inc.
(u) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
the denominator of which is the aggregate sales price of all of the securities
sold by such underwriter, underwriting syndicate, or agent in such offering and
(ii) all out-of-pocket expenses of the Warrantholder, except for the fees and
disbursements of one firm retained as legal counsel for the Warrantholder that
will be paid by the Company.
(v) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
3
<PAGE> 4
2. Exercise of Warrants. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and ending
at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by
surrendering this Warrant Certificate, together with appropriate instructions,
duly executed by the Warrantholder or by its duly authorized attorney, at the
office of the Company, 4553 Glencoe Avenue, Suite 325, Marina del Rey,
California 90292, or at such other office or agency as the Company may
designate. The date on which such instructions are received by the Company shall
be the date of exercise. If the Holder has elected a Cashless Exercise, such
instructions shall so state. Upon receipt of notice of exercise, the Company
shall immediately instruct its transfer agent to prepare certificates for the
Securities to be received by the Warrantholder upon completion of the Warrant
exercise. When such certificates are prepared, the Company shall notify the
Warrantholder and deliver such certificates to the Warrantholder or as per the
Warrantholder's instructions immediately upon payment in full by the
Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased, if any. If the
Warrantholder shall represent and warrant that all applicable registration and
prospectus delivery requirements for their sale have been complied with upon
sale of the Securities received upon exercise of the Warrant, such certificates
shall not bear a legend with respect to the Securities Act of 1933.
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of the
Stock Derivative Securities are subject to adjustment from time to time upon the
happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are divided
into a greater number of shares or a dividend in stock is paid on the Common
Stock, the number of shares of Common Stock for which the Warrant is then
partially exercisable will be proportionately increased and the Exercise Price
will be proportionately reduced; and, conversely, if the outstanding shares of
Common Stock are combined into a smaller number of shares of Common Stock, the
number of shares of Common Stock for which the Warrant is then exercisable will
be proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a).
4
<PAGE> 5
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate.
(c) When any adjustment is required to be made in the number of shares
of Common Stock, other securities, or the property purchasable upon exercise of
the Warrant, the Company will promptly determine the new number of such shares
or other securities or property purchasable upon exercise of the Warrant and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant and (ii) cause a copy of such
statement to be mailed to the Warrantholder within thirty (30) days after the
date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the closing price on a national securities exchange on the day
immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of the
Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or his assignee is entitled under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
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<PAGE> 6
4. Reservation of Securities. The Company agrees that the number of
shares of Common Stock or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for exercise.
5. Validity of Securities. All Securities delivered upon the exercise
of the Warrant will be duly and validly issued in accordance with their terms,
and the Company will pay all documentary and transfer taxes, if any, in respect
of the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant
Certificate.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the Units
were qualified for sale in the Offering or such other states as the Company and
the Warrantholder agree to. In order to comply with the provisions of this
Section 6(a), the Company is not required to file more than one registration
statement. No registration right of any kind, "piggyback" or otherwise, will
last longer than five years from the Effective Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of
the registration, including the contents of the registration, will be entirely
in the control and at the discretion of the Company. The Company will file such
post-effective amendments and supplements as may be necessary to maintain the
currency of the registration statement during the period of its use. In
addition, if the Warrantholder participating in the registration is advised by
counsel that the registration statement, in their opinion, is deficient in any
material respect, the Company will use its best efforts to cause the
registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as it may reasonably request
in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at least
50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6,
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<PAGE> 7
addressed to the Warrantholders and any Participating Underwriter, (ii) furnish
an appropriate letter from the independent public accountants of the Company,
addressed to the Warrantholders and any Participating Underwriter, and (iii)
make representations and warranties to the Warrantholders and any Participating
Underwriter. A request pursuant to this subsection (e) may be made on three
occasions. The documents required to be delivered pursuant to this subsection
(e) will be dated within ten days of the request and will be, in form and
substance, equivalent to similar documents furnished to the underwriters in
connection with the Offering, with such changes as may be appropriate in light
of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will indemnify
and hold harmless each selling Warrantholder, any person who controls any
selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by a Warrantholder for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Company, such approval not to
be unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with
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<PAGE> 8
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in said registration statement, any preliminary
or final prospectus, or other filing, or any amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, preliminary or final prospectus, or other
filing, or amendment or supplement, in reliance upon and in conformity with
written information furnished by such Warrantholder for use in the preparation
thereof; provided, however, that the indemnity agreement contained in this
subparagraph (b) will not apply to amounts paid to any claimant in settlement of
any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under subparagraphs
(a) or (b) above of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party otherwise than under subparagraphs (a)
and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. Restrictions on Transfer. This Warrant Certificate and the Warrant
may not be sold, transferred, assigned or hypothecated for a one-year period
after the Effective Date except to underwriters of the Offering or to
individuals who are either a partner or an officer of such an underwriter or by
will or by operation of law. The Warrant may be divided or combined, upon
request to the Company by the Warrantholder, into a certificate or certificates
evidencing the same aggregate number of Warrants.
9. No Rights as a Shareholder. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its shareholders.
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<PAGE> 9
10. Notice. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail; and if served will
be addressed as follows:
If to the Company:
AdStar.com, Inc.
4553 Glencoe Avenue, Suite 325
Marina del Rey, California 90292
Attn: Treasurer
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours
after mailing when deposited in the United States mail, registered or certified
mail, return receipt requested, postage prepaid and addressed as specified
above. Any party may by written notice to the other specify a different address
for notice purposes.
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of Oregon located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
Dated as of December __, 1999
ADSTAR.COM, INC.
By:
----------------------
President
Agreed and Accepted as of December __, 1999
PAULSON INVESTMENT COMPANY, INC.
By: ----------------------
Lorraine Maxfield, Senior Vice President -- Research
9
<PAGE> 1
EXHIBIT 4.4
WARRANT AGREEMENT
between
ADSTAR.COM, INC.
and
----------------------
Dated as of , 1999
------------
<PAGE> 2
This Agreement, dated as of __________, 1999, is between
AdStar.com, Inc., a ______ corporation (the "Company") and _________________, a
____________ corporation, (the "Warrant Agent").
The Company, at or about the time that it is entering into this
Agreement, proposes to issue and sell to public investors up to 1,150,000 Units
("Units"). Each Unit consists of two shares of Common Stock of the Company
("Common Stock") and one Warrant (collectively, the "Warrants"), each Warrant
exercisable to purchase one share of Common Stock for $_____, upon the terms and
conditions and subject to adjustment in certain circumstances, all as set forth
in this Agreement.
The Company proposes to issue to the Representative of the
Underwriters in the public offering of Units referred to above warrants to
purchase up to 100,000 additional Units.
The Company wishes to retain the Warrant Agent to act on behalf of
the Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and replacement of the certificates evidencing the
Warrants to be issued under this Agreement (the "Warrant Certificates") and the
exercise of the Warrants;
The Company and the Warrant Agent wish to enter into this Agreement
to set forth the terms and conditions of the Warrants and the rights of the
holders thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent
The Company appoints the Warrant Agent to act as agent for the
Company in accordance with the instructions in this Agreement and the Warrant
Agent accepts such appointment.
Section 2. Date, Denomination and Execution of Warrant Certificates
The Warrant Certificates (and the Form of Election to Purchase and
the Form of Assignment to be printed on the reverse thereof) shall be in
registered form only and shall be substantially of the tenor and purport recited
in Exhibit A hereto, and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law, or with any rule or regulation made pursuant
thereto, or with any rule or regulation of any stock exchange on which the
Common Stock or the Warrants may be listed or any automated quotation system, or
to conform to usage. Each Warrant Certificate shall entitle the registered
holder thereof, subject to the provisions of this Agreement and of the Warrant
Certificate, to purchase, on or before the close of business on __________, 2004
(the "Expiration Date"), one fully paid and non-assessable share of Common Stock
for each Warrant evidenced by such Warrant Certificate, subject to adjustments
as provided in Sections 6 hereof, for $_____ (the "Exercise Price"). Each
Warrant Certificate issued as a part of a Unit offered to the public as
described in the recitals, above, shall be dated _____________, 1999; each other
Warrant Certificate shall be dated the date on which the Warrant Agent receives
valid issuance instructions from the Company or a transferring holder of a
Warrant Certificate or, if such instructions specify another date, such other
date.
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<PAGE> 3
For purposes of this Agreement, the term "close of business" on any
given date shall mean 5:00 p.m., Eastern time, on such date; provided, however,
that if such date is not a business day, it shall mean 5:00 p.m., Eastern time,
on the next succeeding business day. For purposes of this Agreement, the term
"business day" shall mean any day other than a Saturday, Sunday, or a day on
which banking institutions in New York, New York are authorized or obligated by
law to be closed.
Each Warrant Certificate shall be executed on behalf of the Company
by the Chairman of the Board or its President or a Vice President, either
manually or by facsimile signature printed thereon, and have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. Each Warrant Certificate shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any Warrant Certificate
shall cease to be such officer of the Company before countersignature by the
Warrant Agent and issue and delivery thereof by the Company, such Warrant
Certificate, nevertheless, may be countersigned by the Warrant Agent, issued and
delivered with the same force and effect as though the person who signed such
Warrant Certificate had not ceased to be such officer of the Company.
Section 3. Subsequent Issue of Warrant Certificates
Subsequent to their original issuance, no Warrant Certificates
shall be reissued except (i) Warrant Certificates issued upon transfer thereof
in accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any
combination, split-up or exchange of Warrant Certificates pursuant to Section 4
hereof, (iii) Warrant Certificates issued in replacement of mutilated,
destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof,
(iv) Warrant Certificates issued upon the partial exercise of Warrant
Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares purchasable thereunder pursuant to Section 22 hereof. The Warrant
Agent is hereby irrevocably authorized to countersign and deliver, in accordance
with the provisions of said Sections 4, 5, 7 and 22, the new Warrant
Certificates required for purposes thereof, and the Company, whenever required
by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates
duly executed on behalf of the Company for such purposes.
Section 4. Transfers and Exchanges of Warrant Certificates
The Warrant Agent will keep or cause to be kept books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the number of Warrants evidenced by each
such Warrant Certificate.
The Warrant Agent shall, from time to time, register the transfer
of any outstanding Warrants upon the books to be maintained by the Warrant Agent
for that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed with such
signature guaranteed by a banking institution or NASD member and such supporting
documentation as the Warrant Agent or the Company may reasonably require, to the
Warrant Agent at its stock transfer office in __________, California at any time
on or before the Expiration Date, and upon payment to the Warrant Agent for the
account of the Company of an amount equal to any applicable transfer tax.
Payment of the amount of such tax may be made in cash, or by certified or
official bank check, payable in lawful money of the United States of America to
the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment
duly filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
provided, however, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
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<PAGE> 4
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.
Any Warrant Certificate or Certificates may be exchanged at the
option of the holder thereof for another Warrant Certificate or Certificates of
different denominations, of like tenor and representing in the aggregate the
same number of Warrants, upon surrender of such Warrant Certificate or
Certificates, with the Form of Assignment duly filled in and executed, to the
Warrant Agent, at any time or from time to time after the close of business on
the date hereof and prior to the close of business on the Expiration Date. The
Warrant Agent shall promptly cancel the surrendered Warrant Certificate and
deliver the new Warrant Certificate pursuant to the provisions of this Section.
Section 5. Mutilated, Destroyed, Lost or Stolen Warrant Certificates
Upon receipt by the Company and the Warrant Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
any Warrant Certificate, and in the case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to them
of all reasonable expenses incidental thereto, and, in the case of mutilation,
upon surrender and cancellation of the Warrant Certificate, the Warrant Agent
shall countersign and deliver a new Warrant Certificate of like tenor for the
same number of Warrants.
Section 6. Adjustments of Number and Kind of Shares Purchasable and Exercise
Price
The number and kind of securities or other property purchasable
upon exercise of a Warrant shall be subject to adjustment from time to time upon
the occurrence, after the date hereof, of any of the following events:
A. In case the Company shall (1) pay a dividend in, or make a distribution
of, shares of capital stock on its outstanding Common Stock, (2) subdivide its
outstanding shares of Common Stock into a greater number of such shares or (3)
combine its outstanding shares of Common Stock into a smaller number of such
shares, the total number of shares of Common Stock purchasable upon the exercise
of each Warrant outstanding immediately prior thereto shall be adjusted so that
the holder of any Warrant Certificate thereafter surrendered for exercise shall
be entitled to receive at the same aggregate Exercise Price the number of shares
of capital stock (of one or more classes) which such holder would have owned or
have been entitled to receive immediately following the happening of any of the
events described above had such Warrant been exercised in full immediately prior
to the record date with respect to such event. Any adjustment made pursuant to
this Subsection shall, in the case of a stock dividend or distribution, become
effective as of the record date therefor and, in the case of a subdivision or
combination, be made as of the effective date thereof. If, as a result of an
adjustment made pursuant to this Subsection, the holder of any Warrant
Certificate thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock of the Company, the Board of
Directors of the Company (whose determination shall be conclusive and shall be
evidenced by a Board resolution filed with the Warrant Agent) shall determine
the allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock.
B. In the event of a capital reorganization or a reclassification of the
Common Stock (except as provided in Subsection A. above or Subsection E. below),
any Warrantholder, upon exercise of Warrants, shall be entitled to receive, in
substitution for the Common Stock to which he would have become entitled upon
exercise immediately prior to such reorganization or reclassification, the
shares (of any class or classes) or other securities or property of the Company
(or cash) that he would have been entitled to receive at the same aggregate
Exercise Price upon such reorganization or reclassification if such Warrants had
been exercised immediately prior to the record date with respect to such event;
and in any such case, appropriate provision (as determined by the Board of
Directors of the Company, whose determination shall be conclusive and shall be
evidenced by a certified Board resolution filed with the Warrant Agent) shall be
made for the application of this Section 6 with respect to the rights and
interests thereafter of the Warrantholders (including but not limited to the
allocation of the Exercise Price between or among shares of classes of capital
stock), to the end that this Section 6 (including the adjustments of the
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<PAGE> 5
number of shares of Common Stock or other securities purchasable and the
Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably
practicable, in all subsequent exercises of the Warrants for any shares or
securities or other property (or cash) thereafter deliverable upon the exercise
of the Warrants.
C. Whenever the number of shares of Common Stock or other securities
purchasable upon exercise of a Warrant is adjusted as provided in this Section
6, the Company will promptly file with the Warrant Agent a certificate signed by
a Chairman or co-Chairman of the Board or the President or a Vice President of
the Company and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company setting forth the number and kind of
securities or other property purchasable upon exercise of a Warrant, as so
adjusted, stating that such adjustments in the number or kind of shares or other
securities or property conform to the requirements of this Section 6, and
setting forth a brief statement of the facts accounting for such adjustments.
Promptly after receipt of such certificate, the Company, or the Warrant Agent at
the Company's request, will deliver, by first-class, postage prepaid mail, a
brief summary thereof (to be supplied by the Company) to the registered holders
of the outstanding Warrant Certificates; provided, however, that failure to file
or to give any notice required under this Subsection, or any defect therein,
shall not affect the legality or validity of any such adjustments under this
Section 6; and provided, further, that, where appropriate, such notice may be
given in advance and included as part of the notice required to be given
pursuant to Section 12 hereof.
D. In case of any consolidation of the Company with, or merger of the
Company into, another corporation (other than a consolidation or merger which
does not result in any reclassification or change of the outstanding Common
Stock), or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
corporation formed by such consolidation or merger or the corporation which
shall have acquired such assets, as the case may be, shall execute and deliver
to the Warrant Agent a supplemental warrant agreement providing that the holder
of each Warrant then outstanding shall have the right thereafter (until the
expiration of such Warrant) to receive, upon exercise of such Warrant, solely
the kind and amount of shares of stock and other securities and property (or
cash) receivable upon such consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock of the Company for which such Warrant
might have been exercised immediately prior to such consolidation, merger, sale
or transfer. Such supplemental warrant agreement shall provide for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided in this Section. The above provision of this Subsection shall similarly
apply to successive consolidations, mergers, sales or transfers.
The Warrant Agent shall not be under any responsibility to
determine the correctness of any provision contained in any such supplemental
warrant agreement relating to either the kind or amount of shares of stock or
securities or property (or cash) purchasable by holders of Warrant Certificates
upon the exercise of their Warrants after any such consolidation, merger, sale
or transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.
E. Irrespective of any adjustments in the number or kind of shares issuable
upon exercise of Warrants, Warrant Certificates theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in the similar Warrant Certificates initially issuable pursuant to this
Warrant Agreement.
F. The Company may retain a firm of independent public accountants of
recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section, and a certificate signed by such firm shall, in the
absence of fraud or gross negligence, be conclusive evidence of the correctness
of any computation made under this Section.
G. For the purpose of this Section, the term "Common Stock" shall mean (i)
the Common Stock or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that at
5
<PAGE> 6
any time as a result of an adjustment made pursuant to this Section, the holder
of any Warrant thereafter surrendered for exercise shall become entitled to
receive any shares of capital stock of the Company other than shares of Common
Stock, thereafter the number of such other shares so receivable upon exercise of
any Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in this Section, and all other provisions of this
Agreement, with respect to the Common Stock, shall apply on like terms to any
such other shares.
H. The Company may, from time to time and to the extent permitted by law,
reduce the exercise price of the Warrants by any amount for a period of not less
than 20 days. If the Company so reduces the exercise price of the Warrants, it
will give not less than 15 days' notice of such decrease, which notice may be in
the form of a press release, and shall take such other steps as may be required
under applicable law in connection with any offers or sales of securities at the
reduced price.
Section 7. Exercise and Redemption of Warrants
Unless the Warrants have been redeemed as provided in this Section
7, the registered holder of any Warrant Certificate may exercise the Warrants
evidenced thereby, in whole at any time or in part from time to time at or prior
to the close of business, on the Expiration Date, subject to the provisions of
Section 9, at which time the Warrant Certificates shall be and become wholly
void and of no value. Warrants may be exercised by their holders or redeemed by
the Company as follows:
A. Exercise of Warrants shall be accomplished upon surrender of the Warrant
Certificate evidencing such Warrants, with the Form of Election to Purchase on
the reverse side thereof duly filled in and executed, to the Warrant Agent at
its stock transfer office in _________, California, together with payment to the
Company of the Exercise Price (as of the date of such surrender) of the Warrants
then being exercised and an amount equal to any applicable transfer tax and, if
requested by the Company, any other taxes or governmental charges which the
Company may be required by law to collect in respect of such exercise. Payment
of the Exercise Price and other amounts may be made by wire transfer of good
funds, or by certified or bank cashier's check, payable in lawful money of the
United States of America to the order of the Company. No adjustment shall be
made for any cash dividends, whether paid or declared, on any securities
issuable upon exercise of a Warrant.
B. Upon receipt of a Warrant Certificate, with the Form of Election to
Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and of an amount equal to any applicable
taxes or government charges as aforesaid), the Warrant Agent shall promptly
request from the Transfer Agent with respect to the securities to be issued and
deliver to or upon the order of the registered holder of such Warrant
Certificate, in such name or names as such registered holder may designate, a
certificate or certificates for the number of full shares of the securities to
be purchased, together with cash made available by the Company pursuant to
Section 8 hereof in respect of any fraction of a share of such securities
otherwise issuable upon such exercise. If the Warrant is then exercisable to
purchase property other than securities, the Warrant Agent shall take
appropriate steps to cause such property to be delivered to or upon the order of
the registered holder of such Warrant Certificate. In addition, if it is
required by law and upon instruction by the Company, the Warrant Agent will
deliver to each Warrantholder a prospectus which complies with the provisions of
Section 9 of the Securities Act of 1933 and the Company agrees to supply Warrant
Agent with sufficient number of prospectuses to effectuate that purpose.
C. In case the registered holder of any Warrant Certificate shall exercise
fewer than all of the Warrants evidenced by such Warrant Certificate, the
Warrant Agent shall promptly countersign and deliver to the registered holder of
such Warrant Certificate, or to his duly authorized assigns, a new Warrant
Certificate or Certificates evidencing the number of Warrants that were not so
exercised.
D. Each person in whose name any certificate for securities is issued upon
the exercise of Warrants shall for all purposes be deemed to have become the
holder of record of the securities represented thereby as of, and such
certificate shall be dated, the date upon which the Warrant Certificate was duly
surrendered in proper form and
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<PAGE> 7
payment of the Exercise Price (and of any applicable taxes or other governmental
charges) was made; provided, however, that if the date of such surrender and
payment is a date on which the stock transfer books of the Company are closed,
such person shall be deemed to have become the record holder of such shares as
of, and the certificate for such shares shall be dated, the next succeeding
business day on which the stock transfer books of the Company are open (whether
before, on or after the Expiration Date) and the Warrant Agent shall be under no
duty to deliver the certificate for such shares until such date. The Company
covenants and agrees that it shall not cause its stock transfer books to be
closed for a period of more than 20 consecutive business days except upon
consolidation, merger, sale of all or substantially all of its assets,
dissolution or liquidation or as otherwise provided by law.
E. The Warrants outstanding at the time of a redemption may be redeemed at
the option of the Company, in whole or in part on a pro-rata basis, at any time
if, at the time notice of such redemption is given by the Company as provided in
Paragraph F, below, the Daily Price has exceeded $_____ for the twenty
consecutive trading days immediately preceding the date of such notice, at a
price equal to $0.25 per Warrant (the "Redemption Price"). For the purpose of
the foregoing sentence, the term "Daily Price" shall mean, for any relevant day,
the closing bid price on that day as reported by the principal exchange or
quotation system on which prices for the Common Stock are reported. On the
redemption date the holders of record of redeemed Warrants shall be entitled to
payment of the Redemption Price upon surrender of such redeemed Warrants to the
Company at the principal office of the Warrant Agent in ___________, California.
F. Notice of redemption of Warrants shall be given at least 30 days prior to
the redemption date by mailing, by registered or certified mail, return receipt
requested, a copy of such notice to the Warrant Agent and to all of the holders
of record of Warrants at their respective addresses appearing on the books or
transfer records of the Company or such other address designated in writing by
the holder of record to the Warrant Agent not less than 40 days prior to the
redemption date.
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G. From and after the redemption date, all rights of the Warrantholders
(except the right to receive the Redemption Price) shall terminate, but only if
(a) no later than one day prior to the redemption date the Company shall have
irrevocably deposited with the Warrant Agent as paying agent a sufficient amount
to pay on the redemption date the Redemption Price for all Warrants called for
redemption and (b) the notice of redemption shall have stated the name and
address of the Warrant Agent and the intention of the Company to deposit such
amount with the Warrant Agent no later than one day prior to the redemption
date.
H. The Warrant Agent shall pay to the holders of record of redeemed Warrants
all monies received by the Warrant Agent for the redemption of Warrants to which
the holders of record of such redeemed Warrants who shall have surrendered their
Warrants are entitled.
I. Any amounts deposited with the Warrant Agent that are not required for
redemption of Warrants may be withdrawn by the Company. Any amounts deposited
with the Warrant Agent that shall be unclaimed after six months after the
redemption date may be withdrawn by the Company, and thereafter the holders of
the Warrants called for redemption for which such funds were deposited shall
look solely to the Company for payment. The Company shall be entitled to the
interest, if any, on funds deposited with the Warrant Agent and the holders of
redeemed Warrants shall have no right to any such interest.
J. If the Company fails to make a sufficient deposit with the Warrant Agent
as provided above, the holder of any Warrants called for redemption may at the
option of the holder (a) by notice to the Company declare the notice of
redemption a nullity as to such holder, or (b) maintain an action against the
Company for the Redemption Price. If the holder brings such an action, the
Company will pay reasonable attorneys' fees of the holder. If the holder fails
to bring an action against the Company for the Redemption Price within 60 days
after the redemption date, the holder shall be deemed to have elected to declare
the notice of redemption to be a nullity as to such holder and such notice shall
be without any force or effect as to such holder. Except as otherwise
specifically provided in this Paragraph J, a notice of redemption, once mailed
by the Company as provided in Paragraph F shall be irrevocable.
Section 8. Fractional Interests
The Company shall not be required to issue any Warrant Certificate
evidencing a fraction of a Warrant or to issue fractions of shares of securities
on the exercise of the Warrants. If any fraction (calculated to the nearest
one-hundredth) of a Warrant or a share of securities would, except for the
provisions of this Section, be issuable on the exercise of any Warrant, the
Company shall, at its option, either purchase such fraction for an amount in
cash equal to the current value of such fraction computed on the basis of the
closing market price (as quoted on NASDAQ) on the trading day immediately
preceding the day upon which such Warrant Certificate was surrendered for
exercise in accordance with Section 7 hereof or issue the required fractional
Warrant or share. By accepting a Warrant Certificate, the holder thereof
expressly waives any right to receive a Warrant Certificate evidencing any
fraction of a Warrant or to receive any fractional share of securities upon
exercise of a Warrant, except as expressly provided in this Section 8.
Section 9. Reservation of Equity Securities
The Company covenants that it will at all times reserve and keep
available, free from any pre-emptive rights, out of its authorized and unissued
equity securities, solely for the purpose of issue upon exercise of the
Warrants, such number of shares of equity securities of the Company as shall
then be issuable upon the exercise of all outstanding Warrants ("Equity
Securities"). The Company covenants that all Equity Securities which shall be so
issuable shall, upon such issue, be duly authorized, validly issued, fully paid
and non-assessable.
The Company covenants that if any equity securities, required to be
reserved for the purpose of issue upon exercise of the Warrants hereunder,
require registration with or approval of any governmental authority under any
federal or state law before such shares may be issued upon exercise of Warrants,
the Company will use all commercially reasonable efforts to cause such
securities to be duly registered, or approved, as the case may
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be, and, to the extent practicable, take all such action in anticipation of and
prior to the exercise of the Warrants, including, without limitation, filing any
and all post-effective amendments to the Company's Registration Statement on
Form SB-2 (Registration No. ___-_____) necessary to permit a public offering of
the securities underlying the Warrants at any and all times during the term of
this Agreement, provided, however, that in no event shall such securities be
issued, and the Company is authorized to refuse to honor the exercise of any
Warrant, if such exercise would result in the opinion of the Company's Board of
Directors, upon advice of counsel, in the violation of any law; and provided
further that, in the case of a Warrant exercisable solely for securities listed
on a securities exchange or for which there are at least two independent market
makers, in lieu of obtaining such registration or approval, the Company may
elect to redeem Warrants submitted to the Warrant Agent for exercise for a price
equal to the difference between the aggregate low asked price, or closing price,
as the case may be, of the securities for which such Warrant is exercisable on
the date of such submission and the Exercise Price of such Warrants; in the
event of such redemption, the Company will pay to the holder of such Warrants
the above-described redemption price in cash within 10 business days after
receipt of notice from the Warrant Agent that such Warrants have been submitted
for exercise.
Section 10. Reduction of Conversion Price Below Par Value
Before taking any action that would cause an adjustment pursuant to
Section 6 hereof reducing the portion of the Exercise Price required to purchase
one share of capital stock below the then par value (if any) of a share of such
capital stock, the Company will use its best efforts to take any corporate
action which, in the opinion of its counsel, may be necessary in order that the
Company may validly and legally issue fully paid and non-assessable shares of
such capital stock.
Section 11. Payment of Taxes
The Company covenants and agrees that it will pay when due and
payable any and all federal and state documentary stamp and other original issue
taxes which may be payable in respect of the original issuance of the Warrant
Certificates, or any shares of Common Stock or other securities upon the
exercise of Warrants. The Company shall not, however, be required (i) to pay any
tax which may be payable in respect of any transfer involved in the transfer and
delivery of Warrant Certificates or the issuance or delivery of certificates for
Common Stock or other securities in a name other than that of the registered
holder of the Warrant Certificate surrendered for purchase or (ii) to issue or
deliver any certificate for shares of Common Stock or other securities upon the
exercise of any Warrant Certificate until any such tax shall have been paid, all
such tax being payable by the holder of such Warrant Certificate at the time of
surrender.
Section 12. Notice of Certain Corporate Action
In case the Company after the date hereof shall propose (i) to
offer to the holders of Common Stock, generally, rights to subscribe to or
purchase any additional shares of any class of its capital stock, any evidences
of its indebtedness or assets, or any other rights or options or (ii) to effect
any reclassification of Common Stock (other than a reclassification involving
merely the subdivision or combination of outstanding shares of Common Stock) or
any capital reorganization, or any consolidation or merger to which the Company
is a party and for which approval of any stockholders of the Company is
required, or any sale, transfer or other disposition of its property and assets
substantially as an entirety, or the liquidation, voluntary or involuntary
dissolution or winding-up of the Company, then, in each such case, the Company
shall file with the Warrant Agent and the Company, or the Warrant Agent on its
behalf, shall mail (by first-class, postage prepaid mail) to all registered
holders of the Warrant Certificates notice of such proposed action, which notice
shall specify the date on which the books of the Company shall close or a record
be taken for such offer of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up
shall take place or commence, as the case may be, and which shall also specify
any record date for determination of holders of Common Stock entitled to vote
thereon or participate therein and shall set forth such facts with respect
thereto as shall be reasonably necessary to indicate any adjustments in the
Exercise Price and the number or kind of shares or other securities purchasable
upon exercise
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of Warrants which will be required as a result of such action. Such notice shall
be filed and mailed in the case of any action covered by clause (i) above, at
least ten days prior to the record date for determining holders of the Common
Stock for purposes of such action or, if a record is not to be taken, the date
as of which the holders of shares of Common Stock of record are to be entitled
to such offering; and, in the case of any action covered by clause (ii) above,
at least 20 days prior to the earlier of the date on which such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up is
expected to become effective and the date on which it is expected that holders
of shares of Common Stock of record on such date shall be entitled to exchange
their shares for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up.
Failure to give any such notice or any defect therein shall not
affect the legality or validity of any transaction listed in this Section 12.
Section 13. Disposition of Proceeds on Exercise of Warrant Certificates, etc.
The Warrant Agent shall account promptly to the Company with
respect to Warrants exercised and concurrently pay to the Company all moneys
received by the Warrant Agent for the purchase of securities or other property
through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its stock transfer
office. Copies of this Agreement may be obtained upon written request addressed
to the Warrant Agent at its stock transfer office in __________, California.
Section 14. Warrantholder Not Deemed a Stockholder
No Warrantholder, as such, shall be entitled to vote, receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Warrants
represented thereby for any purpose whatever, nor shall anything contained
herein or in any Warrant Certificate be construed to confer upon any
Warrantholder, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting stockholders (except as provided in Section
12 hereof), or to receive dividend or subscription rights, or otherwise, until
such Warrant Certificate shall have been exercised in accordance with the
provisions hereof and the receipt of the Exercise Price and any other amounts
payable upon such exercise by the Warrant Agent.
Section 15. Right of Action
All rights of action in respect to this Agreement are vested in the
respective registered holders of the Warrant Certificates; and any registered
holder of any Warrant Certificate, without the consent of the Warrant Agent or
of any other holder of a Warrant Certificate, may, in his own behalf for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company suitable to enforce, or otherwise in respect of, his right
to exercise the Warrants evidenced by such Warrant Certificate, for the purchase
of shares of the Common Stock in the manner provided in the Warrant Certificate
and in this Agreement.
Section 16. Agreement of Holders of Warrant Certificates
Every holder of a Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent and with every other
holder of a Warrant Certificate that:
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A. the Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement;
and
B. the Company and the Warrant Agent may deem and treat the person in whose
name the Warrant Certificate is registered as the absolute owner of the Warrant
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.
Section 17. Cancellation of Warrant Certificates
In the event that the Company shall purchase or otherwise acquire
any Warrant Certificate or Certificates after the issuance thereof, such Warrant
Certificate or Certificates shall thereupon be delivered to the Warrant Agent
and be canceled by it and retired. The Warrant Agent shall also cancel any
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, split-up, combination or exchange. Warrant
Certificates so canceled shall be delivered by the Warrant Agent to the Company
from time to time, or disposed of in accordance with the instructions of the
Company.
Section 18. Concerning the Warrant Agent
The Company agrees to pay to the Warrant Agent from time to time,
on demand of the Warrant Agent, reasonable compensation for all services
rendered by it hereunder and also its reasonable expenses, including counsel
fees, and other disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties hereunder. The
Company also agrees to indemnify the Warrant Agent for, and to hold it harmless
against, any loss, liability or expense, incurred without gross negligence, bad
faith or willful misconduct on the part of the Warrant Agent, arising out of or
in connection with the acceptance and administration of this Agreement.
Section 19. Merger or Consolidation or Change of Name of Warrant Agent
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor warrant agent
under the provisions of Section 21 hereof. In case at the time such successor to
the Warrant Agent shall succeed to the agency created by this Agreement, any of
the Warrant Certificates shall have been countersigned but not delivered, any
such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrant Certificates so countersigned;
and in case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
In case at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignature under its
prior name and deliver Warrant Certificates so countersigned; and in case at
that time any of the Warrant Certificates shall not have been countersigned, the
Warrant Agent may countersign such Warrant Certificates either in its prior name
or in its changed name; and in all such cases such Warrant Certificates shall
have the full force provided in the Warrant Certificates and in this Agreement.
Section 20. Duties of Warrant Agent
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The Warrant Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Company and the holders of Warrant Certificates, by their acceptance thereof,
shall be bound:
A. The Warrant Agent may consult with counsel satisfactory to it (who may be
counsel for the Company or the Warrant Agent's in-house counsel), and the
opinion of such counsel shall be full and complete authorization and protection
to the Warrant Agent as to any action taken, suffered or omitted by it in good
faith and in accordance with such opinion; provided, however, that the Warrant
Agent shall have exercised reasonable care in the selection of such counsel.
Fees and expenses of such counsel, to the extent reasonable, shall be paid by
the Company.
B. Whenever in the performance of its duties under this Agreement, the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by a Chairman or co-Chairman of the Board or
the President or a Vice President or the Secretary of the Company and delivered
to the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
C. The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
E. The Warrant Agent shall not be under any responsibility in respect of the
validity of this Agreement or the execution and delivery hereof (except the due
execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Warrant Certificate; nor shall
it be responsible for the making of any change in the number of shares of Common
Stock for which a Warrant is exercisable required under the provisions of
Section 6 or responsible for the manner, method or amount of any such change or
the ascertaining of the existence of facts that would require any such
adjustment or change (except with respect to the exercise of Warrant
Certificates after actual notice of any adjustment of the Exercise Price); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Warrant Certificate or as to whether
any shares of Common Stock will, when issued, be validly issued, fully paid and
non-assessable.
F. The Warrant Agent shall be under no obligation to institute any action,
suit or legal proceeding or take any other action likely to involve expense
unless the Company or one or more registered holders of Warrant Certificates
shall furnish the Warrant Agent with reasonable security and indemnity for any
costs and expenses which may be incurred. All rights of action under this
Agreement or under any of the Warrants may be enforced by the Warrant Agent
without the possession of any of the Warrants or the production thereof at any
trial or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrant Certificates, as their respective rights
or interests may appear.
G. The Warrant Agent and any stockholder, director, officer or employee of
the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully
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and freely as though it were not Warrant Agent under this Agreement. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
H. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from a
Chairman or co-Chairman of the Board or President or a Vice President or the
Secretary or the Controller of the Company, and to apply to such officers for
advice or instructions in connection with the Warrant Agent's duties, and it
shall not be liable for any action taken or suffered or omitted by it in good
faith in accordance with instructions of any such officer.
I. The Warrant Agent will not be responsible for any failure of the Company
to comply with any of the covenants contained in this Agreement or in the
Warrant Certificates to be complied with by the Company.
J. The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees and the Warrant Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys, agents or employees or for any loss to the Company resulting from
such neglect or misconduct; provided, however, that reasonable care shall have
been exercised in the selection and continued employment of such attorneys,
agents and employees.
K. The Warrant Agent will not incur any liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken, or any
failure to take action, in reliance on any notice, resolution, waiver, consent,
order, certificate, or other paper, document or instrument reasonably believed
by the Warrant Agent to be genuine and to have been signed, sent or presented by
the proper party or parties.
L. The Warrant Agent will act hereunder solely as agent of the Company in a
ministerial capacity, and its duties will be determined solely by the provisions
hereof. The Warrant Agent will not be liable for anything which it may do or
refrain from doing in connection with this Agreement except for its own
negligence, bad faith or willful conduct.
Section 21. Change of Warrant Agent
The Warrant Agent may resign and be discharged from its duties
under this Agreement upon 30 days' prior notice in writing mailed, by registered
or certified mail, to the Company. The Company may remove the Warrant Agent or
any successor warrant agent upon 30 days' prior notice in writing, mailed to the
Warrant Agent or successor warrant agent, as the case may be, by registered or
certified mail. If the Warrant Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Warrant Agent and shall, within 15 days following such appointment, give
notice thereof in writing to each registered holder of the Warrant Certificates.
If the Company shall fail to make such appointment within a period of 15 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Warrant Agent,
then the Company agrees to perform the duties of the Warrant Agent hereunder
until a successor Warrant Agent is appointed. After appointment and execution of
a copy of this Agreement in effect at that time, the successor Warrant Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent without further act or deed; but
the former Warrant Agent shall deliver and transfer to the successor Warrant
Agent, within a reasonable time, any property at the time held by it hereunder,
and execute and deliver any further assurance, conveyance, act or deed necessary
for the purpose. Failure to give any notice provided for in this Section,
however, or any defect therein shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be.
Section 22. Issuance of New Warrant Certificates
Notwithstanding any of the provisions of this Agreement or the
several Warrant Certificates to the contrary, the Company may, at its option,
issue new Warrant Certificates in such form as may be approved by its
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Board of Directors to reflect any adjustment or change in the Exercise Price or
the number or kind of shares purchasable under the several Warrant Certificates
made in accordance with the provisions of this Agreement.
Section 23. Notices
Notice or demand pursuant to this Agreement to be given or made on
the Company by the Warrant Agent or by the registered holder of any Warrant
Certificate shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
AdStar.com, Inc.
at 4553 Glencoe Avenue, Suite 325
Marina del Rey, California 90292
Subject to the provisions of Section 21, any notice pursuant to
this Agreement to be given or made by the Company or by the holder of any
Warrant Certificate to or on the Warrant Agent shall be sufficiently given or
made if sent by first-class or registered mail, postage prepaid, addressed
(until another address is filed in writing by the Warrant Agent with the
Company) as follows:
-------------------------
-------------------------
-------------------------
Any notice or demand authorized to be given or made to the
registered holder of any Warrant Certificate under this Agreement shall be
sufficiently given or made if sent by first-class or registered mail, postage
prepaid, to the last address of such holder as it shall appear on the registers
maintained by the Warrant Agent.
Section 24. Modification of Agreement
The Warrant Agent may, without the consent or concurrence of the
Warrantholders, by supplemental agreement or otherwise, concur with the Company
in making any changes or corrections in this Agreement that the Warrant Agent
shall have been advised by counsel (who may be counsel for the Company) are
necessary or desirable to cure any ambiguity or to correct any defective or
inconsistent provision or clerical omission or mistake or manifest error herein
contained, or to make any other provisions in regard to matters or questions
arising hereunder and which shall not be inconsistent with the provisions of the
Warrant Certificates and which shall not adversely affect the interests of the
Warrantholders. As of the date hereof, this Agreement contains the entire and
only agreement, understanding, representation, condition, warranty or covenant
between the parties hereto with respect to the matters herein, supersedes any
and all other agreements between the parties hereto relating to such matters,
and may be modified or amended only by a written agreement signed by both
parties hereto pursuant to the authority granted by the first sentence of this
Section.
Section 25. Successors
All the covenants and provisions of this Agreement by or for the
benefit of the Company or the Warrant Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.
Section 26. California Contract
This Agreement and each Warrant Certificate issued hereunder shall
be deemed to be a contract made under the laws of the State of California and
for all purposes shall be construed in accordance with the laws of said State.
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Section 27. Termination
This Agreement shall terminate as of the close of business on the
Expiration Date, or such earlier date upon which all Warrants shall have been
exercised or redeemed, except that the Warrant Agent shall account to the
Company as to all Warrants outstanding and all cash held by it as of the close
of business on the Expiration Date.
Section 28. Benefits of this Agreement
Nothing in this Agreement or in the Warrant Certificates shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent, and their respective successors and assigns hereunder and the
registered holders of the Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Warrant Agent, their respective
successors and assigns hereunder and the registered holders of the Warrant
Certificates.
Section 29. Descriptive Headings
The descriptive headings of the several Sections of this Agreement
are inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
Section 30. Counterparts
This Agreement may be executed in any number of counterparts, each
of which shall be an original, but such counterparts shall together constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, all as of the day and year first above written.
AdStar.com, Inc.
By:_________________________
Title:
_________________________
By:_________________________
Title:
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EXHIBIT A
VOID AFTER 5 P.M. PACIFIC TIME ON __________, 2004
WARRANTS TO PURCHASE COMMON STOCK
W_____ _________ Warrants
ADSTAR.COM, INC.
CUSIP ______________
THIS CERTIFIES THAT
or registered assigns, is the registered holder of the number of Warrants
("Warrants") set forth above. Each Warrant entitles the holder thereof to
purchase from AdStar.com, Inc., a corporation incorporated under the laws of the
State of __________________ ("Company"), subject to the terms and conditions set
forth hereinafter and in the Warrant Agreement hereinafter more fully described
(the "Warrant Agreement") referred to, at any time on or before the close of
business on ___________, 2004 or, if such Warrant is redeemed as provided in the
Warrant Agreement, at any time prior to the effective time of such redemption
(the "Expiration Date"), one fully paid and non-assessable share of Common Stock
Stock of the Company ("Common Stock") upon presentation and surrender of this
Warrant Certificate, with the instructions for the registration and delivery of
Common Stock filled in, at the stock transfer office in __________, California,
of __________________, Warrant Agent of the Company ("Warrant Agent") or of its
successor warrant agent or, if there be no successor warrant agent, at the
corporate offices of the Company, and upon payment of the Exercise Price (as
defined in the Warrant Agreement) and any applicable taxes paid either in cash,
or by certified or official bank check, payable in lawful money of the United
States of America to the order of the Company. Each Warrant initially entitles
the holder to purchase one share of Common Stock for $______. The number and
kind of securities or other property for which the Warrants are exercisable are
subject to further adjustment in certain events, such as mergers, splits, stock
dividends, recapitalizations and the like, to prevent dilution. The Company may
redeem any or all outstanding and unexercised Warrants at any time if the Daily
Price has exceeded $_____ for twenty consecutive trading days immediately
preceeding the date of notice of such redemption, upon 30 days notice, at a
price equal to $____ per Warrant. For the purpose of the foregoing sentence, the
term "Daily Price" shall mean, for any relevant day, the closing bid price on
that day as reported by the principal exchange or quotation system on which
prices for the Common Stock are reported. All Warrants not theretofore exercised
or redeemed will expire on _________, 2004.
This Warrant Certificate is subject to all of the terms, provisions
and conditions of the Warrant Agreement, dated as of ____________, 1999
("Warrant Agreement"), between the Company and the Warrant Agent, to all of
which terms, provisions and conditions the registered holder of this Warrant
Certificate consents by acceptance hereof. The Warrant Agreement is incorporated
herein by reference and made a part hereof and reference is made to the Warrant
Agreement for a full description of the rights, limitations of rights,
obligations, duties and immunities of the Warrant Agent, the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are
available for inspection at the stock transfer office of the Warrant Agent or
may be obtained upon written request addressed to the Company at 4553 Glencoe
Avenue, Suite 325,Marina del Rey, California 90292, Attention: Chief Financial
Officer.
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<PAGE> 17
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
In certain cases, the sale of securities by the Company upon
exercise of Warrants would violate the securities laws of the United States,
certain states thereof or other jurisdictions. The Company has agreed to use all
commercially reasonable efforts to cause a registration statement to continue to
be effective during the term of the Warrants with respect to such sales under
the Securities Act of 1933, and to take such action under the laws of various
states as may be required to cause the sale of securities upon exercise to be
lawful. However, the Company will not be required to honor the exercise of
Warrants if, in the opinion of the Board of Directors, upon advice of counsel,
the sale of securities upon such exercise would be unlawful. In certain cases,
the Company may, but is not required to, purchase Warrants submitted for
exercise for a cash price equal to the difference between the market price of
the securities obtainable upon such exercise and the exercise price of such
Warrants.
This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled
to vote, receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatever, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder of this Warrant
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof or give or withhold consent to any corporate
action (whether upon any matter submitted to stockholders at any meeting
thereof, or give or withhold consent to any merger, recapitalization, issuance
of stock, reclassification of stock, change of par value or change of stock to
no par value, consolidation, conveyance or otherwise) or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Warrant Agreement) or to receive dividends or subscription rights or otherwise
until the Warrants evidenced by this Warrant Certificate shall have been
exercised and the Common Stock purchasable upon the exercise thereof shall have
become deliverable as provided in the Warrant Agreement.
If this Warrant Certificate shall be surrendered for exercise
within any period during which the transfer books for the Company's Common Stock
or other class of stock purchasable upon the exercise of the Warrants evidenced
by this Warrant Certificate are closed for any purpose, the Company shall not be
required to make delivery of certificates for shares purchasable upon such
transfer until the date of the reopening of said transfer books.
Every holder of this Warrant Certificate by accepting the same
consents and agrees with the Company, the Warrant Agent, and with every other
holder of a Warrant Certificate that:
(a) this Warrant Certificate is transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in the Warrant
Agreement, and
(b) the Company and the Warrant Agent may deem and treat the person in whose
name this Warrant Certificate is registered as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone other than the Company or the Warrant Agent) for all purposes whatever
and neither the Company nor the Warrant Agent shall be affected by any notice to
the contrary.
The Company shall not be required to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
Warrants evidenced by this Warrant Certificate until any tax which may be
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<PAGE> 18
payable in respect thereof by the holder of this Warrant Certificate pursuant to
the Warrant Agreement shall have been paid, such tax being payable by the holder
of this Warrant Certificate at the time of surrender.
This Warrant Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the proper officers of the
Company and its corporate seal.
Dated:
AdStar.com, Inc.
By:______________________
Chief Executive Officer
Attest:_________________________
Secretary
Countersigned
_________________________________
By:_________________________
Authorized Officer
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<PAGE> 1
EXHIBIT 5.1
[MORSE, ZELNICK, ROSE & LANDER, LLP LETTERHEAD]
(212) 838-1177
December__, 1999
AdStar.com,Inc.
4553 Glencoe Avenue, Suite 325
Marina del Rey
California 90292
Dear Sirs:
We have acted as counsel to AdStar.com,Inc., a Delaware corporation (the
"Company") in connection with the preparation of a registration statement on
Form SB-2, (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"),
to register the offering by (a) the Company of (i) 1,000,000 Units, each Unit
consisting of one share of Common Stock and one Warrant to purchase a share of
Common Stock (the "Warrants")(and the offering of an additional 150,000 Units
if the over-allotment option is exercised); (ii) 1,000,000 shares of Common
Stock included in the Units (and an additional 150,000 shares if the over-
allotment Option is exercised), (iii) 1,000,000 Warrants included in the Units
(and an additional 150,000 Warrants if the over-allotment option is exercised),
(iv) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Units (and an additional 150,000 shares if the over-allotment
option is exercised), (v) an option (the "Underwriter's Option) to purchase
100,000 Units, (vi) 100,000 Units issuable on exercise of the Underwriter's
Option, (vii) 100,000 shares of Common Stock included in the Units underlying
the Underwriter's Option, (viii) 100,000 Warrants included in Units underlying
Underwriter's Option, (ix) 100,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Units underlying the Underwriter's
Option, and any and all amendments to the Registration Statement, and any
Registration Statements for any additional Units, shares of Common Stock,
Warrants, Common Stock underlying the Units, Warrants underlying the Units,
Common Stock underlying the Warrants, Underwriter's Option, Units underlying
the Underwriter's Option, Common Stock underlying such Units, Warrants
underlying such Units and Common Stock underlying such Warrants, pursuant to
Rule 462(b) of the Act.
<PAGE> 2
AdStar.com, Inc.
December __, 1999
Page 2 of 2
In this regard, we have reviewed the Certificate of Incorporation of the
Company, as amended, resolutions adopted by the Company's Board of Directors,
the Registration Statement, the proposed form of the Warrants and the
Underwriter's Option, the other exhibits to the Registration Statement and such
other records, documents, statutes and decisions as we have deemed relevant in
rendering this opinion. Based upon the foregoing, we are of the opinion that:
Each Unit, each share of Common Stock included in the Units being offered,
each Warrant included in the Units being offered, each share of Common Stock
underlying such Warrants, (and as for any over-allotment option each Unit issued
upon the exercise of such option, share of Common Stock included in such Units,
each Warrant included in the Units being offered, and each share of Common Stock
underlying such Warrants) the Underwriter's Option, the Units issuable upon
exercise of the Underwriter's option, the Common Stock underlying those Units,
the Warrants underlying those Units, and the Common Stock underlying those
Warrants being offered pursuant to the Registration Statement and all amendments
thereto and any Registration Statements pursuant to Rule 462(b) of the Act for
additional Units, shares of Common Stock underlying such Units, Warrants
underlying such Units, shares of Common Stock underlying such Warrants, the
Underwriter's Option, the Units issuable upon the exercise of such option, the
Common Stock underlying those Units, the Warrants underlying those Units, and
the Common Stock underlying those Warrants have been duly and validly authorized
for issuance and when issued as contemplated by the Registration Statement or
upon exercise of the Warrants or the Underwriter's Option, will be legally
issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and any and all amendments thereto, and any Registration
Statements pursuant to Rule 462(b) of the Act for any additional Units, shares
of Common Stock, Warrants, shares of Common Stock underlying the Warrants and
Underwriter's Option (including the Units issuable upon the exercise of the
Underwriter's Option, the Common Stock underlying these Units, the Warrants
underlying these Units and the shares of Common Stock underlying these
Warrants). In giving such opinion, we do not thereby admit that we are acting
within the category of persons whose consent is required under Section 7 of the
Act or the rules or regulations of the Securities and Exchange Commission
thereunder. Members of this firm or their affiliates own an aggregate of 148,268
shares of Common Stock of the Company.
Very truly yours,
MORSE, ZELNICK, ROSE & LANDER, LLP
<PAGE> 1
EXHIBIT 10.18
ADSTAR.COM, INC.
PROMISSORY NOTE
OCTOBER 21, 1999
For value received, the undersigned AdStar.com, Inc., a Delaware
corporation, ("Maker") promises to pay to the order of Paulson Capital
Corporation, an Oregon corporation, ("Payee") the sum of ONE MILLION ONE
HUNDRED THOUSAND DOLLARS ($1,100,000.00), together with interest thereon at the
rate of six percent per annum from the date hereof. All principal and accrued
interest shall be due and payable in a single payment during business hours,
Pacific time on October 21, 2001. All or any portion of the principal of and
interest on this Note may be prepaid at any time, without penalty. If any
portion of the principal and accrued interest on this Note remains unpaid after
October 21, 2001, such unpaid principal and accrued interest shall accrue
additional interest at the rate of twelve percent per annum from October 22,
2001 until paid. This Note shall be subordinate in right of payment to the
$850,000 promissory note to InterEquity Capital Partners, L.P., provided that
this Note may be paid when due in accordance with its terms if the Maker is not
then in default under such $850,000 note and the making of the payment on this
Note will not cause an event of default to occur.
All of Payee's rights and remedies under this Note are cumulative and
non-exclusive. The acceptance by Payee of any partial payment made hereunder
after the time when any amount hereunder becomes due and payable will not
establish a custom, or waive any rights of Payee to enforce prompt payment
hereof.
Maker, except as otherwise specifically set forth herein, for itself and
for its successors, transferees and assigns hereby irrevocably (i) waives
diligence, presentment and demand for payment, protest, notice, notice of
protest and nonpayment, dishonor and notice of dishonor and all other demands
or notices of any and every kind whatsoever; and (ii) agrees that this Note and
any or all payments coming due hereunder may be extended from time to time in
the sole discretion of Payee hereof without in any way affecting or diminishing
Maker's liabilities hereunder.
Under no circumstances shall the interest rate charged hereunder exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that Payee has received interest hereunder
in excess of the highest rate applicable hereto, Payee shall promptly refund
such excess interest to Maker.
Maker agrees to pay, upon Payee's demand therefor, any and all costs, fees
and expenses (including reasonable attorney's fees, costs and expenses)
incurred by Payee in enforcing any of Payee's rights hereunder.
<PAGE> 2
In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, in whole or in part or
in any respect, or in the event any one or more of the provisions of this Note
operate or would prospectively operate to invalidate this Note, then, and in
either of such events, such provision or provisions only shall be deemed null
and void and shall not affect any other provision of this Note and the
remaining provisions of this Note shall remain operative and in full force and
effect.
This instrument shall be governed by and construed in accordance with the
laws of the State of Oregon, without giving effect to its choice of law rules.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby,
has duly executed this Promissory Note as of the day and year first above
written.
ADSTAR.COM, INC. a
Delaware corporation
By: B.J. Douek
--------------------------
Its: SVP & CFO
<PAGE> 1
EXHIBIT 10.19
DISTRIBUTION AND SERVICE AGREEMENT
- --------------------------------------------------------------------------------
This Distribution and Service Agreement ("Agreement") is made and entered into
between AdStar.com, Inc., a Delaware Corporation ("AdStar") with offices at 4553
Glencos Avenue, Suite 325, Marina del Rey, CA 90292 and Landon Media Group,
Inc., a New York Corporation (the "Company"), with office at [ADDRESS] as of
September 3, 1999 ("Effective Date").
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
conditions herein contained, ADSTAR and the Company agree as follows:
1) Purpose: Company provides advertising representation for publishers, so as
to increase publishers advertising sales and to simplify the purchase
process for large advertisers. Company will provide an advertising Web site
("RecuitmentMarketPlace") on the World Wide Web part of the Internet
("www.RecruitmentMarketPlace.com") for advertisers ("Users") to purchase
advertising ("Ads") in publications. AdStar provides an Internet based
marketplace for the buying and selling of classified advertising
("Advertise123.com") for its media and advertisers clients. The parties wish
to incorporate the Advertise123.com service ("Service") into Company's Web
site for the purpose of allowing Company's Users to purchase Ads via
Company's Web site. Company will solicit publications to participate in the
Service.
2) Responsibilities of the Parties:
The responsibilities of the parties are detailed in Attachment A.
3) General:
3.1 Each party shall be solely responsible for supplying and managing
its own Web site at its own expense and neither party shall have
any obligation or liability whatsoever with respect to the Web
site of the other. Each party shall manage, review, delete, edit,
create, update and otherwise manage all content and services
available on or through its respective Web site.
3.2 Each party shall promptly inform the other of (a) any information
related to its Web site that could reasonably be anticipated to
lead to a claim, demand, or liability of or against the other
party by any third party, (b) any changes to its Web site which
would substantially change the content in any area to which the
other party has linked, and (c) any changes in its Web site which
would substantially change the page(s) in which links to the other
party appear.
3.3 AdStar grants to the Company during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to use
its trade names, trademarks, service names and service marks
("AdStar Marks") for promotion in connection with this Agreement,
subject to the following conditions: (a) the Company shall comply
with all guidelines that AdStar may provide from time to time; (b)
the look and feel, the use of all logos, the design, and the
overall quality of the AdStar Marks shall be subject to AdStar's
approval; (c) any use of the AdStar Marks shall inure to the
benefit of AdStar; and (d) the Company shall submit to AdStar
for its prior approval, not to be unreasonably withheld, all
advertising, promotional and other material bearing any AdStar
Marks.
3.4 The Company grants to AdStar during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to use
its trade names, trademarks, service names and service marks
("Company Marks") for promotion in connection with this Agreement,
subject to the following conditions: (a) AdStar shall comply with
all guidelines that the Company may provide from time to time; (b)
any use of the Company Marks shall inure to the benefit of the
Company; and (c) AdStar shall submit to Company for its prior
approval, not to be unreasonably withheld, all advertising,
promotional and other material bearing any Company Marks.
3.5 Nothing in this Agreement shall be deemed to grant to the Company
any ownership interest in the AdStar Marks or to AdStar any
ownership interest in the Company Marks.
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<PAGE> 2
4) PROMOTIONAL EFFORTS: Each party will submit to the other party, for its
prior written approval, which shall not be unreasonably withheld or
delayed, all press releases, and marketing, advertising, and other
promotional materials that refer to the other party and/or its trade
names, trademarks, service names and service marks (the "Materials"). Copy
substantially similar to that already approved shall be deemed approved.
5) FEES, SHARE OF ADVERTISING REVENUE AND PAYMENT: AdStar will pay Company a
share of advertising revenues earned and actually received, via Recruitment
Marketplace, in a calendar month within thirty (30) days of the end of that
calendar month. Each party will provide the other party with a monthly
report with all information necessary to show the basis on which
advertising revenues and fee payments are calculated in accordance with
this Agreement. Each party will have the right, at its own expense, to
inspect and audit the accounting books and records of the other party that
are specifically relevant to the determination of advertising revenue
percentage shares, fees and payments due under this Agreement. In the event
such inspection and audit shows a discrepancy in payments in the recipient
party's disfavor of five percent (5%) or more, then the other party shall
promptly reimburse the recipient party for the costs and expense of such
inspection and audit and pay the amount of any underpayment. AdStar's share
of advertising revenue and Company's share of that advertising revenue are
defined in Attachment B.
6) NON-EXCLUSIVITY: Both parties agree and acknowledge that nothing in this
Agreement shall be deemed or construed to provide the other with any
manner of exclusivity.
7) ASSIGNABILITY: This Agreement shall not be assigned, sublicensed or
transferred by either party, without the prior written consent of the
other party, which shall not be unreasonably withheld or delayed. An
acquisition, merger or other change of control of either the Company or
AdStar shall not be deemed an assignment.
8) CONFIDENTIALITY: Each party acknowledges and agrees that any and all
information relating to the other party's business and not publicly known
including, without limitation, the contents of this Agreement, technical
processes and formulas, source codes, trade secrets, names, addresses and
information about users and advertisers, product designs, sales, costs and
other unpublished financial information, product plans, and marketing data
is confidential and proprietary information. Each party agrees that it
will not use or disclose any confidential or proprietary information for
any purpose other than in connection with the performance of and
obligations under the terms and conditions of this Agreement or as
required by a court of competent jurisdiction.
9) REPRESENTATIONS AND WARRANTIES, DISCLAIMERS, AND ADVERTISING
ACCEPTABILITY: Each party represents and warrants to the other that (a)
its Web site is a functional Internet site accessible to subscribers and
users of the Internet; (b) it has the right and authority to enter into
and perform all obligations under this Agreement; and (c) its execution
and performance of this Agreement does not and will not violate any
agreement to which such party is bound. In the event of an error, delay,
defect, breakdown or failure of either party's Web site, that party's
obligation shall be limited to using its reasonable efforts to restore
its Web site to operation as soon as feasible.
THE COMPANY FURTHER REPRESENTS AND WARRANTS TO ADSTAR THAT THE COMPANY'S
WEB SITE DOES NOT AND WILL NOT CONTAIN ANY CONTENT, MATERIAL, OR
ADVERTISEMENT THAT INFRINGES ANY PROPRIETARY RIGHT OF ANY THIRD PARTY,
INCLUDING, WITHOUT LIMITATION, ANY COPYRIGHT, TRADEMARK, PATENT OR TRADE
SECRET, OR THAT VIOLATES ANY LAW OR GOVERNMENTAL REGULATION. ADSTAR DOES
NOT CREATE THE ADVERTISEMENTS OR OTHER MATERIAL WHICH ORIGINATE THROUGH
THE SERVICE NOR DOES IT REVIEW OR EXERCISE CONTROL OVER THE CONTENT OF
SUCH MATERIAL, AND, CONSEQUENTLY, ALL CONTENT, MATERIAL, AND
ADVERTISEMENTS COMING THROUGH THE SERVICE ARE PROVIDED AS IS, AND ADSTAR
EXPRESSLY DISCLAIMS ANY RESPONSIBILITY FOR THE ACCURACY, QUALITY OR NATURE
OF SUCH CONTENT, MATERIAL, AND ADVERTISEMENTS.
THE COMPANY AND ADSTAR RESERVE THE RIGHT TO REFUSE TO DISPLAY ANY
ADVERTISEMENT, INCLUDING, WITHOUT LIMITATION, ANY ADVERTISEMENT THAT: WOULD
OR MIGHT VIOLATE ANY LAW OR GOVERNMENTAL REGULATION; WOULD OR MIGHT
VIOLATE OR INFRINGE ANY RIGHT OF ANY THIRD PARTY; IT DETERMINES IS
INAPPROPRIATE OR MIGHT SUBJECT IT TO LIABILITY OR ADVERSE PUBLICITY; OR IS
OTHERWISE INJURIOUS TO ITS INTERESTS; PROVIDED THAT, NEITHER PARTY
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<PAGE> 3
shall be responsible for, or obligated to review, any content,
advertisement, or other material on the other's Web site.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND
EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, AND IMPLIED WARRANTIES ARISING FROM
COURSE OF DEALING OR COURSE OF PERFORMANCE.
10) INDEMNITY: Each party will defend, indemnify, save and hold harmless the
other party, AdStar's clients and Company Affiliates, and their officers,
directors, agents and employees, from any and all third-party claims,
demands, liabilities, costs or expenses, including, without limitation,
reasonable attorneys' fees ("Liabilities"), resulting from the
indemnifying party's breach of any representation or warranty contained in
this Agreement. Each party agrees to (a) promptly notify the other party
in writing of any indemnifiable claim or demand and (b) give the other
party the opportunity to defend or negotiate a settlement of any such
claim or demand at such other party's expense and cooperate fully with the
other party, at that other party's expense, in defending or settling such
claim or demand. The indemnifying party will not settle a claim or demand
for the indemnified party without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld. Each
party reserves the right, at its own expense, to participate in the
defense of any matter otherwise subject to indemnification by the other
party.
11) LIMITATION OF LIABILITY: In no event will either party be liable to the
other party for consequential, incidental, special, punitive, exemplary,
or indirect damages, including, but not limited to, loss of profits or
sales or loss of or damage to data, regardless of the form of action,
whether in contract, tort, breach of warranty or otherwise, even if a
party has been advised of the possibility thereof. Moreover, except for
the indemnification obligations and charge back allowance and liability
described above, in no event shall the maximum liability of either party
arising out of or relating to the transaction which is the subject matter
of this Agreement, regardless of cause, exceed the amounts payable by the
Company to AdStar under this Agreement.
12) TERM AND TERMINATION: The initial term of this Agreement will be for the
period of three (3) years from the Effective Date and will automatically
renew for successive one year periods unless terminated by either party.
Either party may terminate this Agreement after the initial term for any
reason on ninety (90) days' prior written notice. Notwithstanding the
foregoing, either party may terminate this Agreement with immediate effect
if the other party is in breach of a material obligation hereunder and
fails to cure such breach within ninety (90) days of notice from the
non-breaching party or fails to promptly after notice from the
non-breaching party begin to cure such breach and diligently pursue its
cure if such breach is curable but is not capable of being cured within
ninety (90) days of notice from the non-breaching party. Upon termination,
each party shall promptly return to the other all of the confidential
information (as defined above) of the other party in its possession or
control. Sections 5, 8, 9, 10, 11, 12, 13 and 14 shall survive termination
or expiration.
14) GENERAL PROVISIONS:
14.1 AMENDMENT: No change, amendment or modification of any
provision of this Agreement shall be valid unless set forth
in a written instrument signed by both parties.
14.2 ENTIRE AGREEMENT: This Agreement sets forth the entire agreement
and supersedes any prior agreements, written or oral, of the
parties with respect to the transactions set forth herein.
14.3 CONSTRUCTION: In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be
construed, or if any such provision is held invalid by a court
with jurisdiction over the parties to this Agreement, such
provision shall be deemed to be restated to reflect as nearly as
possible the original intentions of the parties in accordance
with the applicable
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<PAGE> 4
law, and the remainder of this Agreement shall remain in full force and effect.
There shall be no presumption for or against either party as a result of such
party being the principal drafter of this Agreement.
14.4 Independent Contractors: The parties to this Agreement are independent
contractors. Neither party is an agent, representative, or partner of the other
party. Neither party shall have any right, power or authority to enter into any
agreement for, or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other party. This Agreement shall not be interpreted or
construed to create an association, agency, joint venture or partnership
between the parties or to impose any liability attributable to such a
relationship upon either party.
14.5 Governing Law: The Agreement will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflicts of law.
14.6 Arbitration: A. In the event of any disagreement, controversy or dispute
regarding performance under or interpretation of this Agreement, the parties
agree to attempt to reach a negotiated resolution. If such dispute remains
unresolved for a period of thirty (30) days after one party has provided written
notice of the dispute to the other, then each party shall designate an officer
to meet to endeavor to resolve the dispute. Arbitration in accordance with this
section may not be commenced by either party until said officers determine in
good faith that a negotiated resolution is unlikely, or the passage of thirty
(30) days from their first meeting, whichever occurs later.
Upon the expiration of said thirty (30) day period, if a negotiated resolution
has not been reached, the disagreement, controversy or dispute shall be settled
by binding arbitration in accordance with the commercial arbitration rules of
the American Arbitration Association and judgement upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof. The
arbitration shall be conducted in New York, NY by three arbitrators. One
arbitrator shall be selected by AdStar, one arbitrator shall be selected by
Company and the third arbitrator shall be selected by the American Arbitration
Association and shall be subject to approval by both AdStar and Company.
AdStar and Company intend that this provision for settling disputes be
irrevocable.
14.7 Attorney's Fees: In any action or proceeding to enforce any of the terms or
provisions of this Agreement or an account of the breach hereof, the party
prevailing shall be entitled to recover all its expenses, including, without
limitation, reasonable attorney's fees from the other party.
14.8 Notice: Any notices herein shall be given to the appropriate party at the
address specified above or at such address as the party shall specify in
writing. Notice shall be deemed given: upon personal delivery; if sent by fax,
upon confirmation of receipt; or if sent by certified or registered mail,
postage prepaid, five (5) days after the date of mailing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above:
FOR COMPANY: FOR ADSTAR:
Landon Media Group, Inc. AdStar.com, Inc.
By: By:
Name: Name: Adam Leff
--------------------------- ---------------------------
Title: Executive Vice President Title: SVP, Business Development
--------------------------- -----------------------------------
9/3/99 9/3/99
<PAGE> 5
ATTACHMENT A -- RESPONSIBILITIES OF THE PARTIES
Company Shall:
a) promote the Service to its Users via its field based sales force, through
e-mails, updates and other market materials and communications.
b) promote the Service via a link(s), from the RecruitmentMarketPlace
homepage(s) to the Service. This link shall receive premium positioning and
in no case will another link be featured more prominently. The Service will
also be linked to from other appropriate areas of RecruitmentMarketPlace. In
addition, Company will use best efforts to promote the Service with banners
and promotional listings within appropriate areas of its site.
c) Use best efforts to solicit publishers to join the AdStar Service.
ADSTAR Shall:
a) provide Company with the ability to sell Ads via the Service from links from
Company's RecruitmentMarketPlace. AdStar shall also provide Company with
reports to track Ads sold via its RecruitmentMarketPlace.
b) Support Company's efforts to solicit publishers to join the AdStar Service,
with marketing materials, pricing information and other reasonable support.
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<PAGE> 6
ATTACHMENT B -- SHARE OF ADVERTISING REVENUE
AD-STAR ADVERTISING REVENUE SHARE for providing Service are as follows:
1. AdStar receives a percentage or per ad fee for of all advertising revenue
generated through the Service.
2. When Users originate from Company's Web site, RecruitmentMarketPlace, and
purchase Ads via Service, Company will receive half of the net AdStar
advertising revenue share. Net AdStar Advertising revenue share excludes all
merchant, ACH, online processing and distribution fees described below. So
for example, if AdStar receives 10% of a $100 classified Ad originating from
RecruitmentMarketPlace, AdStar's advertising revenue share for the Service
would be $10.00. Since in this example the User originated from Company's
RecruitmentMarketPlace, Company would receive half of that amount or $5.00.
If the User originated from another source, Company would not receive any
compensation. If the publisher of the $100 classified Ad is subject to a
distribution fee, that amount would be netted from the $10.00 before
Company's share would be calculated.
MERCHANT, ACH ONLINE PROCESSING AND DISTRIBUTION FEES for Service, which are
deducted from the Advertising revenue before calculating Company's share are as
follows:
1. Credit card process fees are $.80 per transaction for online clearing plus
the credit card discount --
- MasterCard/Visa 3.05%
- American Express 3.75%
- Diners Club 2.80%
- JCB 2.75%
2. ACH process fees --
- 1.25% of transaction with a $1.25 minimum per transaction
Other fees --
- ACH refund $2.00
- ACH return item $10.00
- ACH Notice of change $2.50
3. Reserves for credit card charge backs and adjustments -- three percent (3%)
of the total advertising revenues for a rolling twelve (12) months will be
held in reserve to handle charge backs and adjustments. This reserve will
serve to reduce fluctuations in monthly payments and may be adjusted from
time to time with written notice to more accurately reflect the actual charge
back and adjustment experience. Sole liability for charge backs and
adjustments remain with the publisher of the Ads. Note that Company's share
of advertising revenue paid out may be adjusted to account for their share
charge backs and adjustments which have occurred.
4. Distribution fees -- certain publications are subject to distribution fees,
which may range from 25% to 33% of the AdStar Advertising revenue share. This
fee must be netted out prior to calculation of Company's share of AdStar's
Advertising revenue share.
6
<PAGE> 1
EXHIBIT 10.20
DISTRIBUTION AND SERVICE AGREEMENT
- --------------------------------------------------------------------------------
This Distribution and Service Agreement ("Agreement") is made and entered into
between AdStar.com, Inc., a Delaware Corporation ("AdStar") with offices at
4553 Glencoe Avenue, Suite 325, Marina del Rey, CA 90292 and CareerEngine, a New
York Corporation (the "Company"), with offices at 2 World Trade Center, Suite
2112, New York, NY 10048 as of August 30, 1999 ("Effective Date").
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
conditions herein contained, ADSTAR and the Company agree as follows:
1) Purpose: Company provides a network of category specific career advertising
Web sites ("CareerEngine Network") on the World Wide Web part of the
Internet ("www.CareerEngine.com") for employers ("Users") to connect with
job seekers ("Consumers"). AdStar provides an Internet based marketplace
for the buying and selling of classified advertising ("Advertise123.com")
for its media and advertisers clients. The parties wish to incorporate the
Advertise123.com service ("Service") into Company's Web site for the
purpose of allowing employers to purchase ads on Company's Web site and
other related sites and to make Company's advertising accessible from
Advertise123.com.
2) Responsibilities of the Parties:
The responsibilities of the parties are detailed in Attachment A.
3) General:
3.1 Each party shall be solely responsible for supplying and managing
its own Web site at its own expense and neither party shall have
any obligation or liability whatsoever with respect to the Web
site of the other. Each party shall manage, review, delete, edit,
create, update and otherwise manage all content and services
available on or through its respective Web site.
3.2 Each party shall promptly inform the other of (a) any
information related to its Web site that could reasonably be
anticipated to lead to a claim, demand, or liability of or
against the other party by any third party, (b) any changes to
its Web site which would substantially change the content in any
area to which the other party has linked, and (c) any changes in
its Web site which would substantially change the page(s) in
which links to the other party appear.
3.3 AdStar grants to the Company during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to use
its trade names, trademarks, service names and service marks
("AdStar Marks") for promotion in connection with this Agreement,
subject to the following conditions: (a) the Company shall comply
with all guidelines that AdStar may provide from time to time;
(b) the look and feel, the use of all logos, the design, and the
overall quality of the AdStar Marks shall be subject to AdStar's
approval; (c) any use of the AdStar Marks shall inure to the
benefit of AdStar; and (d) the Company shall submit to AdStar for
its prior approval, not to be unreasonably withheld, all
advertising, promotional and other material bearing any AdStar
Marks.
3.4 The Company grants to AdStar during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to use
its trade names, trademarks, service names and service marks
("Company Marks") for promotion in connection with this
Agreement, subject to the following conditions: (a) AdStar shall
comply with all guidelines that the Company may provide from time
to time; (b) any use of the Company Marks shall inure to the
benefit of the Company; and (c) AdStar shall submit to Company
for its prior approval, not to be unreasonably withheld, all
advertising, promotional and other material bearing any Company
Marks.
3.5 Nothing in this Agreement shall be deemed to grant to the Company
any ownership interest in the AdStar Marks or to AdStar any
ownership interest in the Company Marks.
<PAGE> 2
4) Promotional Efforts: Each party will submit to the other party, for its
prior written approval, which shall not be unreasonably withheld or
delayed, all press releases, and marketing, advertising, and other
promotional materials that refer to the other party and/or its trade names,
trademarks, service names and service marks (the "Materials"). Copy
substantially similar to that already approved shall be deemed approved.
5) Fees, Share of Advertising Revenue and Payment: AdStar will pay Company
advertising revenues earned and actually received, less advertising
percentage shares and applicable fees, in a calendar month within thirty
(30) days of the end of that calendar month. Each party will provide the
other party with a monthly report with all information necessary to show
the basis on which advertising revenues and fee payments are calculated in
accordance with this Agreement. Each party will have the right, at its own
expense, to inspect and audit the accounting books and records of the other
party that are specifically relevant to the determination of advertising
percentage shares, fees and payments due under this Agreement. In the event
such inspection and audit shows a discrepancy in payments in the recipient
party's disfavor of five percent (5%) or more, then the other party shall
promptly reimburse the recipient party for the costs and expense of such
inspection and audit and pay the amount of any underpayment. AdStar
applicable fees and share of revenue which will be deducted from
advertising revenues include:
a) The AdStar advertising percentage shares, which are defined
in Attachment B;
b) The merchant and ACH online processing fees, which are defined
in Attachment B;
c) a reserve for credit card charge backs of three percent (3%) of
the total advertising revenues for a rolling twelve (12) months.
This reserve will serve to reduce fluctuations in monthly
payments and may be adjusted from time to time with written
notice to more accurately reflect the actual charge back
experience. Sole liability for chargebacks will remain with the
Company.
6) Data Ownership and Usage: Company will own the data relating to its User
advertising and grant AdStar a royalty free world wide right to use its
data, which originates through the Service, for purposes other than for
publishing for Consumers to search and locate employers or for Users to
connect with Consumers. In addition, AdStar will not individually identify
Company data, other than anonymously as in peer group analysis.
7) Non-Exclusivity: Both parties agree and acknowledge that nothing in this
Agreement shall be deemed or construed to provide the other with any manner
of exclusivity.
8) Assignability: This Agreement shall not be assigned, sublicensed or
transferred by either party, without the prior written consent of the other
party, which shall not be unreasonably withheld or delayed. An acquisition,
merger or other change of control of either the Company or AdStar shall not
be deemed an assignment.
9) Confidentiality: Each party acknowledges and agrees that any and all
information relating to the other party's business and not publicly known
including, without limitation, the contents of this Agreement, technical
processes and formulas, source codes, trade secrets, names, addresses and
information about users and advertisers, product designs, sales, costs and
other unpublished financial information, product plans, and marketing data
is confidential and proprietary information. Each party agrees that it will
not use or disclose any confidential or proprietary information for any
purpose other than in connection with the performance of and obligations
under the terms and conditions of this Agreement or as required by a court
of competent jurisdiction.
10) Representations and Warranties, Disclaimers, and Advertising Acceptability:
Each party represents and warrants to the other that (a) its Web site is a
functional Internet site accessible to subscribers and users of the
Internet; (b) it has the right and authority to enter into and perform all
obligations under this Agreement; and (c) its execution and performance of
this Agreement does not and will not violate any agreement to which such
party is bound. In the event of an error, delay, defect, breakdown or
failure of either party's Web site, that party's obligation shall be
limited to using its reasonable efforts to restore its Web site to
operation as soon as feasible.
2
<PAGE> 3
The Company further represents and warrants to AdStar that the Company's Web
site does not and will not contain any content, material, or advertisement
that infringes any proprietary right of any third party, including without
limitation, any copyright, trademark, patent or trade secret, or that
violates any law or governmental regulation. AdStar does not create the
advertisements or other material which originate through the Service, nor
does it review or exercise control over the content of such material, and,
consequently, all content, material, and advertisements coming through the
Service are provided AS IS, and AdStar expressly disclaims any
responsibility for the accuracy, quality or nature of such content,
material, and advertisements.
The Company and AdStar reserve the right to refuse to display any
advertisement, including, without limitation, any advertisement that; would
or might violate any law or governmental regulation; would or might violate
or infringe any right of any third party, it determines is inappropriate or
might subject it to liability or adverse publicity; or is otherwise
injurious to its interests; provided that, neither party shall be
responsible for, or obligated to review, any content, advertisement, or
other material on the other's Web site.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER, PARTY MAKES, AND
EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, AND IMPLIED WARRANTIES ARISING FROM COURSE
OF DEALING OR COURSE OF PERFORMANCE.
11) Indemnity: Each party will defend, indemnify, save and hold harmless the
other party, AdStar's clients and Company Affiliates, and their officers,
directors, agents and employees, from any and all third-party claims,
demands, liabilities, costs or expenses, including, without limitation,
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
party's breach of any representation or warranty contained in this
Agreement. Each party agrees to (a) promptly notify the other party in
writing of any indemnifiable claim or demand and (b) give the other party
the opportunity to defend or negotiate a settlement of any such claim or
demand at such other party's expense and cooperate fully with the other
party, at that other party's expense, in defending or settling such claim
or demand. The indemnifying party will not settle a claim or demand for the
indemnified party without the prior written consent of the indemnified
party, which consent shall not be unreasonably withheld. Each party reserves
the right, at its own expense, to participate in the defense of any matter
otherwise subject to indemnification by the other party.
12) Limitation of Liability: In no event will either party be liable to the
other party for consequential, incidental, special, punitive, exemplary, or
indirect damages, including, but not limited to, loss of profits or sales or
loss of or damage to data, regardless of the form of action, whether in
contract, tort, breach of warranty or otherwise, even if a party has been
advised of the possibility thereof. Moreover, except for the indemnification
obligations and charge back allowance and liability described above, in no
event shall the maximum liability of either party arising out of or relating
to the transaction which is the subject matter of this Agreement, regardless
of cause, exceed the amounts payable by the Company to AdStar under this
Agreement.
13) Term and Termination: The initial term of this Agreement will be for the
period of one (1) year from the Effective Date and will automatically renew
for successive one year periods unless terminated by either party. Either
party may terminate this Agreement after the initial term for any reason on
ninety (90) days' prior written notice. Notwithstanding the foregoing,
either party may terminate this Agreement with immediate effect if the other
party is in breach of a material obligation hereunder and fails to cure such
breach within ninety (90) days of notice from the non-breaching party or
fails to promptly after notice from the non-breaching party begin to cure
such breach and diligently pursue its cure if such breach is curable but
is not capable of being cured within ninety (90) days of notice from the
non-breaching party. Upon termination, each party shall promptly return to
the other all of the confidential information (as defined above) of the
other party in its possession or control. Sections 5, 8, 9, 10, 11, 12, 13
and 14 shall survive termination or expiration.
3
<PAGE> 4
14) General Provisions:
14.1 Amendment: No change, amendment or modification of any provision of
this Agreement shall be valid unless set forth in a written instrument
signed by both parties.
14.2 Entire Agreement: This Agreement sets forth the entire agreement and
supersedes any prior agreements, written or oral, of the parties with
respect to the transactions set forth herein.
14.3 Construction: In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be construed, or if
any such provision is held invalid by a court with jurisdiction over the
parties to this Agreement, such provision shall be deemed to be restated to
reflect as nearly as possible the original intentions of the parties in
accordance with the applicable law, and the remainder of this Agreement
shall remain in full force and effect. There shall be no presumption for or
against either party as a result of such party being the principal drafter
of this Agreement.
14.4 Independent Contractors: The parties to this Agreement are independent
contractors. Neither party is an agent, representative, or partner of the
other party. Neither party shall have any right, power or authority to
enter into any agreement for, or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other party. This Agreement shall
not be interpreted or construed to create an association, agency, joint
venture or partnership between the parties or to impose any liability
attributable to such a relationship upon either party.
14.5 Governing Law: This Agreement will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
principles of conflicts of law.
14.6 Arbitration: A. In the event of any disagreement, controversy or
dispute regarding performance under or interpretation of this Agreement,
the parties agree to attempt to reach a negotiated resolution. If such
dispute remains unresolved for a period of thirty (30) days after one party
has provided written notice of the dispute to the other, then each party
shall designate an officer to meet to endeavor to resolve the dispute.
Arbitration in accordance with this section may not be commenced by either
party until said officers determine in good faith that a negotiated
resolution is unlikely, or the passage of thirty (30) days from their first
meeting, whichever occurs later.
Upon the expiration of said thirty (30) day period, if a negotiated
resolution has not been reached, the disagreement, controversy or dispute
shall be settled by binding arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association and judgement
upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. The arbitration shall be conducted in New
York, NY by three arbitrators. One arbitrator shall be selected by AdStar,
one arbitrator shall be selected by Company and the third arbitrator shall
be selected by the American Arbitration Association and shall be subject to
approval by both AdStar and Company.
AdStar and Company intend that this provision for settling disputes be
irrevocable.
14.7 Attorney's Fees: In any action or proceeding to enforce any of the
terms or provisions of this Agreement or on account of the breach hereof,
the party prevailing shall be entitled to recover all its expenses,
including, without limitation, reasonable attorney's fees from the other
party.
14.8 Notice: Any notices herein shall be given to the appropriate party at
the address specified above or at such address as the party shall specify
in writing. Notice shall be deemed given: upon personal delivery; if sent
by fax, upon confirmation of receipt; or if sent by certified or registered
mail, postage prepaid, five (5) days after the date of mailing.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
For Company: For AdStar:
CareerEngine AdStar.com, Inc.
By: By:
------------------------------- --------------------------------
Name: Name: Adam Leff
----------------------------- ------------------------------
Title: President Title: SVP Business Development
---------------------------- -----------------------------
9/15/99 8/30/99
<PAGE> 6
ATTACHMENT A -- RESPONSIBILITIES OF THE PARTIES
Company Shall:
a) promote the AdStar enabled Web ad taking capability to its Users through
e-mails, updates and other communications to its Affiliates. Company will use
its customer service workers or other qualified representatives to enlist its
Affiliates in the program. Company will include the ad taking capability into
its basic service for all new Company Affiliates.
b) publish the ads delivered to them via the Service, in accordance with what
the Users have paid for, such as appropriate placement and frequency.
c) will promote the Service to the Users of its Web site with prominently
displayed buttons or links from the home pages of the CareerEngine Network.
These permanent buttons will link to the ad taking Web pages. In addition,
Company will use best efforts to promote the service with banners and
promotional listings within the search results and other appropriate areas of
its site.
ADSTAR Shall:
a) provide Company with the ability to take ads via the Web through the Service
into the CareerEngine Network. These ads will be pre-paid and conform to the
reasonable pricing instructions from the Company. AdStar will deliver the
advertising coming through the Service to Company publication via e-mail or
FTP.
b) support and maintain the Company ad taking functionality including hosting of
the Company ad taking Web pages. AdStar will provide reasonable telephone and
e-mail support for Users with regard to the Service at 310-577-8255 during
normal business hours, Pacific Standard Time.
<PAGE> 7
ATTACHMENT B - FEES AND SHARES OF ADVERTISING REVENUE
AD-STAR ADVERTISING PERCENTAGE SHARES for providing Service are as follows:
1. AdStar receives 10% of all advertising revenue generated through the
Service when User comes from CareerEngine Network
2. AdStar receives 35% of all advertising revenue generated through the
Service when User comes from Advertise123.com
MERCHANT AND ACH ONLINE PROCESSING FEES for Service, which are in addition to
the AdStar advertising percentage shares and reserve for credit card charge
backs, are as follows:
1. Credit card process fees are $.80 per transaction for online clearing
plus the credit card discount -
- MasterCard/ Visa 3.05%
- American Express 3.75%
- Diners Club 2.80%
- JCB 2.75%
2. ACH process fees -
- 1.25% of transaction with a $1.25 minimum per transaction
Other fees -
- ACH refund $2.00,
- ACH return item $10.00
- ACH Notice of change $2.50
<PAGE> 1
EXHIBIT 10.21
DISTRIBUTION AND SERVICE AGREEMENT
- --------------------------------------------------------------------------------
This Distribution and Service Agreement ("Agreement") is made and entered into
between AdStar.com, Inc., a Delaware Corporation ("AdStar") with offices at
4553 Glencoe Avenue, Suite 325, Marina del Rey, CA 90292 and CareerPath.com a
Delaware Corporation (the "Company"), with offices at 10880 Wilshire Boulevard,
Suite 600, Los Angeles, CA 90024 as of August 27, 1999 ("Effective Date").
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
conditions herein contained, ADSTAR and the Company agree as follows:
1) Purpose: Company provides a career advertising Web site ("CareerPath.com")
on the World Wide Web part of the Internet for employers ("Users") to
connect with job seekers ("Consumers"). AdStar provides an Internet based
marketplace for the buying and selling of classified advertising
("Advertise123.com") for its media and advertisers clients. The parties
wish to make Company's online job listing advertising opportunity ("Ads")
accessible from Advertise123.com and a network of related sites (the
"Service") for the purpose of allowing Users to purchase Ads on
CareerPath.com.
2) Responsibilities of the Parties:
The responsibilities of the parties are detailed in Attachment A.
3) General:
3.1 Each party shall be solely responsible for supplying and
managing its own Web site at its own expense and neither party
shall have any obligation or liability whatsoever with respect
to the Web site of the other. Each party shall manage, review,
delete, edit, create, update and otherwise manage all content
and services available on or through its respective Web site.
3.2 Each party shall promptly inform the other of (a) any
information related to its Web site that could reasonably be
anticipated to lead to a claim, demand, or liability of or
against the other party by any third party, (b) any changes to
its Web site which would substantially change the content in any
area to which the other party has linked, and (c) any changes in
its Web site which would substantially change the page(s) in
which links to the other party appear.
3.3 AdStar grants to the Company during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to use
its trade names, trademarks, service names and service marks
("AdStar Marks") for promotion in connection with this
Agreement, subject to the following conditions: (a) the Company
shall comply with all guidelines that AdStar may provide from
time to time; (b) the look and feel, the use of all logos, the
design, and the overall quality of the AdStar Marks shall be
subject to AdStar's approval; (c) any use of the AdStar Marks
shall inure to the benefit of AdStar; and (d) the Company shall
submit to AdStar for its prior approval, not to be unreasonably
withheld, all advertising, promotional and other material
bearing any AdStar Marks.
3.4 The Company grants to AdStar during the term of this Agreement a
non-exclusive, royalty-free, world-wide right and license to
use its trade names, trademarks, service names and service marks
("Company Marks") for promotion in connection with this, subject
to the following conditions: (a) AdStar shall comply with all
guidelines that the Company may provide from time to time; (b)
any use of the Company Marks shall inure to the benefit of the
Company; and (c) AdStar shall submit to Company for its prior
approval, not to be unreasonably withheld, all advertising,
promotional and other material bearing any Company Marks.
3.5 Nothing in this Agreement shall be deemed to grant to the
Company any ownership interest in the AdStar Marks or to AdStar
any ownership interest in the Company Marks.
4) Promotional Efforts: Each party will submit to the other party, for its
prior written approval, which shall not be unreasonably withheld or
delayed, all press releases, and marketing, advertising, and other
promotional materials that refer to the other party and/or its trade
names, trademarks, service names and service marks (the "Materials").
Copy substantially similar to that already approved shall be deemed
approved.
<PAGE> 2
5) Fees, Share of Advertising Revenue and Payment: AdStar will pay Company
advertising revenues earned and actually received for Ads on Company's Web
site, less advertising percentage shares and applicable fees, in a calendar
month within thirty (30) days of the end of that calendar month. Each party
will provide the other party with a monthly report with all information
necessary to show the basis on which advertising revenues and fee payments
are calculated in accordance with this Agreement. Each party will have the
right, at its own expense, to inspect and audit the accounting books and
records of the other party that are specifically relevant to the
determination of advertising percentage shares, fees and payments due under
this Agreement. In the event such inspection and audit shows a discrepancy
in payments in the recipient party's disfavor of five percent (5%) or more,
then the other party shall promptly reimburse the recipient party for the
costs and expense of such inspection and audit and pay the amount of any
underpayment. AdStar applicable fees and share of revenue which will be
deducted from advertising revenues include:
a) The Ad-Star advertising percentage shares, which are defined in
Attachment B;
b) The merchant and ACH online processing fees, which are defined in
Attachment B;
c) a reserve for credit charge backs of three percent (3%) of the
total advertising revenues for a rolling twelve (12) months. This
reserve will serve to reduce fluctuations in monthly payments and
may be adjusted from time to time with written notice to more
accurately reflect the actual charge back experience. Sole
liability for chargebacks will remain with the Company.
6) Data Ownership and Usage: Company will own the data generated by its Users
generated through the Service, such as the Users name, billing address and
ad content. Company grants AdStar a royalty free world wide right to use
its data, which originates through the Service, for purposes other than
Consumer searches to locate prospective employers. Some examples of such
non-Consumer use of this data includes providing data along with other
publisher data in aggregate to determine average advertising expenditure by
job title, industry or geography. In addition, AdStar will not individually
identify Company data, other than anonymously as in peer group analysis.
7) Non-Exclusivity: Both parties agree and acknowledge that nothing in this
Agreement shall be deemed or construed to provide the other with any manner
of exclusivity.
8) Assignability: This Agreement shall not be assigned, sublicensed or
transferred by either party, without the prior written consent of the other
party, which shall not be unreasonably withheld or delayed. An acquisition,
merger or other change of control of either the Company or AdStar shall not
be deemed an assignment.
9) Confidentiality: Each party acknowledges and agrees that any and all
information relating to the other party's business and not publicly known
including, without limitation, the contents of this Agreement, technical
processes and formulas, source codes, trade secrets, names, addresses and
information about users and advertisers, product designs, sales, costs and
other unpublished financial information, product plans, and marketing data
is confidential and proprietary information. Each party agrees that it will
not use or disclose any confidential or proprietary information for any
purpose other than in connection with the performance of and obligations
under the terms and conditions of this Agreement or as required by a court
of competent jurisdiction.
10) Representations and Warranties, Disclaimers, and Advertising Acceptability:
Each party represents and warrants to the other that (a) its Web site is a
functional Internet site accessible to subscribers and users of the
Internet; (b) it has the right and authority to enter into and perform all
obligations under this Agreement; and (c) its execution and performance of
this Agreement does not and will not violate any agreement to which such
party is bound. In the event of an error, delay, defect, breakdown or
failure of either party's Web site, that party's obligation shall be
limited to using its reasonable efforts to restore its Web site to
operation as soon as feasible.
The Company further represents and warrants to AdStar that the Company's
Web site does not and will not contain any content, material, or
advertisement that infringes any proprietary right of any third party,
including, without limitation, any copyright, trademark, patent or trade
secret, or that violates any law or governmental regulation. AdStar does
not create the advertisements or other material which originate through the
Service, nor does it review or exercise control over the content of such
material, and consequently, all content, material and advertisements coming
through the Service are provided
<PAGE> 3
AS IS and AdStar expressly disclaims any responsibility for the accuracy,
quality or nature of such content, material and advertisements.
The Company and AdStar reserve the right to refuse to display any
advertisement, including without limitation, any advertisement that: would
or might violate any law or governmental regulation; would or might violate
or infringe any right of any third party; it determines is inappropriate or
might subject it to liability or adverse publicity; or its otherwise
injurious to its interests; provided that, neither party shall be
responsible for, or obligated to review any content, advertisement or other
material on the other's Web site.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND
EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT,
INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, AND IMPLIED WARRANTIES ARISING FROM COURSE
OF DEALING OR COURSE OF PERFORMANCE.
11) Indemnity: Each party will defend, indemnify, save and hold harmless the
other party, AdStar's clients and Company Affiliates, and their officers,
directors, agents and employees, from any and all third-party claims,
demands, liabilities, costs or expenses, including, without limitation,
reasonable attorneys' fees ("Liabilities"), resulting from the indemnifying
party's breach of any representation or warranty contained in this
Agreement. Each party agrees to (a) promptly notify the other party in
writing of any indemnifiable claim or demand and (b) give the other party
the opportunity to defend or negotiate a settlement of any such claim or
demand at such other party's expense and cooperate fully with the other
party, at that other party's expense, in defending or settling such claim or
demand. The indemnifying party will not settle a claim or demand for the
indemnified party without the prior written consent of the indemnified
party, which consent shall not be unreasonably withheld. Each party reserves
the right, at its own expense, to participate in the defense of any matter
otherwise subject to indemnification by the other party.
12) Limitation of Liability: In no event will either party be liable to the
other party for consequential, incidental, special, punitive, exemplary, or
indirect damages, including but not limited to, loss of profits or sales or
loss of or damage to data, regardless of the form of action, whether in
contract, tort, breach of warranty or otherwise, even if a party has been
advised of the possibility thereof. Moreover, except for the indemnification
obligations and charge back allowance and liability described above, in no
event shall the maximum liability of either party arising out of or relating
to the transaction which is the subject matter of this Agreement, regardless
of cause, exceed the amounts payable by the Company to AdStar under this
Agreement.
13) Term and Termination: The initial term of this agreement will be for the
period of one (1) year from the Effective Date and will automatically renew
for successive one year periods unless terminated by either party. Either
party may terminate this Agreement after the initial term for any reason on
ninety (30) days' prior written notice. Notwithstanding the foregoing,
either party may terminate this Agreement with immediate effect if the other
party is in breach of a material obligation hereunder and fails to cure such
breach within thirty (30) days of notice from the non-breaching party or
fails to promptly after notice from the non-breaching party begin to cure
such breach and diligently pursue its cure if such breach is curable but is
not capable of being cured within thirty (30) days of notice from the
non-breaching party. Upon termination, each party shall promptly return to
the other all of the confidential information (as defined above) of the
other party in its possession or control. Section 5, 8, 9, 10, 11, 12, 13
and 14 shall survive termination or expiration.
14) General Provisions:
14.1 Amendment: No change, amendment or modification of any provision of
this Agreement shall be valid unless set forth in a written instrument
signed by both parties.
14.2 Entire Agreement: This Agreement sets forth the entire agreement and
supersedes any prior agreements, written or oral, of the parties with
respect to the transactions set forth herein.
<PAGE> 4
14.3 Construction: In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be construed, or
if any such provision is held invalid by a court with jurisdiction over the
parties to this Agreement, such provision shall be deemed to be restated to
reflect as nearly as possible the original intentions of the parties in
accordance with the applicable law, and the remainder of this Agreement
shall remain in full force and effect. There shall be no presumption for or
against either party as a result of such party being the principal drafter
of this Agreement.
14.4 Independent Contractors: The parties to this Agreement are independent
contractors. Neither party is an agent, representative, or partner of the
other party. Neither party shall have any right, power or authority to
enter into any agreement for, or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other party. This Agreement shall
not be interpreted or construed to create an association, agency, joint
venture or partnership between the parties or to impose any liability
attributable to such a relationship upon either party.
14.5 Governing Law: This Agreement will be governed by and construed in
accordance with the laws of the State of California, without giving effect
to principles of conflicts of law.
14.6 Arbitration: A. In the event of any disagreement, controversy or
dispute regarding performance under or interpretation of this Agreement,
the parties agree to attempt to reach a negotiated resolution. If such
dispute remains unresolved for a period of thirty (30) days after one party
has provided written notice of the dispute to the other, then each party
shall designate an officer to meet to endeavor to resolve the dispute.
Arbitration in accordance with this section may not be commenced by either
party until said officers determine in good faith that a negotiated
resolution is unlikely, or the passage of thirty (30) days from their first
meeting, whichever occurs later.
Upon the expiration of said thirty (30) day period, if a negotiated
resolution has not been reached, the disagreement, controversy or dispute
shall be settled by binding arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association and judgement
upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. The arbitration shall be conducted in Los
Angeles, CA by three arbitrators. One arbitrator shall be selected by
AdStar, one arbitrator shall be selected by Company and the third
arbitrator shall be selected by the American Arbitration Association and
shall be subject to approval by both AdStar and Company.
AdStar and Company intend that this provision for settling disputes be
irrevocable.
14.7 Attorney's Fees: In any action or proceeding to enforce any of the
terms or provisions of this Agreement or on account of the breach hereof,
the party prevailing shall be entitled to recover all its expenses,
including, without limitation, reasonable attorney's fees from the other
party.
14.8 Notice: Any notices herein shall be given to the appropriate party at
the address specified above or at such address as the party shall specify
in writing. Notice shall be deemed given: upon personal delivery; if sent
by fax, upon confirmation of receipt; or if sent by certified or registered
mail, postage prepaid, five (5) days after the date of mailing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
For Company: For AdStar:
CareerPath.com AdStar.com, Inc.
By: By:
Name: Name: /s/ Adam Leff
------------------------------- -------------------------
Title: VP Finance Title: SVP Business Development
------------------------------ ------------------------
8/26/99 8/30/99
<PAGE> 5
ATTACHMENT A - RESPONSIBILITIES OF THE PARTIES
Company Shall:
a) publish the ads delivered to them via the Service, in accordance with what
the Users has paid for, such as appropriate placement and frequency.
ADSTAR Shall:
a) provide Company with the ability to sell Ads via the Web through
www.Advertise132.com and a network of related Web sites into the
CareerPath.com Web site. These Ads will be pre-paid and conform to the
reasonable pricing instructions from the Company. AdStar will deliver the Ads
coming through the Service to Company publication via e-mail or FTP, in a
format specified by company.
b) support and maintain the Company Ad taking functionality on the Service.
AdStar will provide reasonable telephone and e-mail support for the Users
with regard to the Service at 310-577-8255 during normal business hours,
Pacific Standard Time.
<PAGE> 6
Attachment B - Fees and Share of Advertising Revenue
Ad-Star advertising percentage shares for providing Service are as follows:
1. AdStar receives 10% of all advertising revenue provided from Service when
User comes from Advertise123.com or its related network of Web sites.
Merchant and ACH online processing fees for Service, which are in addition to
the AdStar advertising percentage shares and reserve for credit card charge
backs, are as follows:
1. Credit card process fees are 5.80 per transaction for online clearing plus
the credit card discount -
* MasterCard/Visa 3.05%
* American Express 3.75%
* Diners Club 2.80%
* JCB 2.75%
2. ACH process fees -
* 1.25% of transaction with a $1.25 minimum per transaction
Other fees -
* ACH refund $2.00
* ACH return item $10.00
* ACH Notice of change $2.50
<PAGE> 1
EXHIBIT 10.22
ENGAGEMENT AGREEMENT
August 24, 1999
Mr. B.J. Douck
Senior Vice President & CFO
AdStar.com, Inc.
4553 Glencoe Avenue, Suite 325
Marina del Ray, CA 90292
1. This letter agreement will confirm the understanding between AdStar.com,
Inc. and/or its affiliates and successors (the "Company" or "AdStar") and
RCG Capital Markets Group, Inc. ("RCG") with respect to the matters set
forth herein. RCG will provide consulting and other services, as more
particularly described herein and in the attachment hereto entitled
Financial Relations Services Attachment (the "Financial Relations
Services"), to the Company and will represent the Company during the
engagement as exclusive Financial Relations Consultants with respect to the
Financial Relations Services, on the terms and conditions set forth herein
and in the attachments hereto, all of which are incorporated herein by
reference and form a part hereof. The period during which RCG will perform
the Financial Relations Services for the Company will commence on the date
set forth below above the signatures of the parties hereto (the
"Commencement Date") and, unless otherwise terminated as provided in this
paragraph or in paragraph nine of this letter agreement, will terminate on
the date which is the first anniversary of the effective date of the
Company's initial public offering (the "Termination Date"). The period
beginning on the Commencement Date and ending on the Termination Date is
hereafter referred to as the "Engagement Term". As more particularly
described in paragraph 9 below, this agreement may be terminated by either
party at any time after the six month anniversary of the Commencement Date
upon thirty (30) days prior written notice to the other party.
2. During the Engagement Term, the Company agrees to furnish or cause to be
furnished to RCG all information concerning the Company as RCG reasonably
requests and deems appropriate for purposes of providing the Financial
Relations Services. The Company represents that all information, with
respect to the Company, provided to RCG will be complete and correct in all
material respects and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein not misleading in light of the circumstances under which
such statements are made. AdStar understands, that in rendering the
Financial Relations Services required hereunder, RCG will be using and
relying on publicly available information and the information furnished to
RCG by AdStar without independent verification thereof. RCG will treat as
confidential any non-public information provided to it hereunder and will
not disclose the same to third parties at any time unless required by
applicable law. In the event disclosure has been or will be made by RCG, RCG
will use its best efforts to cooperate as reasonably requested by the
Company in minimizing any potential loss or injury to the Company as a
consequence of any such necessary disclosure. In addition, RCG will comply
with all applicable state and Federal securities laws in the performance of
this agreement.
3. During the Engagement Term, RCG and its employees, consultants and
contractors will be available to AdStar in connection with its rendering of
the Financial Relations Services. Specifically, RCG (a) will outline,
develop and implement a financial relations program to assist the Company in
creating and/or enhancing a positive and more visible public image, (b) may
contact existing and future shareholders, broker/dealers, potential
investors, registered representatives, institutions, mutual fund managers,
investment banking sources, securities analysts, independent portfolio
managers, and other professional investment community contacts including
certain financial media sources for the purpose of enhancing the Company's
public image and perceived value, (c) will assist the Company in the
creation, production and distribution of certain financial markets and
investor/shareholder corporate image materials, including corporate
profiles, due diligence materials and investor packages, as well as all
financial press releases; (d) assist the Company in its endeavor to secure
<PAGE> 2
August 23, 1999
Page 2
research analyst coverage through a targeted securities professionals
campaign and (e) otherwise perform the services described in the
Financial Relations Services Attachment.
4. During the Engagement Term, the Company will afford RCG an opportunity
to review and/or comment on any disclosure, prior to its release, which
the Company plans to make to any of the sources described in paragraph
(3) and which relates to the Financial Relations Services to be provided
hereunder. In addition, RCG will be responsible for assisting the
Company in writing and/or editing, producing, coordinating and
disseminating all financial industry press releases. RCG agrees that it
will not release or distribute any press release without the Company's
prior consent.
5. In consideration of RCG's services hereunder, the Company agrees to pay
RCG, promptly when due, the Compensation as described by and in strict
accordance with the attachment hereto entitled Financial Relations
Compensation Attachment. Should RCG and the Company determine to extend
the Engagement Term or change the scope of the engagement, then a
mutually acceptable amendment or supplement to that attachment shall be
promptly executed by RCG and Company. Absent any such amendment, all
terms and conditions of this letter agreement shall be binding to the
parties. NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY,
ADSTAR SHALL NOT BE OBLIGATED TO PAY ANY OF THE COMPENSATION TO RCG
AFTER THIS LETTER AGREEMENT HAS BEEN TERMINATED EXCEPT THAT ADSTAR SHALL
ISSUE ANY OPTIONS THAT HAVE VESTED PRIOR TO SUCH TERMINATION PURSUANT TO
THE TERMS HEREOF AND RCG'S REGISTRATION RIGHTS WITH RESPECT TO ANY
OPTION SHARES UNDERLYING VESTED OPTIONS SHALL BE UNAFFECTED BY SUCH
TERMINATION.
6. RCG shall be entitled to such additional fees as may be mutually agreed
upon by separate agreement between the parties hereto, for additional
consulting services not anticipated in this letter agreement rendered
during the Engagement Term.
7. As more particularly set forth in the Financial Relations Compensation
Attachment, the Company agrees to pay all of RCG's out-of-pocket
expenses reasonably incurred in connection with the performance of the
Financial Relations Services. As set forth in the Financial Relations
Compensation Attachment, an expense retainer shall be utilized for this
purpose.
8. The Company and RCG agree to indemnify each other (the indemnifying
party hereafter being referred to as the "Indemnitor", and the party
entitled to indemnification hereafter being referred to as the
"Indemnitee") as follows: Indemnitor agrees to defend, indemnify and
hold harmless Indemnitee, and its officers, directors, and employees
against any and all losses, claims, demands, suits, actions, judgments,
awards, damages, liabilities, costs, reasonable attorneys' fees, and
expenses incurred in investigating, preparing or defending any such
action or claim, directly or indirectly caused by, related to, or
asserted by a third party, based upon or arising out of (a) the
Indemnitor's breach of or the incorrectness of any of its
representations, warranties, agreements or covenants contained in this
letter agreement; and/or (b) any of the Financial Relations Services
rendered by RCG. Notwithstanding the foregoing, the Indemnitor shall
have no obligation to indemnify or hold the Indemnitee harmless with
regard to Indemnitee's negligence, willful misconduct, or the material
breach of or the incorrectness of any representation, warranty or
covenant of Indemnitee contained in this letter agreement.
9. (a) Either party hereto may terminate this letter agreement at any time
beginning six months after the Commencement Date upon thirty (30) days
prior written notice to the other party.
(b) A party to this letter agreement may terminate this letter agreement
prior to the sixth month anniversary of the Commencement Date, if
the other party to this letter agreement commits a "Terminable
Act". A Terminable Act shall mean: (i) a material breach of any
term or provision of this letter agreement by such other party
and such breach remains unremedied for a period of thirty (30)
days following the receipt of notice from the nonbreaching party
setting forth in reasonable
<PAGE> 3
August 23, 1999
Page 3
detail the circumstances of such breach; provided, however, if the party
receiving such notice has begun to remedy such breach such cure period
shall be extended for no more than an additional thirty (30) days; and
provided further, however, if such breach cannot be remedied, termination
shall be immediate; (ii) the negligence, willful misconduct, fraud or
misrepresentation of such other party; (iii) the failure of such other
party to materially comply with any applicable law or regulation relating
to the Financial Relations Services being provided; (iv) if such other
party shall plead guilty or nolo contendre to any violation of the
securities laws of the United States or any state; and (v) upon the filing
by or against such other party of a petition to have such party adjudged
as bankrupt or a petition for reorganization or arrangement under any law
relating to bankruptcy, and where any such involuntary petition is not
dismissed within 90 days.
(c) Upon termination under subparagraphs (a) or (b) of this paragraph 9,
the Company shall have no liability to RCG for Compensation accruing after
such termination, and RCG shall have no further entitlement thereto. Upon
such termination, RCG shall be entitled to receive and retain only accrued
Compensation and vested Options to the date of such termination, to the
extent it is unpaid, together with expenses not yet reimbursed.
(d) If this letter agreement is not terminated by either party prior to
the Termination Date, it shall renew automatically on a month to month
basis until specifically renewed in writing or terminated upon thirty (30)
days prior written notice. Such renewal on month to month basis shall be
on the same terms and conditions contained herein.
10. RCG hereby fully discloses that certain associates, affiliates, officers
and employees of RCG are:
(a) Licensed as Registered Securities Principals issued by the National
Association of Securities Dealers ("NASD"); and/or
(b) Licensed as Registered Representatives issued by the NASD.
All NASD registrations are carried by SWS Financial Services, Inc., which
is a non-RCG affiliated NASD-registered broker/dealer.
RCG REPRESENTS AND WARRANTS AND THE COMPANY SPECIFICALLY ACKNOWLEDGES THAT
RCG IS NOT A BROKER/DEALER REGISTERED WITH THE NASD OR ANY OTHER
REGULATORY AGENCY. FURTHERMORE, IN THE PERFORMANCE OF FINANCIAL RELATIONS
SERVICES UNDER THE TERMS AND CONDITIONS OF THIS AGREEMENT, SUCH SERVICES
SHALL NOT BE CONSIDERED TO BE ACTING IN ANY BROKER/DEALER OR UNDERWRITING
CAPACITY AND THEREFORE RCG IS NOT RECEIVING ANY COMPENSATION FROM THE
COMPANY AS SUCH.
11. The Company understands and acknowledges that RCG provides other and
similar consulting services to companies which may or may not conduct
business and activities similar to those of the Company. RCG is not
required to devote its full time and attention to the performance of its
duties detailed in this agreement, and may devote only so much of its time
and attention as is reasonable or necessary. RCG represents and warrants
that it does not currently represent nor does it perform services to or
for any individual, partnership, limited liability company, sole
proprietorship, corporation or any other entity engaged in the business of
developing, licensing, selling, marketing or distributing internet and
software applications to or for the classified advertising industry. RCG
further covenants and agrees that throughout the Engagement Term and any
extension thereof it will not represent or provide services to or for any
individual, partnership, limited liability company, sole proprietorship,
corporation or any other entity engaged in the business of developing,
licensing, selling, marketing or distributing internet and software
applications to or for the classified advertising industry.
12. The terms of this letter agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
<PAGE> 4
August 23, 1999
Page 4
13. For the convenience of the parties, any number of counterparts of this
letter agreement may be executed by the parties hereto. Each such
counterpart shall be deemed to be an original instrument, but all such
counterparts taken together shall constitute one and the same letter
agreement.
If the foregoing correctly sets forth our agreement, please sign the enclosed
copy of the letter in the space provided and return it to us, whereupon all
parties will be bound to the terms of this engagement.
Confirmed and agreed to this 24 day of August, 1999
RCG CAPITAL MARKETS GROUP, INC. AdStar.com
By: /s/ By: /s/ B.J. Douck
- ----------------------------- ------------------------------
Title: President SVP & CFO
<PAGE> 5
August 23, 1999
Page 5
FINANCIAL RELATIONS
SERVICES ATTACHMENT
At the date of execution of this letter agreement as delineated in
Paragraph 1 of this letter agreement, RCG Capital Markets Group, Inc. ("RCG")
will serve as the exclusive Financial Relations Counsel for AdStar.com ("AdStar"
or "Company"). Consistent with the AdStar.com Financial Relations Campaign
Overview, a copy of which is attached hereto, RCG anticipates the following
services will be attempted and/or implemented within the scope of this
engagement:
Pre-IPO Activities:
- Assist Paulson Investment Company in expanding selling group for IPO;
- Coordinate additional roadshow participation in conjunction with the
Paulson schedule
- Continually review and attempt to enhance PowerPoint presentation for
IPO roadshow (for use also in post-IPO presentations);
- Participate in the roadshow and assist in the follow-up coordination
of all investment community contacts
- Create an expanded "Broker Fact Sheet" for use during the IPO process;
- Assist the Company in obtaining a listing for its securities on AMEX.
- RCG will assist with routine investment community inquiries and
distribution of offering memorandum during the IPO process; channel
all lead opportunities to Paulson Investment Company.
POST-IPO ACTIVITIES:
- Outline, define, establish and implement a well-coordinated "Financial
Relations" campaign.
- Create, produce, enhance existing and distribute high-quality, due
diligence and marketing materials, which specifically include, but are
not limited to a "Corporate Profile" document and the Company's
"Investor Package".
- Specifically develop, proactively execute and maintain a targeted
securities professionals telecommunications and information campaign
specifically directed toward retail brokers, institutional investors,
third-party portfolio managers and small/mid-cap mutual funds, buy and
sell side analysts and the financial media as circumstances dictate,
including, but not limited to, preparation, clearing with the Company
and dissemination of quarterly press releases and other news releases
deemed appropriate by the Company. RCG will allocate and utilize its
proprietary securities industry, small/mid cap company oriented,
databases and fax-line communications programs. (This will include
responding to all incoming investment community inquiries and
fulfillment of information and data requests.)
- RCG will attempt to secure investment recommendations and on-going
corporate research coverage from national or regional investment
banking or research firms and/or an endorsement by an investment news
letter publication.
- When appropriate, plan, arrange and coordinate specific follow-on
road-show presentations to strategically targeted primary metropolitan
financial markets.
<PAGE> 6
August 23, 1999
Page 6
- - RCG will be responsible for the origination and release of financial industry
data and financial media information on behalf of AdStar. RCG will also be
responsible for editing (or writing) all press releases and coordinating
information disseminated to all media sources relating to the securities
industry and capital markets.
- - RCG will organize, monitor and follow-up all conference calls between the
Company and RCG's targeted segment of the investment community, in conjunction
with material press releases, through a teleconferencing service. (RCG will be
responsible for faxing and/or emailing the invitations and will follow up with
calls to the recipients in an effort to expand the conference call
participation.)
- - Plan, arrange and coordinate periodic registered representative, institutional
and/or other securities professionals meetings, luncheons, dinners or special
gatherings.
- - Implement periodic direct mailings which may include the most recent
statistical information reports, and any appropriate articles or press
releases that have been released during the last reported quarter.
- - Update all due diligence and marketing materials. RCG anticipates updating
Company information on a regular basis as required when there are material
changes or events that should be disseminated to the investment community.
- - Implement an AdStar Internet Site on RCG's Internet Home Page, RCG Online (the
"AdStar Page"). RCG Online will also create an Internet link to the Company's
home page. The purpose of these inclusions will be to provide the investment
community a 24-hour access site to obtain up-to-date information about the
Company. The AdStar Page will be available within 30 days of the completion of
the Company's initial public offering. Except as set forth in the next
sentence, AdStar agrees that it will pay RCG the sum of $350 per month for
this service beginning with the month the AdStar Page is available online.
Within 90 days of the launch of the AdStar Page, RCG will provide the Company
with a Peer Group Comparison Report (the "Report"). AdStar shall have 30 days
from the receipt of the Report to notify RCG if it wants to terminate the
AdStar Page and AdStar will have no further liability to RCG with respect to
the AdStar Page from the date of such termination.
RCG intends to perform the services and accomplish the specified goals within
the scope of this engagement. However, due to the nature and type of services
being performed, RCG cannot guarantee, nor can it be assumed that certain
specific results will be realized with reference to increased market valuation
of AdStar securities.
<PAGE> 7
August 23, 1999
Page 7
FINANCIAL RELATIONS
COMPENSATION ATTACHMENT
In consideration of the Financial Relations Services to be rendered pursuant
hereto, AdStar agrees to pay RCG the following compensation (the
"Compensation"):
A. Cash Compensation. AdStar shall pay RCG a monthly retainer as follows:
(a) $6,100.00 for each of the first six months of the Engagement Term,
payable monthly beginning on the Commencement Date
(b) $5,000.00 for each month thereafter until this letter agreement is
terminated in accordance with its terms.
B. Expense reimbursement. In addition, RCG shall be reimbursed for reasonable
out-of-pocket incurred in connection with the performance of the Financial
Relations Services pursuant hereto. It is the policy of RCG that an expense
debit account of $5,000 be utilized for these out-of-pocket costs. RCG will
provide the Company with a detailed breakdown of all reimbursable expenses
debited against the remaining monthly balance by the twentieth (20th) day of the
following month of service and, upon request by the Company, will provide the
Company with a copy of all receipts, invoices or other documentation
substantiating such disbursements. When the remaining unused portion of the
expense debit account falls below $1,250, the Company will be required to
reinstate the account balance to $5,000. If the expense reimbursement account
drops to zero, or has accrued a debit balance, RCG may upon written notification
cease to incur expenses on behalf of the Company until the expense reimbursement
account is replenished to the $5,000 level. Such discontinuance does not
extinguish the Company's obligation for reimbursement.
RCG will obtain prior approval from the Company for all specific expense items
and any single miscellaneous expense item in excess of $500. RCG acknowledges
and understands that the Company will have specific amounts budgeted for these
expenditures and will attempt to ensure those budget amounts are not exceeded.
C. Stock Options. As additional compensation for Financial Relations Services,
RCG requests non-forfeitable granted options/warrants to purchase 55,000 shares
of AdStar common stock (the "Options"). The Options will only be granted if the
Company completes an initial public offering pursuant to a registration
statement filed with the Securities and Exchange Commission (the "Company IPO").
The Options will vest as follows:
(a) Options covering 25,000 shares, as additional compensation for the
"Pre-IPO activities," shall vest upon completion of the Company's IPO.
(b) Options covering 1,666 shares, as additional compensation for the
"Post-IPO activities," shall vest on the last day of each of the six
months commencing on the last day of the seventh month following the
Commencement Date.
(c) The remaining options, as additional compensation for the "Post-IPO
activities," shall vest and become exercisable at the expiration of
five years from the date of grant provided that RCG is still providing
services to the Company on that date and provided further than such
options shall vest and become earlier exercisable on a performance
basis as outlined below:
5,000 shall become exercisable upon confirmation of an average 5%
increase per calendar month in the average daily trading
volume of AdStar for any period of 90 calendar days;
provided, however, in no event shall any Options vest if
the average daily trading volume in AdStar common stock
is less than 5,000 shares. (The baseline average shall
determine as the average daily trading volume calculated
from the 23rd through the 44th trading day (inclusive) as
a public company.)
5,000 shall become exercisable upon confirmation of corporate
research coverage from a buy- or sell-side analyst at a
reputable national or regional investment banking firm
having institutional clients and at least 50 retail
brokers.
<PAGE> 8
August 23, 1999
Page 8
5,000 shall become exercisable upon securing confirmation of two (2) new
institutional investors or third-party portfolio managers positioning
at least 2% of the Company's issued and outstanding stock. (Vesting to
be prorated at 2,500 Options for each investor secured.) For this
purpose, the term "new" shall mean an investor that did not purchase
securities in the Company IPO.
5,000 shall become exercisable upon confirmation of two (2) positive
financial (non-trade oriented) media events, such as articles in
newspapers or financial magazines of recognized standing in the
financial and investment community or television or radio media
coverage on nationally recognized financial, investment or business
programs. (Vesting to be prorated at 2,500 Options for each media
event).
The Company agrees to issue an options/warrants document within sixty (60) days
of the IPO effective date which conforms to and delineates the terms and
conditions contained herein.
The exercise price for all options/warrants shall be set at 110% of the IPO
price.
The Options issued will possess a five (5) year expiration term and the shares
of AdStar common stock underlying the Options (the "Option Shares") will be
eligible for registration 13 months after the effective date of the Company IPO.
Such registration shall be accomplished by one demand registration rights via a
form S-3 registration statement or by non-prorated piggy-back registration
rights should the Company file a registration after the one year period. In the
event that RCG provides a written request to register the Option Shares, as
provided herein, the Company hereby agrees that it will use its reasonable best
efforts to file such registration statement within 45 days of such request. The
Company's obligation to file a registration statement, or cause such
registration statement to become and remain effective, shall be suspended for a
period not to exceed 120 days in any 12-month period if there exists at the time
material non-public information relating to the Company which, in the reasonable
opinion of the Company, based on the advice of counsel, should not be disclosed.
RCG agrees to pay 50% of the cost of such S-3 registration up to an amount not
to exceed $12,500. Such payment by RCG is due upon the effective date of the
registration statement. RCG's demand registration right shall terminate at such
time as the Option Shares shall be salable under Rule 144 during a period of
not more than 90 days.
Notwithstanding anything contained herein, the Company shall not be required to
include any Options in any Registration Statement filed in connection with the
Company IPO or on Form S-8 or Form S-4 or their equivalents relating to an
offering of securities by the Company to be issued in connection with any
acquisition of any entity or business or otherwise issuable in connection with
any stock option or employee benefit plan.
In the event that AdStar is merged into or a controlling interest is acquired by
any entity, or there is a material change in AdStar management, RCG will be
immediately vested in all remaining options, including those, which to that
point have not yet been vested.
NOTWITHSTANDING ANYTHING CONTAINED HEREIN, ADSTAR SHALL NOT BE OBLIGATED TO PAY
ANY OF THE FOREGOING COMPENSATION TO RCG AFTER THIS LETTER AGREEMENT HAS BEEN
TERMINATED EXCEPT THAT ADSTAR SHALL ISSUE ANY OPTIONS THAT HAVE VESTED PRIOR TO
SUCH TERMINATION PURSUANT TO THE TERMS HEREOF AND RCG'S REGISTRATION RIGHTS WITH
RESPECT TO ANY OPTION SHARES UNDERLYING VESTED OPTIONS SHALL BE UNAFFECTED BY
SUCH TERMINATION.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF DIRECTOR NOMINEE
I hereby consent to reference in the Registration Statement of AdStar.com,
Inc., a Delaware corporation, to me as a Director Nominee.
Dated: December 1, 1999
/s/ CHRIS KARKENNY
--------------------------------------
Signature
Name: Chris Karkenny
<PAGE> 1
EXHIBIT 23.4
CONSENT OF DIRECTOR NOMINEE
I hereby consent to reference in the Registration Statement of AdStar.com,
Inc., a Delaware corporation, to me as a Director Nominee.
Dated: December 1, 1999
/s/ R. S. POSNER
--------------------------------------
Signature
Name: RONALD S. POSNER
